We’ve reached part five of five. In my previous articles on reducing inventory, I’ve explained the importance of setting a goal, fine-tuning your safety stock strategy, reducing your high-side forecast bias, and reducing stocking locations.
The fifth thing you can do this week to reduce inventory is to spin the A’s.
I’m talking about those “A” items that are the bread and butter of our businesses. According to ABC Inventory concepts, “A” items make up just 20% of our product list but account for 80% of our sales. They typically have less demand variance than our “B” or “C” items, and they carry much less risk of becoming obsolete.
What do I mean when I say you should “spin” your “A” items? It’s simple: instead of making huge orders of these high-demand items, order a lower quantity but do it more frequently. You’ll end up with a lower average inventory level.
How to Reduce Your Average Inventory Level
What I’m talking about isn’t a hard concept to understand. Most companies will let their inventory be gradually consumed by customer orders until it reaches a certain minimum level. At that point, they’ll place a replenishment order to bring the inventory back up to its maximum level. This slow decline to the minimum, followed by a spike directly up to the maximum, is represented by the saw-tooth graph of inventory levels.
Our goal here is to reduce the average size of your inventory. Average inventory is calculated as one half of your replenishment order quantity plus your safety stock quantity. I’m advocating smaller replenishment orders done more frequently. Smaller orders placed more frequently mean smaller inventory.
Push Your Suppliers to Support Your Inventory Strategy
Now, you may be reading this and thinking, “Yeah, that’s all well and good, but I can’t increase my order velocity—we buy from China!”
I hear you. When you’re ordering from the other side of the world, it can be tough to control your lead times. Your suppliers may have told you from day one to expect 120-day lead times, and so you feel there’s nothing you can do to speed things up. Shipping takes as long as it takes.
But I urge you to dig deeper. Have you ever actually tracked your shipments to see if shipping truly takes as long as the lead time you’ve loaded into your system? If your shipments from China only take 100 days to arrive, instead of 120, that’s important to know. That information can have a significant effect on how frequently you place orders.
Also, talk with your suppliers about what goes into their lead times. Are they building to order or shipping from stock? If they’re shipping from stock, you can and should expect shorter lead times. You may be able to get faster service by providing them with projections of your future purchases. Remember: they’re probably trying to reduce their inventories, too. Speeding up the purchase process will be good for everyone.
There’s much more I can tell you about spinning the “A’s,” and about the simple things you can do to reduce your inventory. For a more detailed discussion, download our free white paper, “Five Things You Can Do This Week to Reduce Inventory.” Or send me an email with your questions or comments.