Inventory should be an enabler for your business to produce and deliver products. But sometimes it can feel like the Reality TV show Hoarders. If inventory costs are skyrocketing, then you need to use some of these methods to reduce the cost of inventory and free up the cash for other higher value activities.
In a perfect world you would have exactly what inventory you need and not a single unit more. Here’s how to improve your crystal ball in ways that aren’t so mystical.
1. Don’t Carry Inventory
In some businesses, it is obvious that you don’t need to carry inventory, but some businesses it is a grey area. If you are going to carry inventory, make sure you are justified in doing so. In this world of 1 and 2-day shipping, you can get just about anything in a very short amount of time. Can you use drop shipping? Can you set up your process so that you have a few days to order everything from the start of PO?
2. Made to Order
Only produce products when they are ordered. Be one of the few companies in your industry that does made-to-order products. If you can figure out how to do this and manage the customization that comes with it you can offer a premium product and have lower inventory costs while doing it. People are willing to pay more and wait longer for customized items.
3. Buy the Most Expensive Inventory Just In Time
Most projects have a select few items you need to purchase that are high dollar compared to the rest of the products. Don’t buy those until you have to. Find a way to make installation of the high-cost items occur later in the production cycle so you can order them after the PO arrives or after finishing the first part of production and avoid having them in inventory at all.
4. Find Suppliers that Can Get Your Products in Minutes or Hours
If there is a warehouse in the same city as you, then set up a relationship with them where they will deliver products within 30 minutes of you ordering them. Yes, it is possible and surprisingly common. It is rare that you will need to carry inventory from those suppliers.
5. Ask Suppliers to Help Manage Your Inventory
Some suppliers will stock your shelves for you. In the case of grocery stores, most of the chips, beverages, and snacks are actually stocked for the store by their suppliers. This is surprisingly common. Many suppliers actually dream of this as an ideal scenario. However, watch out that they are limited in how they can stock so they don’t overstock you and charge for it. Many times you can make an agreement that you are only charged when an item is sold or when they have to restock. You can also require them to carry or finance the cost of inventory.
6. Have More Than One Supplier for Each Part
If you have a low cost but slower supplier you use primarily, you can reduce inventory if you have a high cost but faster backup for the same product. You can also pit these suppliers against each-other so they compete on price and lead times. I have saved thousands of dollars just by asking my suppliers to beat my current price while maintaining lead times.
7. Use Inventory Stocking Targets
If you must carry inventory, then be intentional about how much you carry. You can use a simple inventory stocking tool. Track your inventory levels and order based on a targeted stocking level instead of just ordering 3 units across the board without thinking through it.
8. Adjust Inventory Targets Based on Seasonality
Make sure you understand what kind of seasonality you will have. You can identify which month or quarter is higher in overall sales than the general trend by using multiple regression or use a simpler method. If you know that November and December are always 30% higher than sales in Q3, then you can adjust your inventory stocking levels accordingly.
9. Invest in IT Infrastructure for Inventory
If you have large amounts of inventory, then it is a good idea to invest in some of the latest intelligent inventory software. Machine Learning has made leaps and bounds in it’s ability to suggest which SKUs to stock more of and which SKUs to reduce. Use a system that is integrated with mobile devices to improve connectivity and real-time data.
10. Segment your Inventory and Look for Slow and Fast Moving Segments
Do a segmentation analysis of your inventory. There are probably a few slow-moving expensive items that drive the majority of your inventory costs. Use Paretos and drill down methods to find where the highest cost, slow-moving items are.
11. Improve your Demand Accuracy and Reduce Variability
Use a sales funnel and predict how many units you might sell based on average conversion levels for each stage of the sales process. Combine this with seasonality and other key market leading indicators.
Develop a consistent process for understanding your customer’s needs. If you can have visibility to their inventory levels of your product you can set your orders based on whether their inventory is at 80% or 20% of their targeted levels. The same inventory cost problems that apply to you also apply to your customers, so improved communication process could benefit both companies.
If your sales are highly variable, find a way to give yourself more prediction capability for when a spike in demand may occur. If you have marketing plans that may increase sales, make sure inventory reflects the potential spike in demand.
12. Offer to Manage Your Customer’s Inventory for Them
This gives you maximum visibility to how soon you will need to produce parts and stock up your own inventory. It also has the benefits of improving customer relationships, streamlining your ordering process and identifying additional business opportunities at the customer site.
13. Reduce The Price of Old Inventory Until it’s Sold
The value of inventory is decreasing with age as it can become obsolete or pass its use-by date. If it’s been there for a long time start lowering the price on a regular basis, such as 1% per day until it is sold. Even if you sell it for less than you bought it for, it’s not worth keeping the money and space tied up for depreciating assets.
14. Allocate Holding Costs to Product Lines
Accurate cost accounting would ensure that each project or product line accounts for the holding cost of inventory. This helps pay for warehousing and helps project teams make better inventory decisions.
15. Sequence All of Your Production Cells
Make sure that your faster moving production cells don’t produce more product than your bottleneck can use. The overproduction will only result in your having Made In Works inventory sitting between production cells. You can use inventory stocking targets to manage the production rate of a faster moving cell. You might have excellent throughput from one cell, but if it’s faster than needed then it’s wasted effort.
16. Be Excellent at Operations Management
Operations Management Excellence could become your competitive strategy as part of your core business. For example: “Control your expenses better than your competition” – Sam Walton, Walmart Founder. Decide if continued focus in this area could be a key to differentiation in your market.