The main concern of nearly every logistics consultant is if companies were any smarter at managing their inventories, they would not need us. Put another way, there is no greater source of consulting opportunities than surplus inventory, and (much to my delight) this issue extends across nearly all industries and their multiple supply chains.
There is also the marvellous phenomenon of commercial self-correction. Even when companies try to manage their inventories properly, there will always be someone who will overorder or screw up predefined replenishment levels. Warehouses will fill up, setting off an expensive overhang of stock-outs, locked-up capital and overflow storage requests. It happens so predictably, be it chasing a month-end incentive or just not believing accurate sales forecasts.
A warehouse is a place to hide buying mistakes. There are some justifiable reasons for surplus inventory — a customer cancels a large order, or a vendor offers an attractive rebate or discount to double an order to chase sales targets; the month's sales forecast is not accurate or is based on poorly implemented incentives. All these scenarios can result in something that keeps logistics consultants in business and erodes bottom-line profit: surplus inventory.
As sales teams enthusiastically create problems by adjusting already accurate forecasts, they also are very skilled at hiding their buying mistakes as surplus inventory in the dusty, back corners of their warehouses or forcing retail stores to absorb excess inventory into their poorly designed back rooms of through-push orders.
Keeping spare parts is not easy. Most businesses keep spare equipment and other operationally important items on hand to ensure they are providing services, day after day, month after month without interruption. Whether stored in warehouses, stashed at corporate headquarters or distributed among trucks in the field, the parts are numerous, deteriorate over time — and are notoriously difficult to keep tabs on.
Conducting thorough inventory counts on a regular schedule and then cataloguing all assets using robust inventory management software is highly recommended. But what to do next?
Prioritise what is important: Every industrial distributor knows that surplus inventory exists — finding that surplus can be a challenge. Some likely causes include a loss of a customer or supplier, a new competitor, lack of a scrapping process, the end of a season or product life cycle or an internal consolidation or branch closure.
Distributors need to prioritise their surplus inventory by shelf life, ageing, investment value and turnover. Closely examine trends. For example, management issues may cause problems with inventory location, while training issues could contribute to buyer-related surplus inventory.
Avoid it: Another way to eliminate the cost of surplus inventory is to avoid it altogether. Industrial distributors know that is easier said than done. By reacting quickly to accurate customer and vendor intelligence, improving procurement and inventory processes and changing ineffective stock policies and procedures, you can succeed in avoiding some level of surplus.
Excess can take a number of forms, from outdated equipment to broken and unfixable items to duplicates that exceed a company's designated minimum/maximum or safety levels. As with many things, less is often more when it comes to hanging onto equipment.
Simple as ABC: I worked a few years ago with a public company in Rayong province that succeeded in simplifying its inventory. With some help, it replanned requirements and stocking levels using customer-supplied forecasts (cutting out the sales team fairy tales). Customers provided their estimated annual use and normal replenishment quantities.
By combining these estimates with actual demand history, the distributor was then able to establish stocking levels and pass that information on to its manufacturers (rather than squeeze them on cost). Manufacturers then used this data to ensure on-hand quantities reflected forecast needs. They produced only what was required, postponing final production to buffer their own long-lead-time raw materials.
The distributor improved service levels and could then order just in time. In this case, inventory managers cut stocking levels by up to 50% while service levels remained stable. The company worked with others in the Map Ta Phut industrial zone to consolidate purchases and storage of commodity and indirect materials further — and I got an elephant stamp in my homework book for being so clever!
Avoid "just in case" inventory: With the right strategy, software and systems, industrial distributors can successfully identify, avoid and eliminate surplus inventory. Know your safety levels, meet them and keep a well-stocked business but know the pitfalls of having too much.
No business can make money from its stock of obsolete or ageing inventory or pay financially for the fallout of hanging on too long when there are sound financial and operational reasons to let go.
Summary: As with any improvement project, each distributor must begin by determining the areas within the organisation where the largest opportunity to avoid surplus inventory exists. Depending on the industry and organisation, such an effort can save thousands to hundreds of thousands of US dollars annually.
The worldwide market continues to raise the competitive bar, and today's economy remains soft. Tackling challenges such as surplus inventory can mean big savings across the board.
(Direct article sources: Gerry Aubert, IndustrialSupplyMagazine.com and AldenSys.com)
The Link is coordinated by Barry Elliott and Chris Catto-Smith as an interactive forum for industry professionals. We welcome all input, questions, feedback and news at: barry.elliott@abf1consulting comcattoc@ freshport.asia