How to reduce inventory
/13 Ways to Reduce Inventory
There are several ways to reduce inventory without making it noticeable to customers. The outcome of this reduction can be a vastly reduced investment in inventory and lower obsolescence costs, while still maintaining a high level of order fulfillment. We break the improvement options into the categories of product planning, purchasing and receiving, production, and fulfillment.
Inventory Reductions from Product Planning
Minimize parts. If the engineering staff can be persuaded to use the same components in as many products as possible, the number of parts in stock can be held to a minimum, which reduces the investment in raw materials inventory.
Minimize the number of product variations. If management insists on stocking every possible variation of every product, then one option is to reduce the number of product variations. Target for elimination those product variations that are rarely purchased.
Schedule change orders. If the engineering department wants to alter a product, it usually issues an engineering change order that stops the use of one component and substitutes another. Time the release of each change order so that existing stocks of the component to be replaced are used up before the change order goes into effect.
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Inventory Reductions from Purchasing and Receiving
Shrink the size of orders. Reduce the number of units ordered per purchase, and increase the number of orders to compensate. By doing so, the average amount of inventory on hand at any time is lower than if you just placed one large order up front, and this reduces the average investment in inventory. However, this approach will not work if delivery costs are high or if suppliers are located far away.
Order from nearby suppliers. Ordering from nearby suppliers reduces inventory by enabling just-in-time (JIT) deliveries, minimizing the need for large stockpiles. Faster delivery times lower the risk of stockouts while reducing the need for excessive safety stock. Additionally, shorter lead times improve flexibility, allowing businesses to adjust orders based on real-time demand rather than holding excess inventory.
Use supplier-managed inventory. Supplier-owned inventory reduces a company's on-hand stock by shifting ownership to the supplier until the goods are used or sold. This minimizes carrying costs, such as storage and insurance, while ensuring materials are available just in time for production or sales. Additionally, it improves cash flow since the company only pays for inventory when it is consumed, rather than when it is received.
Inventory Reductions from Production
Concentrate machinery. Reconfiguring the production area to place machines closer together reduces the distance that materials must travel between processing steps. This minimizes the amount of work-in-process inventory held in transit, as items move more quickly between machines. Faster processing reduces bottlenecks, preventing excess inventory buildup between stages. As a result, overall inventory levels decrease, leading to lower carrying costs and improved production efficiency.
Install conveyors. To build on the last point, once you have put machines close together, install conveyor belts between them. Doing so avoids the old approach of letting inventory pile up in a container until it is full, and then transporting it to the next machine. Instead, inventory flows in units of one, which reduces the overall inventory requirement.
Minimize the size of production runs. Schedule very small production runs, preferably only to accommodate existing customer orders. Otherwise, excessive production will lead to too much finished goods inventory.
Minimize machine setup times. It is much easier to have the short production runs just advocated if it takes only a few moments to reconfigure a machine to manufacture a different product.
Inventory Reductions from Fulfillment
Delay final assembly. If there are many products that only vary slightly each other, build inventory only to the point at which the variations are added to the products, and then complete them once customer orders arrive. By doing so, you avoid having committed too much of an investment in finished goods for very specific product variations that sit in the warehouse until an order arrives.
Concentrate slow-order items in storage. If there are many warehouses, only store high-turnover finished goods in them, while retaining slow-moving items in a central location. This is a balancing act of minimizing the inventory of slow-moving items by keeping a small number of them in one place, while also paying more for overnight deliveries to deliver them to customers on time.
Use drop shipping. If you are selling goods to customers that are made entirely by your suppliers, then pass along the customer orders to them, so that they can deliver straight to the customers.