12 Powerful Inventory Reduction Tips to Free Up Cash

Inventory Reduction Tips

Inventory reduction is one of the key goals for most businesses. In this article I have outlined 12 tried and test tips which I have used in my career and find it effective in terms of achieving results.


  1. Reduce Lead Times

A reduction in lead time will lead to products / materials not being held in stock for a long time. Both a reduction in supplier lead time and manufacturing lead time will contribute to inventory reduction. To reduce lead time the throughput, WIP and cycle time will need to be measured in order to get a realistic estimation of a reduction in lead time. This in turn will reduce the risks related to holding inventory for longer periods of time.

Inventory Reduction
Inventory is money, just not in notes!
  1. Improve supplier rapport

Having an improved relationship with suppliers is highly beneficial not only to the whole supply chain but also with inventory reduction. Having a rapport with the supplier will mean that communication between the parties is effective. The suppliers have the best knowledge of product they produce this can be utilised with a good rapport as this information can be shared. By having a good relationship with the suppliers communicating will be easier.

  1. Smaller order sizes

Ordering a smaller volume of inventory, more frequently is beneficial for the company to manage cash flow and also inventory reduction. Depending on the product this will reduce costs associated with keeping a higher volume of inventory. As a result the inventory on hand will be low but the frequency of replenishment will be higher. Having less inventory reduces several risk associated with keeping inventory e.g. issues that can cause a product to depreciate in value.

  1. Reduce obsolete stock

By identifying, repurposing or removing obsolete inventory the volume of inventory on hand will decrease. With this both direct and indirect costs of keeping the obsolete inventory will be reduced. This closely links to reduced order sizes as a smaller volume of the inventory will be in stock and as a result fewer inventories will be in stock to become obsolete.

  1. Pull based demand / replenish based on demand

A way for inventory reduction is by having a pull based demand system , this means only manufacturing the product once it has been made , this will reduce the risk of obsolete stock as all the materials ordered are being used to make the product.  This is different from making a product then selling it therefore as the demand is not certain, this will make forecasting easier. Therefore reducing inventory as it is only ordered when it is needed (this needs a good supplier rapport and short lead time.)

  1. More accurate Forecasting

Having a standardized reliable way of forecasting demand will mean that excess stock is not order and will reduce the chance of obsolete stock. Utilising all the data available and using up to date technology can help with reductions. Having a more streamlined supply chain with information being passed along and shared can also increase the chance of a better forecast as more information is available.

  1. Reduce SKU or delayed differentiation

Reducing the number of SKU’s in a range will mean less of the differentiated products will be produced and allow the benefits of manufacturing homogenous products however this reduction can be difficult but a way of reducing the costs that are associated with differentiation e.g. machine is reconfigured with a new set of algorithms in order to facilitate for the new product , this will save time but another way to diminish the cost would be by delaying the differentiation process to as far down the line as possible as to not cause a disruption to the other products in production.

  1. Pareto ABC

Using Pareto ABC analysis will help determine which inventory is used most often. A is the inventory that is used the most, B- product that ae important but are used less frequently and C these are products that are rarely used. “A” classification products are ones that are used frequently and can therefore be ordered in a small quantity, or be delivered Just in time and will require less safety stock , and C products can be ordered less frequently but with more safety stock kept. In my experience this is the most effective method of inventory reduction and fast!

  1. Better measuring system

Implementing a system that will recognise when a product needs replenishing and is dynamic can also be useful . Using a system that can change how much to order not only by using how much current stock is on hand but by also a change in trends will help reduce the chance of obsolete stock and excess stock.

  1. More versatile components

Using a material or component that is versatile will result in inventory reduction . Ordering a material that can be used in many different products can reduce the inventory on hand .This is because the one material can go into several products , if the material has a high inventory turnover then it can be ordered in a smaller quantity often as above.

  1. Move inventory up-stream in supply chain

Move inventory up stream in supply chain by using Vendor Managed Inventory (VMI) or Consigned Inventory Program. With Strategic suppliers who suppliers high value, volume and frequency items can keep minimum & maximum stocks for you as long as you can cover the liability of that inventory. That means you can simply cut the manufacturing lead time and pull from stock, in turn reduce your safety stocks and/or cycle stocks. Again I have used this tactics quite a lot in my 10 years of supply chain career and this give high gains when it comes to inventory reduction.

  1. Focus on Top 50 high value inventory items

During my 10 years in supply chain planning I have found between 20%-25% inventory sits with Top 50 high value inventory items (may vary with different business!). I always ask my material planners to focus on those and “micro manage” them and for rest they can use MRP and Parameter setting. And buy applying one or more of the 11 techniques mentioned above you can reduce significant amount of inventory related to these Top 50 high value inventory items and free up some cash flow

Conclusion

Inventory reduction should not be reactive and by applying one or more of these tips systematically as a part of your standard work a sustainable results can be achieved and lot of cash can be freed up to inventory in other growth initiatives.

Please let me know what you think of these 12 tips and share more ideas if I have missed any!





