In my previous blog I discussed two approaches to bringing down your cost: cost cutting and cost reducing, with regards to the overall supply chain network. The most effective way of cost reduction in supply chain is through the collaborative effort of the whole organization. As discussed previously, the supply chain has various areas where cost reduction can be done, but for this blog, I want to focus on cost reduction with better or best inventory management processes and practices.Basically inventory can appear in a variety of forms, such as raw material, goods in process, and finished goods. And each form represents funds (money) that are tied up until that inventory is “used up” by company as sold goods. Similarly, in retail stores, any stock on the shelves represents dollars tied up until it sells. In other words, inventory is anything holding up operating funds.
The main objective of a supply chain is to have the right inventory, at the right time, at the right location with the right quantity. To achieve this objective, it’s key to have a proper inventory management process in place within the organization. There are numerous ways to achieve this without driving up the cost of operations or the cost of inventory. Most importantly, such strategies will help the organization reduce the cost associated with inventory. There are some common techniques and some unique business processes which can be implemented to achieve cost reduction and help with the better management of inventory. Many organizations should implement the following ten practices to reduce inventory costs:
1. Conduct periodic reviews and audits of various inventories being held in-house.
2. Analyze the usage and lead times of on-hand and order book inventory.
3. Reduce safety stock based on customer demand.
5. Improve cycle counting techniques for inventory management.
6. Use vendor managed inventory or implement vendor stocking programs, which means supplier are managing inventory with the organization.
7. Use collaborative planning and replenishment (CPFR) business processes and IT standards to collaborate among multiple parties in the supply chain network.
8. Improve the forecast of each product at the item level, i.e. use a variety of demand forecasting arithmetic models. No single set of algorithms fits all customers’ forecast or product families.
9. Communicate demand/hard orders to suppliers for better delivery of inventory.
Many inventory management teams have ideas and strategies in their minds, but no time to bring them into action. That’s why when implementing any inventory management best practice, it’s important to have upper management’s support. Additionally, any process improvement should be in-line with the corporate objectives. Regardless of what size the organization is, any of the above inventory management best practices can be used to gain extraordinary results for the organization’s bottom line.
As organizations have an overall objective to put best practices into its supply chain management, supply chain managers need to start by looking at each process within the supply chain. Each activity needs to be mapped to understand where a best practice can be implemented, and where standard cross-functional processes can be set up. Every process and activity has owners who need to be in-line with the overall best practice implementation. For every process, it is crucial to have performance measurements which will create accountability and allow users to focus on the continuous improvement of process.
To achieve cost reduction in the supply chain, it’s imperative to have these inventory management strategies extend out to the organizations suppliers as well. By doing so, organizations will streamline processes internally and externally, and integrate will with the overall business objectives.
In last blog of this series, I will discuss what IT systems need to be in place for better cost reductions in the overall supply.
Good article. At the tail end of the article you very appropriately suggest that the inventory management efforts need to reach beyond the factory walls and to the suppliers supporting the business. What I believe is missing here is the importance of the extended supply chain visibility. It isn’t good enough just knowing that your suppliers have inventory management strategies, but rather that their strategies are directly in line with yours. How much demand and supply disruption flexibility will the current inventory strategies support both theoretically and in reality?
Thanks for the comment Kerry, I totally agree with you. The extended supply chain visibility is just not critical for the organizations but also to each player within the supply chain. To gain most out of any inventory strategy its crucial for all the players in the supply chain from customers customer to suppliers supplier to communicate, calloborate and implement most effective inventory strategy to take full benefits. Its never know when the demand is going to go down if you communication is open at every end it becomes quicker to implement downturn or upturn strategies to better meet the demands.
I am sending this to you because it captures the essential highlights of the current consumables approach to managing inventories.
More to follow…
I enjoyed the article as well. I am a Distribution Manager for a non-profit with a background in the profit sector. Your quote, “The main objective of a supply chain is to have the right inventory, at the right time, at the right location with the right quantity,” sums up the essence of our organizations biggest opportunity. I could not have read your article at a more perfect time. The link to
multi-echelon inventory optimization was extremely beneficial. I look forward to reading your blog regarding IT systems, as I am in the brainstorming process of potential solutions for a warehouse management system.
In the challenging economic times that we find ourselves in, organizations are focusing on cost-cutting opportunties now more than ever. One of the best ways to reduce costs is to reduce inventory and improve business results with inventory optimization. We regularly provide a rapid rate of return within 12 months. Full disclosure: TCLogic is a provider of web-based inventory optimization software. Please visit www.tclogic.com for more information.
i read an article but i need sumthing more.as i m working as an intern in robotics and automation company whre i need to make a project on “techniques to improve better inventory” so plz send sum thesis related to tht.
please send me a sample of stock control register
send me a sample of stock control register,that i can use to minimise stock expenses,stock usage