MRO Cost Reduction Services Inventory Optimization

Holding costs are too high – this often happens when a business is carrying more inventory than is profitable. It is advisable to regularly review the performance of your business to determine whether you need to carry out inventory reductions. Once you automate your warehouse, it will be easy to keep track of supply deliveries and product turnover. Observe the trends for a while and use that data to identify an ideal reorder point.

An example of joint procurement can be found in the EU’s Joint Procurement Agreement , set up in 2014 to procure medications to deal with pandemics. The aim behind the JPA was to ensure that medical treatments could be supplied to members in a cost-effective and equitable way. Under a 3PL model, the external party receives inventory and receives orders as they are made at the main points of sale. This can be done manually or through an automated notification system.

ABC analysis is important for the subject of how to reduce inventory because each class of inventory requires a different level of inventory monitoring and control. When you order too much inventory and it just sits in your warehouse, not only do you lose profits, but you are forced to find ways to get rid of it. If you mark down the items in a fit of desperation, your customers will become accustomed to that price reduction and expect it in the future. Strategy3 led the purchasing team of a Beverage Distributor with $650MM+ in annual revenue to decrease inventory as a Percentage of Revenue from 13.4% to 11.4%. This decrease resulted in $13.67MM in inventory cost avoidance, while improving overall Customer Service Level from a baseline of 96.7% to 98.2%.

Conduct Inventory Self Audit or Assessment

When companies do find themselves moving through inventory too slowly, promotions and bundling may help clear it out. Review the performance of all products every month to see if they’re selling at the expected rate. If turnover is higher or lower than expected, adjust accordingly. Once again, accurate forecasts will minimize excess inventory that sits around and loses value. For a quick, rough estimate of carrying costs, divide your total annual inventory value by four. To reduce the cost of capital, invest in forecasting that leads to smaller or more strategic purchases.

Customer service facets like improved delivery time is also a benefit. With the ever changing business environment, controlling cost has not always been on the top of the list of priorities. In the past, cost reduction strategies companies maintained a steady level of inventory because competition was low. Now, more competitors and a growing market with rapid changing products and features cause inventory prices to rise.

Starting from up steam of supply chain and map out the average lead-time to down stream of supply chain. I have found this exercise very useful to present visually to the team involved to show how much inventory we should be carrying at each stage of supply chain. Reduced inventory saves your business carrying costs, storage costs, and transportation costs between warehouse facilities. Obviously the percentage levels of each class will vary based on the size of your total inventory, but these are good concepts to keep in mind. You want to keep an eye on your items holding the biggest total value. If you order too much and it never gets sold, that’s a whole lot of cash flow that could have been used somewhere else.

It’s tough to get rid of stuff when you’re in the inventory management business. Those are products, after all—products that are theoretically worth real money. But if they’re obsolete and not selling, they’re just taking up space. Ordering in smaller quantities is only possible if your supplier doesn’t require large minimum order quantities . If this is the case, you need to weigh up the unit cost saving against the increase in carrying costs.

Use Data-Based Approaches

Inventory optimization software, such as EazyStock, enables inventory management teams to plan and manage inventory with one centralized view. Forecasting and reordering calculations can be based on point of sale demand data, not demand at each stage of the supply chain. And, with a view of stock levels across all echelons, inventory can be balanced out, so excess stock at one location can be redistributed to other sites, where levels of the same item are lower.

• Organizations can minimize obsolete inventory by finding ways to offload stock while it still has some value, perhaps through deep discounting, donating it or by selling it to a liquidator.
• If you need to fill the gaps in your knowledge, you can always ask for clarifications related to your paper.
• I always ask my material planners to focus on those and “micromanage” them and for rest they can use MRP and Parameter setting.
• The longer you have to hold inventory, the more expenses you are likely to incur.

Outside the office, he enjoys spending time with his family and friends, catching up with the latest offering from HBO or paying a visit to a new place. Want to have a look at some best practices that might help you with your inventory management? For these products, you need to use software that can manage all of your SKU data in one place so you know how these products are really performing on the market. This can become an inventory headache, as products with multiple SKUs can send confusing signals when it comes to demand. You might think that there is no interest in a particular product, only to find that the reason people aren’t ordering that shirt is because the size they want is never in stock. Stock keeping units are identification codes for products that help you track them through inventory.

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Using a material or component that is versatile will result in inventory reduction. Ordering a material that can be used in many different products can reduce the inventory on hand. If the material has a high inventory turnover then it can be ordered in a smaller quantity often as above.

