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Inventory Reduction

03 February, 2023

Recall that the reason for holding safety stock is variation. Variation of lead time, variation of demand, variation of supply, variation of quality, all contribute to safety stock. Wherever variation can be reduced, safety stock can be reduced too. Ironing out the wrinkles in a supply chain so that it delivers reliably the right quantity at the right time will cause safety-stock holding to be reduced. A similar effect can be had if quality is improved. With variable quality, more inventory is needed in case the inventory turns out to be defective.

Having more inventory than is necessary is waste. Most of us would evaluate our current inventory levels as appropriate and necessary, with any reduction in inventory being impossible. But in most cases, there is plenty of room to reduce inventory, and the key is reducing variability.

Benefits of Inventory Reductions

A number of benefits result from inventory reduction. These include:

  • Lower Costs
    • Less money tied up in inventory.
    • Less warehouse space is required.
    • Lower insurance costs, as the risk of loss is reduced.
    • Fewer losses due to spoilage, or to expired or out-of-date products.
  • Less Labor
    • Reduced labor to track and verify inventory.
    • Less labor to maintain the warehouse(s).
    • Smaller warehouses are easier to manage.
  • Improved Quality
    • When product improvements are made, there is not a need to sell off large quantities of the older, obsolete product.
    • If there is a defect or design problem, large quantities of defective product do not end up in inventory (because there are no large inventories).

On the other hand, there are concerns about going too far with inventory reduction. Some of those include:

  • Not having enough product available to meet customer demand and delivery requirements.
  • Short production runs result in increased production costs.
  • Without stocks of raw materials, a minor supply delay can completely stop production.

Of course, there also may be outside circumstances that dictate inventory levels; for example, an electric utility must be able to continuously supply power, but if their fuel supplier's employees may go on strike, it would be a good idea for them to build up an available inventory of fuel.

Lean Manufacturing and Inventory Reduction

The core idea behind lean manufacturing methods, such as Kanban is to have supply and production driven by actual customer demand. The goal is zero inventory; where zero is not realistic, a very low inventory can usually be achieved.

If there is no variability, then each day suppliers can deliver just enough materials for that day's production. The incoming materials go directly from the loading dock into the production area. The finished products go directly from the production area to the shipping department, and are sent out to customers that day. However, variability is a fact of life. Balancing the benefits of inventory reduction against the risks of not having enough inventory will require you to reduce variability whenever possible, and manage the variability that remains. How is this accomplished?

Simple Inventory Reduction Ideas ? Obsolete Stock and Multiple SKUs

Two easy first steps to reduce inventory are to eliminate obsolete stock from your inventory, and reduce the number of SKUs that are carried.

Obsolete stock is just taking up space. While management may not want to take the financial hit of having to write off obsolete inventory, it is more cost-effective to get rid of it once than to keep paying for it forever. If your obsolete stock can be sold, make a big push to sell it. The longer it remains in your warehouse, the more out-of-date it gets, and the harder it is to sell. If necessary, heavily discount the obsolete items to move them out. 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. You have just reduced the number of SKUs by 33%.

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.

Inventory Reduction Through Reducing Restock Lead Times

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:

  1. The time required to issue a purchase order.
  2. The supplier's manufacturing time and reliability.
  3. The shipping time and reliability.

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. To paraphrase George E. P. Box, you could say that all forecasts are wrong - but some are useful. With improved information flow, your forecasting can be less wrong and more useful. As a buyer, you will help your suppliers reduce variability and uncertainty, and this will help them reduce their manufacturing time and improve reliability. In turn, their improvements will allow you to further reduce your inventory.

The same can be done with shipping. Reduced shipping time does not always mean using overnight delivery. Let's say you have three different suppliers in the same region, each of which sends you a full truck-load of materials once every three days. Shipping more frequently would result in partial loads, and significantly increased total shipping expenses. But what if they all used the same delivery company? Then one truck could visit each supplier each day, collecting a third of a truck-load from each and delivering a full truck-load to you. With this approach you would have a continuous flow of the materials you need arriving daily, cutting your inventory requirements by 66%.

Inventory Reduction ? Aided By Visual Communication

An efficient warehouse is one step closer to a lean warehouse. Efficiency means using visual communication to mark traffic lanes, identify aisles, and mark SKUs on shelves and bins. At times, easy-to-change magnetic labels and signs are needed to allow frequent adjustments for a rapidly changing mix of products. At other times tough, durable, permanent labels are needed to mark shelving and the floor. In some warehouses low-temperature cold storage labels are needed. In other locations labels and signs need to survive harsh outdoor weather conditions.

Whatever your labeling and sign needs are, DuraLabel custom printers and tough-tested supplies are the right answer. With DuraLabel you always get the job done right, because you always get DuraLabel superior quality, and only DuraLabel has more than 50 types of labeling supplies available.

If you are considering implementing Kanban in your facility, pick up a copy of our free Kanban Best Practices Guide for expert advice on how to take action. Get your free copy below!