Part 1: Unlock all that cash tied up in inventory

During these challenging times, many organizations are experiencing cash flow pressures. For that reason, I have published a list of 50 practices that will quickly and sustainably reduce inventory levels. Quickly because they do not require investment in expensive technology. These tools focus on using your head, not your wallet. Sustainably because they are all about improving the "critical few" process gaps, not short term gimmicks, such as refusing supplier deliveries at quarter end.

The list can be found at my website: https://steveclarkeconsulting.com/papers

Today I have selected one of the simplest practices, namely Item Level Excess Inventory Analysis.

Every stock keeping unit (SKU) has a planned (design) minimum and maximum inventory level. Since the objective here is to reduce excess inventory, I'll focus on maximum inventory level. Since inventory replenishment should theoretically happen when a SKU reaches its safety stock, then:

Maximum planned (design) inventory level = safety stock + order quantity

Obviously, excess inventory is everything above the design maximum for each SKU:

Excess inventory = Actual inventory - maximum design inventory

Hopefully this data that can easily be exported from your ERP system into MS Excel. With some simple formulae, it is possible to quickly identify those SKU's with the most excess inventory. In my experience, this data will roughly follow Pareto's Principle, with 20% of SKU's accounting for 80% of excess inventory (critical few).

The next step is to analyze those critical few items in a team environment, asking what caused the excess inventory. If you have many SKU's, then you can limit this analysis to about 30 representative SKU's from a cross-section of your product portfolio. Ideally, the team should be cross-functional, but I have also done this analysis effectively with just Planners and Buyers, who typically understand the issues. Eventually though, the analysis must be shared with the broader team to get feedback and buy-in.

Through this analysis, chronic and repeating patterns will emerge. Sometimes, the issues are relatively simple to correct, others may require a project initiated to address them. In one organization that I performed this analysis, it quickly became clear that the key cause of excess inventory was that Buyers were being asked to make speculative purchases for a customized product by the sales team. Sometimes the sale did not happen, and so the company held all this excess, customized inventory. We quickly instituted a formal approval process for such purchases, and made the order cancellation policy more robust, and the problem was quickly addressed. Frequently the actual causes of excess inventory are much different than commonly held opinions within the organization.

Once the chronic issues have been identified, it is time to brainstorm solutions and select the ones that will have the largest impact. An action plan should be developed for those solutions that require minimal effort aka low hanging fruit. Those solutions that require significant resources should be added to the road-map.

The solutions will likely fall into one of these processes:

• Supplier Management
• Demand Planning
• Supply Planning
• Inventory Management
• Logistics
• Returns

In addition, there are also "enablers" that cut across all these processes. For example, daily management is when the operational team meets on a daily basis to review issues, such as sudden demand changes, supplier delays etc. This facilitates proactive intervention, such as cancelling/rescheduling production or supplier deliveries, which can prevent excess inventory.

You can find many best practices on my website that can be leveraged for inventory reduction: https://steveclarkeconsulting.com/papers . It is critical that there is at least one experienced and knowledgeable supply chain representative on the team that is familiar with many of these best practices, so that effective solutions are selected to address the challenges identified earlier.

Finally, based upon your findings and action plan, it should be possible to develop monthly inventory reduction targets, since each solution's impact was quantified in the earlier analysis. This will take into account "burn off" rates and the expected benefit realization date for each initiative.

My broader takeaway is that organizations must better utilize readily available data to improve supply chain performance. Too many organizations today over-complicate their supply chain transformation initiatives. Many times an executive will want the latest technology, or believes that a practice that worked well at her previous employer, will work well at her new organization. They'll created strategic road-maps and spend large amounts on expensive consultants, without first checking the data. For example, one organization concluded that the key issue with their supply chain planning process was software functionality, and initiated a project to find a more suitable software solution, without first checking data accuracy and operational reliability. If they had, they would have found that QC/QA lead-times regularly ranged from 90-300 days. In addition, bills of material had low accuracy levels, forecast accuracy was low, and inventory transactions were not performed in a timely manner. Clearly, improving data accuracy and operational reliability should occur before focusing on technology.

If you have any questions, please contact me at: [email protected] or 415-246-2938