Inventory reduction is still a hot topic at most manufacturers, distributors, and retailers these days. While the economy has shown signs of stabilizing, few are seeing demand pick up much. Many of my clients have remarked that it continues to be a very difficult time to forecast. Just saying things are likely to be flat is not enough. Most have seen dramatic shifts in demand within their offerings. While this was a pronounced shift to lower priced items before, now it is harder to generalize. There has never been a more important time to be customer demand driven than today. However, for many companies, the task of becoming demand driven seems too large. I will write on conversion to demand pull in a future post, but today I will focus on tactical issues that help everyone.
Even though inventory levels are significantly reduced from several years ago, most companies still see many items where they have too much and other where they do not have enough. Finding balance has been hard. Most companies will find that they have significant opportunities in tactical improvements. Some common root causes include:
- Inaccurate item lead times
- Huge minimum order quantities
- BOM changes not accurately translated to orders
- Lack of coordination across plants buying the same items, often from the same suppliers
- Procurement staff spend most of their time firefighting open orders (push outs and pull ins)
Of course all of these can be tied to poor planning and procurement practices. However, even if you have all of your materials on kanbans, many of these causes can occur. Cleaning up the critical item master data, talking with suppliers about things that do not make sense, coordinating on big spend across plants, and improving daily procurement practices are all parts of the solution.
So where do you start? How do you find the items with the biggest opportunity for inventory reduction? The answer is in lots of product quantity and pareto analysis. The key is to isolate individual items that have one or more of these problems and which are about to trigger more orders. These are the ones where you can make economic impacts the fastest. The problem items where you already have obsolete or several years supply are a different matter entirely. Unless they take up lots of space in the warehouse, they are going to be more problematic in terms of creating real cash value for your company quickly.
After all of the craziness of this economy for the last year, most companies are well served by getting back to basics on planning and procurement. These actions will yield real savings in the short term and build a foundation for bigger changes later.
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