With Excel spreadsheets, paper records or other legacy tracking methods, a company’s inventory reports are often inaccurate and can’t update in real time. Administrative costs encompass a wide variety of expenses, including property taxes, facility maintenance and cleaning, transportation and equipment depreciation. Generally, if a company holds more inventory, it has higher administrative costs, in part because it needs a larger facility. SCMDOJO aims to help Supply Chain Professionals grow by providing high-quality supply chain on-demand courses, guides, best practices, tools and consulting from industry experts. I am aiming to develop a self-audit tool so the supply chain professionals can answer the questions as Yes or No format and understand where they stand. Business has a stated service level strategy and has established inventory targets by category.

Pull Based Demand / Replenish Based on Demand

But machinery, equipment and damage to products after you take possession are also part of this expense category. A company may not need as much machinery or equipment, or it may use them less frequently and reduce the need for maintenance and repair, if it stores fewer items in its facility. This expense often totals about one quarter of the inventory’s total value. For a more precise calculation, add up your carrying costs and divide that number by the total inventory value. In most business reduce cost of piece price is an immense focus to increase profitability.

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They may be crazy about linen shirts one summer and obsessed with printed t-shirts by the next and your business needs to keep up. In turn, you can sell and reduce the stock you have before ordering more. It is more manageable than just ordering a constant quantity of inventory that may only fill up your premises.

Of course, no supplier is perfect and delays in the supply chain are expected from time to time. However, if your supplier is not dependable and causes you to stockpile, it may be best to consider partnering with a different supplier. When you have more products in stock than you are selling, their expiry dates can come due while they are still in your warehouse. It would, therefore, be wise to reduce your inventory to stop accumulating and maintaining more product units than you are selling. So, in today’s blog, we shine a light on all things inventory reduction.

If you’re looking for a more advanced form of inventory classification you could consider ABC XYZ analysis which takes into account forecastability . But for a more sophisticated means of inventory classification you’ll need to use inventory optimization software to do the job automatically. Donate excess stocks, which helps them keep costs low while helping people in need. Out of stock costs – the loss caused by missed sales opportunities due to poor inventory.

A flexible ordering arrangement means that you can order different product quantities when you restock instead of a fixed regular quantity. Incentives like discounts and other sale offers encourage customers to buy goods that they may have previously been reluctant to buy. They would, therefore, be a great way to get rid of some of the stock that you have. Group A should comprise products that have a high sell-through rate and bring in good profits. Group B should consist of average-performing products while Group C would include the lower-ranking goods in terms of sales and profits. You may be prone to ordering and holding more inventory than necessary to avoid shortages when your supplier fails to deliver on time.

Inventory Cost Reduction

Meanwhile, reducing your inventory could free up your capital and save you from having to take up any loans and incurring the cost of credit. A warehouse management system is complementary and can make fulfillment and shipping faster and more cost effective. Businesses outgrow spreadsheets quickly because of their limited functionality and lack of automation.

Inventory Carrying Costs: What It Is & How to Calculate It

You need to use the data you have to estimate the right quantities of stocks you need to fulfill all orders. In the same time, you need to come up with innovative solutions to cut costs due to excess inventory. Keep these tips in mind and your business will be better for it in the long run. In most cases, it brings more expenses than what you could gain with long-term storage.

Improve the Layout of Your Warehouse

Inventory cost reduction is at the top of the priority list of any wholesaler or retailer. Companies use a lot of resources making sure that they have the right Inventory levels. Having too much inventory is very costly as it is cash sitting in the warehouse, having too little Inventory will result in loss of sales and eventually loss of consumer confidence. Up ahead, we’ll look at five practical ways to reduce your inventory management costs and end with some resources that break down other tricks and techniques to managing your inventory. Typically, planners only forecast and order for their part of the supply chain and this leads to a ‘bull-whip’ effect. But when this is done at each echelon of the supply chain these ‘little extras’ amount to surplus stock.

Once the correct reorder point is found it can be set in your system to make the ongoing reordering process smoother. Inventory Control is a science, it involves a lot of variables which includes cooperation from your shipping company, your vendor and other logistics https://globalcloudteam.com/ Providers. Thanks to technological advancements, automation is accessible even to small businesses. Inventory management systems are complicated, and change is hard. Better than that, you can try to take advantage of possible association discounts.