22 thoughts on “12 Powerful Inventory Reduction Tips to Free Up Cash

  1. Hi Mudd, tgere are a few more….

    – Apply seasonality un the safety stock patameters
    – For A&B’s work with forecasts signals
    – Using the min-max replenishment model
    ….
    Cheers mate

    David

    1. Thanks for your Input David, your experience in supply chain is commendable! And your comments are welcome.

      Regards,
      Muddassir

  2. Hi Mudd, there are a few more….

    – Apply seasonality in the safety stock patameters
    – For A&B’s work with forecasts signals
    – Using the min-max replenishment model
    ….
    David

  3. Fantastic topic, Mudd!

    However, I have a doubt on item 3: Smaller Order Size. I totally agree on this topic when you have closer suppliers, but if your supplier stands overseas, this tip is still valuable? The transportation cost won’t be higher than the holding cost?

    1. Marcus, thanks for the feedback. And I agree Item 3 won’t be as effective if you have long lead time suppliers, for example India, China or Pakistan.

  4. Those are very useful ones Dr. Mudd. If I may add to consider also Systems Contracting with Vendor, Ship to Stock with Zero Defect, or better Ship to Load (to the WIP), Ship to Sell/Subcontracting, Conduct Time Study and Layout, Set up the right ERP System, Upgrade equipment Capacity, Create more Sales, Educate and Train people with Continuous Improvement, Six Sigma, Deming Cycle, Monitor progress (actual vs targets), Partner with the right supplier, focus on TQM/100% Quality in all areas, implement 5S and JIT,. look at the Total Supply Chain, Aim for Cost Reductions, reward people for great contributions to Improvement Ideas, Review Supply/Product Portfolio, Use Commodity Strategy, etc. Thanks

  5. Same concept as seasonlity, a consumer index may also be a factor to consider. FX rate going high or low, gas price tendency will affect consumer purchase power. If vendor is based out in China, Korea, Taiwan and Vietnam, there is huge impact on lead time in period of Chinese/Lunar New Year.

  6. Thanks Muddassirism.

    this is a great topic and thanks for the clear explanation. i have few questions, hope it is not too much.

    # 7 is confusing to me , i thought we want more differentiated products using similar materials.
    # 8 for ABC Analysis. from my experience i noticed high demand items under category A but with longer lead time , always need high safety stock . and items under C category always ends up with high inventory and high returns. this contradict the analysis that A require less Safety Stock and ordered in small quantity… for C yes it is ordered less frequent , but in small volumes and require min safety stock due to less turns into sales.
    # 10 for the versatile material , i get the value of the material that is in high demand and can be used in production, it can results in less inventory of the material stored or high turn over of the material . but how this can results in finished goods being reduced in inventory , assuming it is different products produced that have different demand generated.

    # 11 either producing and storing at the Suppliers warehouse or the Buyer/Customer house or third party , isn’t that considered increasing the Safety Stock inventory ? wouldn’t that impact the shelve time of the item, if it fall below the life time so it may results in Slope inventory ?

    For Seasonal Items , how can you reduce their high inventory OH , if they have very short time in the market ? considering they always end up with devalued toward the end of their season.

    Thank you So much in advance,
    Jailan Elsarha

    1. Hello! Your sharing is very good for acquiring knowledge through different perspectives! If you let me I can share my thoughts on #7. Delayed differentiation comes as an answer to variability, as we know, variability is one factor that contributes to higher stock levels… this concept tries to contribute to reduce stock level mostly in an scenario where uncertainty in the demand is strong. Delayed Differentiation or postponement means that the manufacturing process will be common to a broader range of final products, allowing a simpler mix of raw materials and in a more controllable way, up to the point where this differentiation is inevitable (ideally, very close to being delivered to the end consumer).

  7. This is a great article!
    Here are some additions from a retailer’s point of view:
    Monitor inventory at its lowest level on a consistent, regular basis. That way, the winners, losers, and cash cows can be readily identified and actions taken.
    A retail axiom is that the first markdown is always the cheapest, so finding something that is not moving (presuming that it is in the appropriate season and similar items are moving well) will allow a minor price adjustment that may spur activity. As you state in your article, removing old inventory frees up cash to buy something else. Also, taking a markdown while an item is still in season and likely to have some demand is way better than waiting until it is out of season to take action and selling the product at pennies on the dollar.
    Winners can be repurchased if possible or marked so that similar items in subsequent seasons can be considered.
    Cash cows just have to have inventory in the pipeline so that they can keep on providing cash!

    Ensure that sell-through of inventory is maximized by making certain that the items are up on your Web site, on your store shelf, or any other way to present them to the customer. Customers do not tour your stockrooms, nor do they visit any of your planned items for upload to the Web.

    Thanks for your great articles.

    Regards,

    Leslie

  8. #8. Use double ABC analysis measuring both number of picks and value of used materials. Two products with equal value, where one is picked several times a day and the other once a months should not be planned in the same way.

    Another point… Make it a habbit to review inventory history at SKU level to see if you’re actually using the safety (i.e. have a stock level below the safety stock). If not, you can remove some of the safety.

  9. Good, sound, steady & proven approaches. The key factor to consider is the correct KPI’s that directly impact the “output” which is the inventory turns achieved. Without the correct inputs & KPI’s the output is always left to chance. I see this is many companies. Focus & measure forecasting accuracy & bias + lead times and EOQ’s etc and turns will improve naturally. Also a big one that is always hard for companies to swallow is SLOB (slow & obsolete). Companies rarely know when to scrap or auction off old products because they don’t really know what their true COGS is. I.e inventory carrying costs. Seen it so many times…. Good article!

  10. Demand plays the most important role in any of the inventory management style..I request my seniors here to suggest the most effective sales forecast technique & also the most widely used one with the reasons to choose them.

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