March 30, 2023 | Supply Chain Strategy
Inventory management can make or break a company's bottom line. Too much inventory ties up capital and storage space, while too little inventory can lead to stockouts and lost sales. So, what needs to be done to strike the right balance and optimize an enterprise’s supply chain?
This blog explores some proven inventory reduction strategies that can be implemented today to improve business efficiency and profitability.
The first step to reducing inventory is to understand what’s there and where it's located. Conducting regular inventory audits helps identify slow-moving items, excess inventory, and potential obsolescence. Knowing the true value of inventory can help enterprises arrive at decisions on what to keep, what to sell, and what to discard.
Lean principles are all about eliminating waste in the supply chain. By streamlining processes and eliminating non-value-added activities, an enterprise can reduce lead times, improve quality, and reduce costs. One of the most powerful tools in lean manufacturing is just-in-time (JIT) inventory management. This approach involves producing or procuring goods only when they are needed, rather than holding inventory in anticipation of future demand.
Order quantities have a significant impact on an enterprise’s inventory levels. Ordering too much can lead to excess inventory, while ordering too little can result in stockouts. Finding the optimal order quantity requires a balance between the costs of ordering and holding inventory. One way to achieve this balance is by using economic order quantity (EOQ) models, which take into account the costs of ordering, holding, and stockouts.
Accurate demand forecasting is critical to inventory management. By understanding how much inventory an enterprise needs and when it’s needed, an enterprise can avoid overstocking and understocking. One way to improve forecast accuracy is by using statistical forecasting techniques such as time-series analysis, regression analysis and causal modeling. It's also important to collaborate closely with the sales and marketing teams to gather as much information possible about customer demand and market trends.
Outsourcing has proven to be an effective way for enterprises globally to cut inventory and improve supply chain efficiency. Partnering with third-party logistics (3PL) providers has the advantage of being able to leverage their expertise and infrastructure for more effective inventory management.
Vendor-managed inventory (VMI) is a collaborative inventory management strategy in which the supplier is responsible for managing the customer's inventory levels. This approach can help reduce lead times, improve inventory accuracy, and reduce the risk of stockouts. By giving the supplier access to an enterprise’s inventory data, they can proactively manage the enterprise’s inventory levels and replenish stock as needed.
Technology can be a powerful ally in inventory management. From advanced planning systems (APS) to radio-frequency identification (RFID) tags, there are many tools available that can help companies optimize their supply chains. For example, implementing an automated inventory tracking system can help improve inventory accuracy, reduce labor costs, and minimize the risk of errors. Similarly, using a cloud-based inventory management system can give real-time visibility into inventory levels, allowing an enterprise to make informed decisions about ordering and replenishment.
Let's take an example of a retail store that faced inventory management issues. The store's owner was constantly worried about having too much inventory on hand, which tied up capital and storage space. At the same time, the store often ran out of popular items, leading to lost sales and dissatisfied customers. After implementing some of the inventory reduction strategies mentioned above, the store owner was able to achieve a better balance between inventory levels and customer demand. By using lean principles and optimizing order quantities, the store was able to reduce excess inventory and minimize stockouts. Additionally, by improving forecast accuracy and implementing VMI with key suppliers, the store was able to stay ahead of trends and customer demand.
In another example, a manufacturing company struggled with high inventory levels and long lead times. By embracing lean principles and implementing JIT inventory management, the company was able to reduce lead times by more than half, improve quality, and reduce costs. The company also leveraged technology to track inventory levels and implement a customized system for managing production orders. As a result, the company was able to significantly reduce inventory levels and improve customer satisfaction.
Inventory reduction strategies help enterprises optimize their supply chain and improve their bottom line. Conducting regular inventory audits, embracing lean principles, optimizing order quantities, improving forecast accuracy, considering outsourcing, implementing VMI, and using technology, can help enterprises achieve a better balance between supply and demand. Enterprises, in order to stay ahead of the competition, need to keep experimenting, collaborating, and stay focused on their goals.