Building on our previous article (LINK), I want to share with you how to continue the optimization of your inventory beyond minimizing obsolescence, increasing accuracy, and accelerating turn over.
You know these are basic ideas, but as Alex Goldfayn (goldfayn.com) mentions in many of his publications, the secret to achieving results is in actually doing what we know we should be doing. As he calls it, closing the space between knowing and doing.
Two key elements as they relate to the optimization of you inventory are shortening replenishment lead-times and addressing the variability of these lead-times. By focusing on these two elements, you will notice significant reductions in required inventory levels, and meaningful cash liquidity.
Lead-times
I refer here to the time it takes to manufacture and subsequently stock an item, and this amount of time plays a critical role in the management of your inventory. Most manufacturers could actualize significant savings in operating costs by simply reducing these lead-times, both among sites and across all SKUs. Quite simply, if you reduce your lead times, you’ll don’t need to carry as much inventory, thus reducing carrying costs overall.
There are several proven methods to cutting back on lead-time, and you should explore at least three. Here you have my favorites:
Order Frequency: By ordering smaller amounts of inventory in higher frequency, you can increase your turnover rate, which will in turn lower the cost of carrying inventory. More frequent ordering should be based on sales data and studied sales forecasts (remember our recommendation for a good S&OP discipline).
Automation: Another great method to cut back on lead-times is the automation of stocktaking processes, as well as aspects of your supply chain. This process can be assisted via various forms of inventory management software, and will help streamline your operations overall.
Sharing of Sales Data: Any company that is already maintaining records of sales data can easily share this information with suppliers. By reviewing this data, suppliers can more easily and accurately anticipate upcoming orders, and have a more informed sense of how to best assist your business.
Address Variability
Once lead-times are thoroughly dissected and improved, the next step is to address the variability of lead-times as they relate to each product and each route. With variability comes luck of trust and inevitably overprotection of our orders. I see all the time. Buyers preemptively ordering additional inventory just in case the following order comes late or doesn’t come at all.
Despite the challenge, here are some ways in which you can address the variability as it pertains to each product.
Data: Track transactions and forecast timelines based off of the data collected and implement corrective actions. A number of software tools can generate lead times that are informed by historical data including the specific product in question, the time of year, and previous transactions.
Consolidate Suppliers: Reducing the number of suppliers is another method to reduce lead-time variability, and it also consolidates shipments and cuts down on shipping costs. Having less suppliers also makes it easier to partner with them to resolve issues and leverage opportunities.
In Summation
By addressing the duration and variability of lead times, you will notice a substantial reduction in required inventory levels. Besides, having a grasp of these elements cuts back on wasted resources, as they lead to decisions that are informed by hard data and historical analysis of inventory.
Jose-Luis Bretones
Linar Advisors – Managing Partner
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