Top 10 Reasons for Too Much Inventory
This newsletter provides my version of the Top Ten Reasons for Too Much Inventory. Unlike David Letterman’s lists, this one will include at least one idea that you can use today to improve your company’s inventory performance.
- Padded lead times – Everyone in your supply chain process from suppliers to manufacturing, engineering, and purchasing adds a safety factor to their lead time. Step one in eliminating the “pad” is to challenge people to provide realistic estimates. Step two is to explore ways to execute tasks in parallel, rather than sequentially. For example, can purchasing begin to order some long lead time items prior to all specifications being finalized? The really good news is that progress made here leads to permanent reductions in the level of inventory.
- Slow moving, excess, and obsolete inventory is ignored. One of my clients said “we do not have much obsolete inventory.” After we developed a report to capture those items it turned out to be 20% of their total inventory! Putting someone in charge of working on disposition and prevention of excess inventory is a good first step. Without an “owner” it is too easy for everyone, management included, to avoid the issue. I have used a five step program that was developed at Helene Curtis to address excess and obsolete with clients. I also have some contacts who offer some creative approaches to disposing of excess and obsolete materials. If you are interested, send me an e- mail.
- Management does not get involved in inventory planning decisions. Someone in your company is making decisions daily on how much material to order from suppliers or to produce in your factory. On a regular basis, decisions are made on lot sizes for production and purchased materials. The sales and marketing departments ask for inventory to be produced or purchased to support forward customer projections of demand. The result is cash being committed to inventory. I recommend that you establish a monthly Sales and Operations review to look at current and projected inventory levels. It’s a lot easier to not produce or purchase inventory than it is to work it off after the fact.
- Purchasing decisions are driven by quantity breaks. More experienced purchasing people know that there are many approaches to obtaining the lowest price without buying a six month supply. Make sure that your buyers understand the impact on inventory of their decisions. Include Purchasing in the Sales and Operations review mentioned above. Focus the discussion on optimizing the balance between purchase price and inventory.
- Supplier stocking and vendor managed inventory programs have not been implemented. These programs shift some of the inventory back to your suppliers. Whether you deal with manufacturers or distributors, they likely have programs in place with other customers. If you have a supplier looking for an opportunity to do business with you, they will probably be more receptive to a new program than will your incumbents. Reducing purchased material inventory may save more money in terms of warehousing and carrying costs than a price reduction.
- Sales adds new items to your product line without sufficient review. Everyone wants to respond to a new customer or a request from an existing account, and they should. Your company needs a process to review the decision on how much of the new item to make or buy. There should be follow up to see if the original forecast is achieved. If you want a radical idea, challenge your sales and marketing people to eliminate two “old dogs” from the product line for each new one that they add.
- Product changes are made too often and without a plan to work off existing inventory. I remember well the debates with Sales and Marketing about why the world needs another size bottle of shampoo or a new color on the label. You may ultimately decide to make the change, but the reasons will be clearer and the next request may not occur. Manage the change process to use up existing inventory (raw materials, work-in-process, and finished goods) of the old version and dispose of any excess material immediately.
- Errors in inventory records and/or bills-of-material always result in too much of the wrong part and a shortage of the right one. I have worked with several clients where the lack of accuracy led to lost sales and lost customers. Establish measurements of inventory record accuracy and b-o-m accuracy. Identify the cause of each error and take corrective action to prevent it from occurring again. If you rely on a periodic physical inventory and you do not have a cycle counting program, start one.
- No one de-expedites when schedules change. People called “expediter” used to chase parts and reschedule when necessary. With most of those jobs eliminated, the idea of de-expediting has been lost as a result. Schedule changes need to be communicated immediately to your factory and to suppliers. Otherwise they will be producing inventory that you don’t need or want.
- “Fill in the blank” on this one. Every company has at least one situation, not mentioned above, that results in too much inventory. I am interested in helping you resolve yours.
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