Adjusting to a new economic reality is a must for your organization to thrive in the coming months and years. This will require looking deep within the leadership and operations of your organization, but where do you begin? While there are a few solid starting points, inventory management is often an area of great opportunity that can be relatively simple to achieve.
Did you know that the generally accepted cost of carrying inventory is around 25%? That is, if you have $5,000,000 in inventory, it will cost you ~$500,000 annually? For many organizations, this adds up to millions of dollars. These costs include designing, sourcing, ordering, receiving, inspecting, tracking, storing, counting, handling, damage, obsolescence, and sales discounts. Therefore, strategic inventory management systems are critical to the success of your business.
Do you have a robust and formal approach to inventory management? Or do you add buffers based only on experience? We’ve seen countless cases where inventory is dramatically larger than required, often with dead stock that has been sitting idle for years. If you don’t know, right at this moment, how much dead stock is in your facility, then we’d bet a lot of money that it’s there and it’s more than you would expect.
While your team may have many years of experience, the tendency is to hold more inventory than one really needs, out of fear of running out. Instead, inventory requirements should be calculated precisely and should include Cycle Stock, Safety Stock and Order Interval Stock. This should be applied to finished goods, raw materials, and work in progress. This undertaking can be daunting, but there are ways to accomplish this in smaller steps.
At a minimum, conduct an ABC stratification on either your finished goods or raw materials (depending on your context) and focus your efforts on the “A” items (priority items that account for ~80% of related costs). Collect the data, do the math, and determine your target inventory quantities. Then develop a simple plan to reduce to the target quantities and remember to include a target date for your goal.
We’re here to help. If you’d like a free template on ABC Stratification, or if you’d like to learn more about how we can help you improve your business, contact us here.