Why reduce inventory

If they are so old that they are unsellable, then scrap them. Multiple SKUs for the same product results in excess inventory. This situation can arise in a number of ways. For example, if you produce products that are uniquely branded for different customers, you may have the same actual product in inventory with ten different SKUs — one for each of your 10 major customers.

Instead, customization should be done just before the product ships. This reduces inventory to just one SKU, which simplifies inventory management and reduces the amount of inventory. Another situation in which there are multiple SKUs would be for a product such as light bulbs. Let's say you stock packages of light bulbs in which there are various numbers of bulbs. You have packages available with two, four, six, eight, 10, and 12 bulbs. However, with appropriate market research, you might find that the eight- and ten-packs are significantly less popular and can be eliminated.

By eliminating obsolete inventory and multiple SKUs, you have reduced variation in the type of inventory, freeing up warehouse space and financial resources that can now be used for more profitable products. The less time it takes to replenish inventory, the less inventory you need. In addition, the less uncertainty there is in restocking less variability , the lower your inventory levels can be. There are three factors that impact restocking times:.

A reduction of any of these three factors will allow an inventory reduction in your warehouse. For example, let's say that it takes your company three days to process and issue a purchase order for raw materials.

If that time can be reduced to one day, then the amount of raw material inventory can be reduced by the amount used during two days of production. On the supplier's end, their manufacturing time includes the time required to receive and process your purchase order. If that time can be reduced, then the amount of inventory you need to carry can be further reduced. This has led to direct connections between buyer and seller computer systems, with automatic handling of orders.

This reduces the buyer's purchase order generation time, and the supplier's order processing time, to essentially zero. Having buyer and seller computer systems automatically exchanging information can reduce lead times in other ways. For example, it will provide the information needed to improve forecasting. Obviously the percentage levels of each class will vary based on the size of your total inventory, but these are good concepts to keep in mind.

You want to keep an eye on your items holding the biggest total value. Keep a tight control over this class of inventory and allow a little more wiggle room for the smaller classes. If centralizing multiple warehouses for your company is possible, it could help greatly in inventory reduction. But if you can narrow it down to one warehouse, your order quantities can be greatly reduced while order frequency can be increased.

Safety stock is a key component to the push of increased inventory. The more facilities you have the bigger the amount of safety stock you need to have on hand. Safety stock increases by the square root of the facility increase. As you have learned by now, carrying large quantities adds up in storage costs and carrying costs. Obviously this is not ideal. Businesses can still practice inventory reduction without sacrificing a level of customer service.

After all, smart inventory management is all about running an efficient and automated business with less inventory to better plan for the future. Be nimble in business and only purchase what you absolutely need. As a final piece of advice, remember these parting words of importance:.

Your email address will not be published. This site uses Akismet to reduce spam. Learn how your comment data is processed. What Does Inventory Reduction Mean?

When customer demand is forecasted incorrectly, unsold inventory is accumulating. As a result, more expense is needed to expedite in products in short supply. How to Reduce Inventory Inventory reduction is performed to reduce costs in several areas, like: Maintenance Storage Shipping In order to reduce inventory, companies must formulate an inventory strategy first.

Reduced Waste Unused inventory is waste. Why Inventory Buffers Are Important Part of that inventory strategy is implementing inventory buffers. For example, when excess and shortage reports are available in real time and across multiple sites, actions can be taken more quickly to alleviate a shortage at one site with excess inventory at another.

This saves the cost of premium part prices and improves inventory turnover by reducing overall inventory. Some challenges arise without an immediately clear solution. Particularly pesky problems can become recurring headaches for weeks or even months.

Uncovering a solution requires a deep dive into data analytics and root cause problem-solving. For problems like this, a team of Lean or Six Sigma experts often proves invaluable. Using industry best practices, these experts provide direction for how teams improve their work. This is where prescriptive analytics is most valuable. AI-based analytics provide an outlook on the future and recommended action items that are based on accurate data and industry best practices.

This makes continuous improvement efforts more streamlined and easier to implement. Utilizing a single dashboard for the entire company means that all teams use the same standardized work, improving efficiency and cross-site collaboration. This equips stakeholders with visibility into ongoing lean projects, and align KPIs with strategic initiatives.

All performance should be tracked in real time, allowing all staff members to collaborate directly within the project management platform.

There is significant cost-saving opportunity for complex supply chains by optimizing inventory levels, positively impacting inventory turnover, for every part in the system. It is tempting to focus on avoiding shortages because of how chaotic and costly they are, but improvement in the long term requires a deep dive into improving inventory turnover, which means you need to reduce inventory levels and costs across the board.

Toggle navigation. LeanDNA Blog. To Reduce Inventory, Start From the Top Inventory optimization efforts are by far most effective through a top-down approach. Equip Teams With Smarter, Automated Work One reason for the lack of urgency in tackling inventory reduction has to do with how labor-intensive inventory optimization processes are for many supply chain teams. Improve Inventory Turnover With ABC Analysis In order to get the absolute most out of inventory optimization efforts, it is critical to focus on the parts that cost the company the most money.

Tap Into Continuous Improvement Expertise Some challenges arise without an immediately clear solution. Wrapping It Up There is significant cost-saving opportunity for complex supply chains by optimizing inventory levels, positively impacting inventory turnover, for every part in the system.

This website uses cookies to personalize content and ads. We'll assume you're ok with this, but you can opt-out if you wish. Accept Reject Read More. Close Privacy Overview This website uses cookies to improve your experience while you navigate through the website. It not only helps streamline your processes, but it generates valuable data to aid your decision making. Achieve measurable improvements by using the techniques highlighted in this handbook.

Download the Inventory Optimisation Handbook now and build these capabilities in your company. Never miss a post! The 5 key benefits of implementing an inventory optimisation solution. Written by Simon Abi Saad.

Here are the five main benefits of implementing an inventory optimisation solution : 1 Reduce your working capital Optimising your inventory allows you to reduce working capital by reducing unnecessary inventory buffers and improve your service level. It ensures that you get your customers what they want, when they want it - without holding too much inventory. The Result? Easily set the best safety stocks and replenishment quantities by individual item.