Would you like to reduce your inventory by 10%?

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Here are 8 tips on how to quickly reduce your inventory

 

Do you have an unpleasant feeling that your stock has gotten a little out of control?Is the inventory turnover rate going down? Is your warehouse getting so full that it hurts the productivity? And does it reduce your flexibility and slow down your further growth?

Don't worry, here are some simple tips on how to lower your inventory - without compromising the availability of your products.

1 Buy later - not less

Everyone can easily lower the stock by simply buying smaller quantities and more frequently. An apparent no-brainer. But if you want to maintain your profitability and product availability at the same time, the answer is a bit different: Then you should avoid buying less and more frequently and instead buy later. This requires that you have control over the various parameters in your logistics. If this is the case, my first recommondation would be that you maintain your calm and hold back on your next purchase - right up to the exact time where you need to buy to maintain your service level. But there is so much more you can do, so just keep on reading!

2 Calculate more accurate forecasts

It's inevitable - all good supply chain management starts with accurate forecasts. And to make accurate forecasts, you need a good foundation. Make sure you calculate lost sales when you are out of stock and that you filter out extraordinary demand when, for example, you run promotions or deliver extra volumes to projects. This gives you a more accurate foundation when calculating your forecasts.

In its simplest form, you now have to classify your items so that you have an idea on their sales patterns - which ones sell evenly, unevenly, have seasononal patterns, etc., so that you can use forecasting models that fit the behavior of the individual items. And seasonal items must of course be assigned seasonal profiles that provide reasonably precise indications of future seasonal patterns.

When you master this, you can easily carve out 3-5% inventory reductions - and for some items 8-10%.

3 Remove the buffer your buyers have applied in the supplier lead time numbers

Your buyers are only humans. And when we are shouted at when running out of stock, what do we typically do? - we put in some extra lead time - "to be on the safe side". If you take a closer look, you will quickly discover that there may be buffers on lead time applied that easily reach 10 to 20%. If a supplier has 180 days lead time, this means 18-36 days worth of extra stock!

It may actually be that a supplier has had delivery problems with some of the goods you have ordered previously, but it is not necessary to impose such a buffer on all the goods if only a few are in need of it. Furthermore, there are smarter ways to do this than simply relying on assumptions or emotions. What we need is a lead time forecast and calculation of lead time variation and then use this down to the item level when calculating safety stock. The nice thing is: If you review this among your buyers / planners you will often be able to carve out another 3-5% inventory reduction.

4 Differentiate your service level goals!

Too high service level goals lead to unnecessarlily high inventory levels - and your customers probably won't pay for it either. And if you set too high service level goals on items that sell very unevenly, you often need very high safety stocks. And then the question again is whether the customers are willing to pay for it and whether you can afford all the stock needed.

If you do not use service level goals yet, it's probably a good thing to consider. And when applying service level goals, the secret is differentiation. Differentiation means that you recognize that some of your items are more important to you and / or your customers than others. Thus, you may want to consider applying ABC classification. And if you want to combine several concepts in parallel, you can do a so-called ABC / XYZ classification. If you want to do this even more elegantly, let advanced algorithms calculate the optimal service level goals for you, which our Supply Chain Planning solution can do for you.

The advanced ones do not only work on setting the right service levelgoals,but do also work on how they can influence the very factors that impact safety stock. Here, there is often a real "chest full of golden nuggets" waiting for you to dig into. If you do this correctly, you can both increase the service level goals, lower your inventories and radically increase your profits at the same time!

And a reduction of inventory of 4-5% is definitely in reach.

Are you wondering on how to do this? Reach out, and we will happily explain.

5 Calculate correct safety stocks

Do you apply a min / max value as the starting point for your orders? For some items, min / max may work, but for many items - especially those that sell a lot and are important to you and your customers, this can be risky, as you for these items depend on your particular minimum value to capture fluctuations in demand, not to forget seasonal variations. This requires careful maintenance, which often falls short and subsequently fails. This means that in advance of a season you may encounter too little on stock, and also that you after the season risk being left with too much in stock. Or rather - overstock and risk of obsolesence.

