Top Steps You Can Take to Reduce Inventory
Posted on: April 3, 2012 | By: SuperUser Account | Microsoft Dynamics AX/365
This is the second of a 3 part series on 1) Increasing Inventory Turns, 2) Reducing Inventory and 3) Improving Service Levels.
It is clear to most business people that reducing inventory levels, if done properly, can save money and hence allow you to make more money.
More specifically, reducing inventory allows you to tie up less money in working capital inventory. It also reduces what’s susceptible to obsolescence, spoilage, theft and damage. Less inventory means less time moving inventory around. Less insurance. High levels of inventory can make it hard to find the inventory you need in a timely manner, reducing your operating speed and throughput.
However, if you decide to have lower levels of inventory, you are exposed to the risk of not having a finished good for a customer order or a component for a production order.
It is not easy to balance the need to have enough inventory to satisfy this demand with the desire to reduce inventory to save money. Fortunately, there are some proven approaches to strike the right balance – to optimize inventory levels.
First, you can look at your finished good demand. Your demand can come from customer orders, order forecast and internal distribution orders. You will want to consider current service levels by item, factoring in things like item volume, item margin, seasonality, sales and promotions.
Finished good demand drives the need for inventory, production and purchases. For a distributor, satisfying demand involves looking at on-hand inventory and planned purchases. For a manufacturer, it involves looking at on-hand inventory and manufacturing production orders.
Materials demand is driven by these manufacturing production orders, factoring in what materials are already on hand.
To reduce inventory levels and save money, a company needs to determine purchased (and manufactured) item lead times based on past averages and then meet with suppliers to emphasize the importance of hitting the promised lead times. Financial incentives certainly don’t hurt.
In the end, the company needs to calculate re-order points, safety stock, order frequency and economic order quantities by item. While price breaks at certain quantities should be factored in along with promotions, these decisions should factor into the equation, not drive the decision.
Excel models, or better yet well implemented ERP, can help automate this math, resulting in reduced inventory levels and more money for your company.
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All the best!
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