4 Sustainable Inventory Reduction Strategies
Can you remember the last time you went to the grocery store to buy ketchup for your weekend barbecue? How many different brands, flavors, packages, sizes, etc. did you find? Can you imagine no less than 15? From regular bottles to squeezable bottles and from regular to ‘light’ and ‘low salt’ varieties, there is a wide variety we fickle consumers have to choose from. With the ever increasing proliferation of SKU’s it is becoming more and more difficult for organizations to manage inventories to ensure the right amount is in stock. A simple evening news story on recycling is able to change customer’s buying perceptions on non-recyclable containers – and render non-compliant ketchup inventory obsolete within days. Here are four long-term inventory reduction strategies that will help reduce inventory while maintaining customer service.
One of the first steps to manage your inventory is to have an intimate understanding of it. It makes sense to conduct a pareto analysis of your inventory. This will give you insight on which items customers demand most and expect you to be in stock.
- Strategy #1 – Reduce Transportation Lead Times
Perform a geographical analysis of your suppliers. How far away are your key suppliers (from the items that were identified from your pareto analysis)? If they are less than one hour’s drive, how much excess safety stock do you need to carry? Consider reducing safety stocks and implementing a ‘just in time’ delivery service for key items should unusual spikes in demand occur.
- Strategy #2 – Reduce Order Quantities
In accordance with just-in-time principles, reducing the lot size will also reduce inventory levels. This means that the delivery frequency will increase. Care must be taken to understand the trade-offs in other logistical areas such as warehousing so costs do not increase overall. For example, material handling costs may increase more than the inventory cost savings for certain items.
- Strategy #3 – Ensure Accurate Forecasting
The main challenge is to get access to ‘clean’ data. Often promotions, specials and one-time events ‘cloud’ the data from the normal weekly demand for items. Invest in systems and processes to ensure that you get a forecast as accurate as possible. Once you have an accurate forecast it is possible to manage other levers such as transportation lead time to reduce safety stocks.
- Strategy #4 – Avoid the ‘Great Divide’
People make decisions based on the reward systems in place. Thus, Sales & Marketing people will receive a bigger bonus for increased sales by increasing product availability while the Finance folks are trying to increase Return on Assets. Inventory is what is stuck in the middle and can increase or decrease departmental performance. If % in stock was being measured for a certain budget inventory level these problems would be avoided and company performance as a whole would be better off.
By following these four strategies you are on the path to reducing your inventory levels while maintaining customer service and increasing profitability.