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Solutions on Optimization of Inventory |
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Managing inventory in the supply chain is critical
to ensure high customer service levels.
However, it is also a very costly asset to maintain.
Having the right amount of inventory to meet customer
requirements is critical. Find out what inventory best
practices reduce inventory costs across the supply
chain.
Here are Four solutions to help keep you on top of your
inventory :
Eliminate Dead Stock
Dead stock is ‘stuff’ that has been lying around for
ages. I worked for a high-end clothing retailer and they
sent out all of their unsold seasonal merchandise to a
clearance store, marking down prices by 70%. If it did
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not sell there, it was shipped to an off-site
warehouse (because the main warehouse was full!) where
it was checked, labeled and inventoried into the
system.
Massive amounts of paper reports were generated and
kept in logs. The merchandise sat there for one year,
where it was brought out and transported back to the
clearance store. Once again, if it did not sell it
went back to the off-site warehouse. I even remember
seeing polka-dot dresses from the 1970’s in there.
Even if some of those items were sold at 10% of the
retail price the company would not make a profit.
Smart retailers like The Gap and H&M have a markdown
policy that clears merchandise in the store – no need
to transport it and inventory it for many years. Make
sure that you have a pro-active policy that clears
dead stock. |
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Perform an ABC Analysis of your
Inventory
Pareto’s Law, otherwise known as the 80/20 rule
applies to Inventory Management. For example, 80% of
your sales are represented by 20% of your items. Let’s
look at a hypothetical situation for a full-service
food warehouse with 40,000 SKUs. Please refer to the
the "ABC Analysis" table below.
Only 5,000 items represent 75.7% of the annual sales
volume. These SKUs are classified as ‘A’ items. They
may include items such as milk, produce, bread and
snack foods. To ensure a high level of customer
service, it is imperative that these items have a high
in-stock level. From a management perspective, it’s
sensible to keep low inventory of ‘A’ items and
arrange for frequent replenishments, reducing capital
requirements. Conversely, the strategy best suited for
‘C’ items is to holding inventories and looking at
other alternatives such as stockless buying (discussed
next). As ‘B’ items fall in between, they should be
reviewed less often than ‘A’ items, however if they
are ‘key’ items that consumers want, must be treated
like ‘A’ items. For example, a young mother will want
to purchase diapers for her new-born along with milk &
bread, but if diapers are a ‘B’ item it must be
treated as an ‘A’ item to ensure high customer
satisfaction.
Arrange Stockless Buying / Systems Contracting
A good way to understand how this arrangement works is
with an example. A small boat manufacturer requires
fasteners & rivets to make boats. These are
small-dollar value (i.e. ‘C’ class) items, however
having the right sizes and quantities in inventory is
essential to keeping on track to the monthly
production schedule. Rather than buying large
quantities of these items (and risk obsolescence with
future design changes) the boat manufacturer arranged
a stockless buying arrangement with the fastener
supplier. This is how it works: The boat manufacturer
would share its monthly production schedule with the
supplier. The supplier is then responsible for
ensuring that an adequate supply of materials is
available at the manufacturer’s facility. There is a
special secured area in which the supplier keeps the
inventory. When a requisition request is generated in
the manufacturer’s system, it allocates inventory to
production. At this point an invoice is generated and
the manufacturer pays for the materials it used. This
introduces beneficial process efficiencies into the
management of purchasing and inventory functions for
both the manufacturer and the supplier. |
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Vendor Managed Inventory Systems
Vendor managed inventory (VMI) systems have placed the
responsibility for the replenishment function to the
vendors. For example, Heinz, a manufacturer of
ketchup, will arrange to have its products available
to its customers (grocery retailers, mass merchants,
etc.). They will monitor sales and send the right
quantities at the right time to ensure consumers will
find Heinz ketchup on store shelves. The
purchasing/order processing functions are more
streamlined, allowing the management team of Heinz’s
customers to focus their efforts on other areas.
VMI
has evolved to Collaborative Planning, Forecasting and
Replenishment (CPFR), which included additional
partners in the supply chain. Wal-Mart, a world leader
in CPFR, has its own proprietary system called Retail
Link, which gives all of its suppliers information on
product sales history, inventories, in-stock percent,
etc. across all of its retail locations over the last
two years. Suppliers are responsible to maintain an
in-stock level of 98.5%. The relationship works both
ways. Wal-Mart provides this information for free to
help its suppliers; however their suppliers must meet
the 98.5% in-stock level if they would like to remain
a Wal-Mart supplier.Use the above four solutions to
reduce inventory costs in your supply chain. One of
the few remaining ways to drive down inventory costs
are a result of organizations becoming more
collaborative and sharing their data across the supply
chain. |
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