As we wrote before, reducing the amount of inventory keeps costs down and improves on-time shipment performance . So the question is, what inventory cost reduction methods can be put in place and will do the job? Here are three suggestions that will help greatly.

1. Follow up very closely on inventory lifetime

There are two categories you need to watch like a hawk:

Slow moving inventory – has already been here for longer than you’d like to keep anything. For example, in the food industry, many finished goods lose 1% of their value every day as they get close to expiry date. They have to be sold fast!

Aged inventory – needs to be scrapped or reprocessed. Imagine metal parts that have had time to rust and that need a new treatment or old stickers that have turned yellow and have to be thrown away. That’s a lot of costs!

How do you follow very closely on the amount of those categories? With a weekly report. Many companies hold a weekly meeting about this. Typically, the purchasers, the planning (including material control) staff, and a warehouse representative.

2. Set a “safety stock” level and purchase accordingly

Many companies say “we need one-month worth of this material” and, when we challenge them, they realize they only need 10 days of consumption in stock. You need to look at the historical lead time from a certain supplier and make sure you always have enough to avoid shortages 95% (or whatever that number is) of the time.

If another source can be developed, great! You have extra flexibility and you can reduce your safety stock. It can all be based on historical data and projections, not on rough guesses.

3. Implement a strong warehouse management system (WHS)

The number of wasted efforts and materials in warehouses is staggering. Here are a few examples:

Many operators are necessary because they waste hours every day looking for components. (What they need is a unique address and an up-to-date list in the computer.)

They write down every in/out change by hand, and then enter it in an Excel form, instead of carrying around an iPad and a bar code scanner (waste of time, many opportunities for mistakes).

The materials are not managed in a FIFO (First In, First Out) fashion, so they age and have to be scrapped.

Some components get stolen or lost.

4. Implement a suitable Materials Requirement Planning (MRP) system

Many companies keep all their information in an Excel database. But there is no logic and few controls, there is usually no real-time view of the situation for the whole company, and there is seldom a forecast of future demand. These companies are missing on a great deal of value.

It might be SAP’s MM and PP modules. Or it might be in Chinese software suite Kingdee. Both are fine and obviously come with different budgets. There is certainly something suitable for your company.

Overall, good inventory cost reduction methods, ideally assisted by a good MRP system, will lead you closer to a just-in-time situation.

Have you visited factories that turn inventory more than 20 times in the year, and that have managed to cut their costs accordingly? What do you think are key success factors, or key obstacles?