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Can You Bring Cost Down through Better Inventory Management?

Written By: Khudsiya Quadri
Published On: February 24 2009

In my previous blog I discussed two approaches to bringing down your cost: cost cutting and cost reducing, with regards to the overall supply chain network. The most effective way of cost reduction in supply chain is through the collaborative effort of the whole organization. As discussed previously, the supply chain has various areas where cost reduction can be done, but for this blog, I want to focus on cost reduction with better or best inventory management processes and practices.Basically inventory can appear in a variety of forms, such as raw material, goods in process, and finished goods. And each form represents funds (money) that are tied up until that inventory is "used up" by company as sold goods. Similarly, in retail stores, any stock on the shelves represents dollars tied up until it sells. In other words, inventory is anything holding up operating funds.

The main objective of a supply chain is to have the right inventory, at the right time, at the right location with the right quantity. To achieve this objective, it’s key to have a proper inventory management process in place within the organization. There are numerous ways to achieve this without driving up the cost of operations or the cost of inventory. Most importantly, such strategies will help the organization reduce the cost associated with inventory. There are some common techniques and some unique business processes which can be implemented to achieve cost reduction and help with the better management of inventory. Many organizations should implement the following ten practices to reduce inventory costs:

1. Conduct periodic reviews and audits of various inventories being held in-house.

2. Analyze the usage and lead times of on-hand and order book inventory.

3. Reduce safety stock based on customer demand.

4. Use 80/20 rule (ABC approach) for inventory control.

5. Improve cycle counting techniques for inventory management.

6. Use vendor managed inventory or implement vendor stocking programs, which means supplier are managing inventory with the organization.

7. Use collaborative planning and replenishment (CPFR) business processes and IT standards to collaborate among multiple parties in the supply chain network.

8. Improve the forecast of each product at the item level, i.e. use a variety of demand forecasting arithmetic models. No single set of algorithms fits all customers’ forecast or product families.

9. Communicate demand/hard orders to suppliers for better delivery of inventory.

10. Implement new inventory software which uses inventory quality ratio methodology and multi-echelon inventory optimization tools.

Many inventory management teams have ideas and strategies in their minds, but no time to bring them into action. That’s why when implementing any inventory management best practice, it’s important to have upper management’s support. Additionally, any process improvement should be in-line with the corporate objectives. Regardless of what size the organization is, any of the above inventory management best practices can be used to gain extraordinary results for the organization’s bottom line.

As organizations have an overall objective to put best practices into its supply chain management, supply chain managers need to start by looking at each process within the supply chain. Each activity needs to be mapped to understand where a best practice can be implemented, and where standard cross-functional processes can be set up. Every process and activity has owners who need to be in-line with the overall best practice implementation. For every process, it is crucial to have performance measurements which will create accountability and allow users to focus on the continuous improvement of process.

To achieve cost reduction in the supply chain, it’s imperative to have these inventory management strategies extend out to the organizations suppliers as well. By doing so, organizations will streamline processes internally and externally, and integrate will with the overall business objectives.

In last blog of this series, I will discuss what IT systems need to be in place for better cost reductions in the overall supply.
 
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