To Cut Inventory is NOT Difficult

All you must do is sell, sell, sell, and NOT replenish! Is this even possible??

It works if you can sell slow-moving, non-moving, and obsolete products. These are not what customers want to buy.

You have no choice. You reduce the popular inventory and risk being unable to supply. The consequences are lost sales, profit, and ROI.

I was business manager when corporate demanded we cut inventory to 2700k units. From experience, we knew with inventory below 3000k we invariably were unable to supply and would lose customers. We argued the case against the cut and lost. Our CFO wanted to show low stock levels for the annual report (and Wall Street). So, we complied and lost business as expected, and our prices deteriorated. They deteriorated because we “bought back” the customers we lost to the competition.

I never understood such actions. But they were a regular occurrence.

To cut inventory is NOT difficult. Dealing with the consequences is not difficult either. All you must accept is an enormous hit to the bottom line! That hit to the bottom line will never be measured - the CFO and CEO don't want to know and don't want shareholders to know!

Is there a better way?

The better way is to have…

“EVERYDAY LOW INVENTORY”

With ‘everyday low inventory’ AND perfect item availability there is no need for year-end inventory reduction.

How can “EVERYDAY LOW INVENTORY” be implemented?

An item’s inventory is the maximum amount you expect to sell until the next replenishment arrives. Most managers do not think of inventory in this way. Inventory is handled as a misbehaving stepchild and a pain in the butt. Necessary, but unwanted.?

If the stock on hand is what we expect to sell until the next replenishment arrives then this expectation is a forecast. Why not use this fact?

Every forecast is based on history. Management assumes the sales organization or a sophisticated statistical projection makes the best forecast. Goldratt suggested that the best and simplest unbiased forecast assumes tomorrow will be very much like today. If demand is constant all a company must do is replenish what was just sold. Right?

At the item level, demand is not always constant. An item’s popularity with consumers changes, so how much we maintain in stock should change too. An item’s inventory must always be enough to cover the maximum expected demand (within reason) until the next replenishment arrives.

Goldratt proposed what I call Dynamic Inventory Management (DIM). The algorithm senses changes in demand and adjusts all items' target inventory accordingly. To prevent undue nervousness the algorithm includes factors to dampen reaction time.?

The factors can be set to react quickly to increases in demand. This reduces the chance of production delays or missed sales. For the same reason, a company may want to react less quickly when demand declines.

Every item’s stock adjusts in the direction of the optimum. The desired optimum availability level is never achieved. The algorithm automatically and intelligently moves inventory targets towards the optimum. After implementation, the system soon stabilizes near the optimum.

DIM does not make longer-term forecasting obsolete. A company must still plan for and commit to next year's demand.

Results:

The improvement a company achieves depends on how good its current performance is.

Experience has shown:

• 95-99% item availability.
• 30 – 50% less inventory.
• A better flow of demand on production leads to an improved flow through the factory and a capacity gain.
• Fewer missed sales, an increase in sales
• A significant increase to Profit and ROI

The benefits can be realized in production (material and component availability), distribution and retail.

There is one fly in the ointment. Supply chains are usually made up of independent companies or departments with varying goals and targets. Unless these companies and departments cooperate properly; the overall impact of Dynamic Inventory Management (DIM) is diminished. That is something for the CEO and his team to work on!

Implement DIM on your own or get it from Alkyone Consulting (an add-on to your ERP or a module available in SAP's ERPs). The functionality is the same whichever you choose.

To learn more contact Alkyone or me.

https://alkyone-consulting.com???????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????????

Alkyone Consulting GmbH & Co. KG

Auf dem Wall 29

78628 Rottweil?

(Deutschland)

???Tel.?????????+49 741 2096 924-0

???Fax?????????+49 741 2096 924-9

Email:???[email protected]

[email protected]

Rudolf Burkhard???????????

www.dhirubhai.net/in/killthewickedwitchofwip/

Email:??[email protected]??OR [email protected]

(POOGI =?Process?Of?Ongoing?Improvement)