There are a number of factors besides demand that should impact your safety stock - such as the service level goal and how reliable your suppliers are.

In any case, the key is to have a safety stock that, at any given time, is exactly large enough to provide you with the service levels that you want to achieve. Here you have the opportunity to gain another 2-3% reduction in your stock levels.

6 Place your orders exactly when needed

You will be amazed to learn how many of your buyers that place orders on fixed schedules. Ordering on fixed schedules mean that you build up unnecessary cycle stock that over time turns into overstock. Have your buyers place orders exactly when needed instead, which is the point in time placing the order will secure your service level goal on the supplier. We call this "Due Order Logic". And you will also avoid unnecessary cycle stock from ordering too early.

Placing orders on fixed schedules over time generates overstock.

7 Check MOQ and MULT

This was a bit cryptic, so let me explain: MOQ means Minimum Order Quantities. This is often the same as your min value, see the explanation above, and may be something your supplier has defined for you. But it may also be that the buyer has defined this and that the supplier actually never required it.

MULT or MULTIPLE means that you typically do not buy items in pieces, but buy them in packs, boxes, cartons, layers, pallets, dozens, etc.

For example, let's assume that the multiple is 50. And your minimum is 100. If your net need is 7, you will still need to order 100 - so you order 93 more than you need. The result is probably that you will skip this item on several of your future orders because you now have a completely unnecessarily high cycle stock that will last for a long time to come - and maybe turn into real overstock.

What if your need is 110? Well, now this is a bit more in line with the defined minimum restriction, but you will still have to order an extra multiple of 50 pieces - so you buy 40 extra that you do not need. What if you instead could buy in boxes of 10 and 10 instead of a carton of 50?

Check this out with your buyers. You will be surprised by how many minimums and multiples that can be lowered here - and as a consequence lower your inventory. And although the supplier has set the values in the first place, it may not have been as conscious and necessary as one should think. There are surprisingly many suppliers who are all ears if you just take the initiative!

Here you might come across huge and quick wins! - We have helped identify very large potentials here - often well above 10% of the inventory value! Reach out, and we will happily share how we idendified the potentials.

8 Do you build your truck- or container loads correctly?

When purchasing from a supplier, it is often necessary to fill trucks and containers, or to reach a minimum weight- or amount bracket in order to have your order delivered free of freight charge.

It is not uncommon for logistics departments or TMS office to have their own budgets for inbound transport or outbound distribution. And, with their own budgets in mind, it is normal to strive for as large inbound orders as possible so that the annual transportation costs are kept low. And common sense also tells you not to transport air, doesn't it?

But here lies a dog buried! One thing is that shipping costs in this way may go down, but what is the totalresult on the costs if you at the same time are charged with the costs of overstock, increased warehousing costs, costs of increased obsolescence and more?

The key is to look at this wholistically instead of in separation. Spending more money on transport can actually contribute to the total costs going down and to significant stock reductions.

As mentioned initially: Everyone can reduce stock levels by simply ordering less and more frequently. However, all logistics is about tradeoffs: If you want more of something, you will probably have to give up on something else. So only focusing on capital reduction by increasing the turnover rate is not only risky, you can actually lose money on it. That's what makes this so exciting! By thinking smart and using available science and optimization technology, you can master the challenge and both reduce capital tied up in inventories, keep your product availability high and maintain satisfied customers - and not the least - increase your competitiveness and flexibility whilst supporting your further growth.

Would you like to learn more? And maybe look at what potentials can be triggered in your company? Contact Us for a profitable chat.

Sverre Rosmo

Sverre Rosmo

Sverre has worked with supply chains, transport and purchasing for over 20 years. For the past 10 years, Sverre has worked as a project manager, consultant and in sales-oriented activities, mainly to Nordic wholesalers, distributors and retailers. Sverre is passionate about the logistics industry and not least purchasing and inventory management. He has for a long time been engaged as a lecturer at BI Norwegian Business School and Logistics College. He has previously published professional articles. Sverre is currently a member of the board of LOGMA.

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