10 proven ways to cut inventory cost

8/4/2019 10 Proven Ways to Cut Inventory Cost

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1Copyright 2011 Tompkins Associates. All rights reserved. www.Tompkinsinc.com

10 Proven Ways to Cut your Inventory Costs

Businesseso Manufacturerso Wholesale Distributorso Retailerso eCommerce / Consumer Direct

Demand Patternso Routineo Trend

o Seasonalityo Level Shifto One-time Event / Promotiono New SKUs

Supply Chainso Domestic

o Global

Inventorieso In Transito Raw Materialso WIPo Finished Goods

o MRO

Inventory Policieso SKU Stockingo Safety Stocko Cycle Stock

Business Processeso Forecasting

o Demand Planningo Capacity Managemento Inventory Managemento Production Schedulingo SKU Discontinuationo Reverse Logistics


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Organizational /Geographical

Logistical

ProductHierarchical

Company

DC

Category

Region

Bill-to-Customer

Class

Forecast Level

High

Low

ForecastError(MAPE)

State

Ship-to-Customer

SKU

ForecastingRealms

Organizational /Geographical

Logis

tical

Product

Hierarch

ical

1. Improve Forecast Accuracy

Editing data in the sales history whichwould mislead forecasting software

algorithms past out-of-stock situations past promotions

Establishing a database of pastpromotion lifts for forecasting futurepromotions

Incorporating non-routine demandand structural changes into the futureforecast the number of stocking locations

(level shifts) future promotions

Keys:

Why: Improving SKU-location-level forecastaccuracy minimizes overstock,reduces out-of-stock situations,reduces unnecessary transportationcosts and increases revenue

How: Edit sales history Forecast promotions explicitly Use statistical forecast tools Get input from multiple stakeholders Collaborate with customers


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2. Base Safety Stock on Customer Service Levels

Current Customer Service Levels

50%

55%

60%65%

70%

75%

80%

85%

90%

95%

100%

1 706 1411 2116 2821 3526 4231 4936 5641 6346 7051

Ranked SKUs

CustomerServiceLevel/

MaximumF

illRate

Basing customer service levelson desired unit fill rates.

Calculating the safety stocklevels dynamically based on: demand variability / forecast

error lead time and lead time

variability cycle stock policies

Adjusting desired customerservice levels based on the

actual order fill rates achieved

Keys:

How: Calculate safety stock for eachstock SKU-location based on thedesired customer service level, by

SKU class, either: as a minimum during thereplenishment lead time

as a long-term average

Why: Basing safety stock on desiredcustomer service levels provides themost effective use of working capital

relative to the fill rates and SKU in-stock percentages achieved


4/114Copyright 2011 Tompkins Associates. All rights reserved. www.Tompkinsinc.com

3. Transfer; Avoid Acquiring More

Why: In the reverse direction, betweennetwork tiers, transfers repositioninventory from lower to higher

demand locations to work it off In the lateral direction, within the

same network tier, transfersminimize purchases

How: Understand the warehousing andtransportation costs involved

Identify potential transfers automatically Review transfers and release manually

Limit transfers to: SKUs with very accurate forecasts SKUs with significant overstock Transfers for which the cost is

significantly less than the upcomingannual holding cost

Keys: Lateral transfers work most effectivelywith medium-volume product which isinexpensive to handle and ship

Reverse logistics transfers, say frombranch or store to DC, work mosteffectively with more expensiveproduct which can be backhauled forfree


5/115Copyright 2011 Tompkins Associates. All rights reserved. www.Tompkinsinc.com

4. Vendor-managed Inventory (VMI) andVendor Stocking Program (VSP)

Invoice on Deliveryor Consumption

VMI Vendor Purchaser

Inventory

Balances

OrderDecisions

?

$$

Forecasts

Product

Unit Cost Agreement

Objective: Balance, Fill Rate

Invoice on Delivery

VSP Vendor Purchaser

Inventory

SKU Lists

OrderDecisions

?$$

Product

Unit Cost Agreement

Objective: Response Time

Beginning with extensive duediligence: suppliers demand planning

systems and internal performance

management program results achieved for others

Measuring performance andproceeding slowly based on results

Operating with written agreements,

defining responsibilities and goals

Keys:

How: Negotiate an agreement withsuppliers for selected SKUS:

Difficult to forecast Expensive

If trusted, as well as properly andadequately incentivized: true VMI suppliers have increased

visibility and thus the potential toreduce both inventory as well asunit costs and, sometimes,operating costs

VSP suppliers, most often used forMRO, dont have increased visibilitybut can reduce inventory,

especially when other customersare in close proximity

Why:


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5. Think Postponement

How: Understand the concept Identify SKUs with high potential Make appropriate changes in routings,

procedures, etc.

