Wednesday, August 13, 2008

Another 15 ways to lower Inventory Costs

  1. Purchase minimums. Compare the total cost of ownership for purchased products as quoted prices with no minimums to reduced prices with minimums to determine if the reduced prices really provide savings.
  2. Implement SKU-specific purchase transaction costs. Purchase transaction costs aren't normally SKU-specific. But reflecting any extraordinarily low receiving costs associated with specific SKUs will serve to reduce inventory for them. The opposite, of course, is also true.
  3. Get demand plans from downstream. Hard information on upcoming needs from customers reduces demand variability, thus reducing the safety stock required for a given customer service level.
  4. Send demand plans upstream. Sharing demand forecasts with suppliers is more indirect, but in the long run it will serve to reduce the suppliers' finished goods inventory and associated costs and, with effective negotiation, perhaps yield lower prices.
  5. Don't stock it. Manufacturing or purchasing to order when the acquisition and customer lead time and order quantity relationships allow it is a very direct way to reduce inventory, providing that the acquisition capacity exceeds the potential short-term demand rate.
  6. Cross-dock customer shipments. With effective use of joint replenishment, the potential increases in inbound transportation costs associated with purchasing to order can be mitigated. Cross-docking customer shipments can facilitate purchasing to order even when the order quantity relationship would have otherwise dictated purchasing to inventory. In a similar manner, aggregating purchase requirements for multiple DCs into a single order and cross-docking to multiple DCs effectively reduces purchase transaction costs and reduces cycle stock inventory.
  7. Keep in stock, but not everywhere. In multiple-DC tier environments, stocking certain SKUs in fewer/upstream facilities as opposed to more/downstream facilities yields obvious benefits. Likewise, within a single tier of DCs, not every SKU deserves to be stocked in every DC.
  8. Extend payment terms. When negotiating long-term purchase agreements, getting the best payment terms at a given unit price is the most direct way to increase the portion of inventory funded by the vendor.
  9. Take advantage of price/quantity breaks. Taking price/quantity breaks into account when purchasing for replenishment seems an obvious way to reduce the inventory investment, but it’s frequently overlooked. Often this is a result of not quantifying breaks at the time of sourcing or negotiation, not having an effortless way to take them into account, or a lack of understanding of the impact of purchasing larger quantities at reduced unit cost.
  10. Transfer instead of purchase. When inventory of an overstock SKU in one location needs to be purchased to replenish inventory in another location, transfers are a smart way to reduce inventory. Be careful that additional warehousing and transportation expenses aren't unnecessarily incurred, though, so that the reduction in holding cost does not exceed the cost to transfer.
  11. Consider liquidation. Although there will always be a short-term price to pay on the P&L and the balance sheet, when it is absolutely clear that the value to be gained through liquidation—whether through sale at reduced price, sale as distressed product, salvage, or charitable donation—is greater than the most optimistic estimate of future gross margin from conventional product sales, then liquidation is the best decision.
  12. Try merge-in-transit. The concept of in-transit product merging—where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment—can be seen as a technique for reducing inventory if the need for the customer to simultaneously receive multiple SKUs is a given. To some extent, merge-in-transit represents an extension of postponement beyond the distribution center walls.
  13. Get help from friends. Collaborative planning, forecasting, and replenishment (CPFR) is an open set of predefined business processes and IT/communications standards created to facilitate collaboration between supply chain partners. CPFR can reduce inventories through inventory balance, forecast, demand, and other data visibility and associated collaboration in the planning area.
  14. Use vendor-managed Inventory (VMI). With the appropriate incentives, allowing suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory.
  15. Implement vendor stocking programs (VSP). Used primarily for maintenance inventories but applicable to all, VSPs require a supplier to commit to an extremely high service level for delivery of specific SKUs within a fixed time at a predefined markup. VSPs can reduce or eliminate inventories for slow-moving products. There are numerous ways to take better control of inventory and decrease its associated costs. The key to managing inventory successfully is to continuously measure your performance and look for new ways to improve. These 25 strategies should get your organization thinking about what it can do to lower inventory costs. Many of these strategies may seem challenging to implement. This is when it is wise to seek outside help for insight on how to put these strategies to work for you.

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