Establish semi-finished level inventorypolicies

Keys: Identifying commonality in bills of materialmirroring the production sequence

Some examples Common formulations with the

exception of color or fragrance Products sold in many package styles

or capacities Product-packages sold under different

labels (the most common example:bright (unlabeled) cans - packagedto inventory and labeled only afterreceipt of customer orders

Why: Postponement facilitates holdingsmaller inventories andsimultaneously reduces customerlead time


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6. Rationalize SKUs and SKU Stocking Locations

Why: SKUs tend to be added fasterthan they are discontinued,unnecessarily increasing inventoryand reducing turnover

Multiple SKU-locations exacerbateinventory, reducing customertransit time, but often onlymarginally and possiblyunnecessarily

Keys: Investigating the GMROI ratio (annual gross margin /

average inventory value) and SKU revenue / number of stock SKU-

locations across the full range of SKUs helpsidentify opportunities for improvement.

For multi-tier networks, use a hierarchicalstrategy

Make SKU stocking decisions based on: For single locations, comparative lead

time and order quantity logic For networks, minimum cost

How:


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7. Reduce Lead Times

LOWER SHORT-TERMDEMAND RATESTHAN ANTICIPATED

O

N-HAND

IN

VENTORY

RE-ORDERPOINT

SAFETYSTOCK

FORECAST

HIGHER SHORT-TERMDEMAND RATESTHAN ANTICIPATED

"OUT OF STOCK"CONDITION

ACQUISITION LEAD TIMEZERO

NO DEMAND

INFINITE DEMAND

How: Understand lead time components Measure supplier lead time and variability vs.

the average supplier as part of a mutually-beneficial Supplier Relationship Management(SRM) program with the currentreplenishment structure

Change to a different replenishment logisticsstructure

Identify options to reduce lead timecomponent times

Keys: Stratify suppliers based onpast performance and needfor the business

Measure lead time (andinbound fill rate) against firstreceipt date

Its not all about suppliers Pre-purchase manufacturing

capacity

Longer lead times increase safety stock increase cycle stock increase forecast error

Why:


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8. Minimize MOQs (Minimum Order Quantities)

How: Calculate the excess inventoryvalue due to MOQs, by vendor

Train purchasing personnel in

the impact of MOQs on inventoryand its turnover Train purchasing personnel in

win-win negotiating techniques

Why: MOQs, regardless of how defined ($, units,pallets, etc.) at the vendor- (least harmful),SKU- (less desirable) or SKU-location-(worst) level require inventory to be acquiredprior to when it would have otherwise beenacquired

Concentrating on thelarger opportunities, first: Long-term vendors Many SKUs (facilitates

negotiating betteragreements)

Inventory impact ofMOQS > 15%

Keys: Maximum Past Sales Rate

Average

Economics-based

Re-orderPoint

Forecast Sales

Safety Stock

Business / MarketingPhilosophy - based

Time Acquisition Lead Time

On-hand

Inventory

Balance

Cycle Stock

Safety Stock

Maximum Past Sales Rate

Average

Economics-based

Re-orderPoint

Forecast Sales

Safety Stock

Business / MarketingPhilosophy - based

Time Acquisition Lead Time

On-hand

Inventory

Balance

Cycle Stock

Safety Stock


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9. Extend Payment Terms

Owned Inventory as a Percent of Total Inventory

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 1.5 2 2.5 3 4 6 8 10 12

Annual Inventory Turnover

PercentofInventoryOwned

15 Day Payment Terms




75 Day Payment Terms90 Day Payment Terms

How: Calculate the relative ownershippercent of various inventory categories[(balance less AP portion) / averagebalance] to identify highest priority

concerns Train purchasing personnel in the

ownership relationships betweenturnover, payment turns and discounts

Train purchasing personnel in win-win

negotiating techniques

Keys: Concentrating on the largeropportunities, first: Long-term vendors

Low aggregate inventory turnoverfor vendors SKUs

Long payment terms Ownership > 75%

Paying on time

Why: The economic impact of high inventorylevels is only the portion of inventoryactually owned, i.e., the total on hand,and possibly in-transit depending on

the freight terms, less the portioncurrently in accounts payable (AP)


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10. Sales and Operations Planning (S&OP)

S&OP

Decisions

Finite

Capacity

RealLe

adTime

s

CostCo

ntrol

DEMAND

Open

Customer

Orders

NewC

ustom

erOrders

Forec

astDe

mand

Cu

rrentRequirements

WIPFutureNeeds

CashWorkingCapital

Profitability

PLANNING

SUPPLY

FINANCE

How: Learn how the best work Develop the process:

Participants Facilitator Purpose

Required pre-work Agenda Best aggregation level

Implement, refine, train, repeat Measure meeting time and its

reduction

Keys: Management support Participation by all stakeholders

Existing SKU demand (Sales)

New SKU demand (ProductDevelopment and/or Marketing) Supply (Manufacturing and/or

Purchasing) Planning Finance

Why: S&OP programs provide astructured decision-making processfor coordinating supply and demandand for addressing inevitable

conflicts between priorities

10 proven ways to cut inventory cost

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