In my last blog post, I mentioned that I’d be sharing five steps you can take to start reducing your inventory as soon as this week. As promised, today’s post will continue the series.
If you read my first post and took my advice, you’ve already set a goal for inventory reduction. That wasn’t so hard, was it?
So, what comes next?
Well, now that you've committed to reducing your inventory by a specific amount within a set timeframe, you’ll need to make sure you can still maintain your desired customer service levels. This will require you to have adequate inventory on hand to meet your anticipated customer demand.
In other words, step #2 is to develop a safety stock strategy.
How to Develop a Safety Stock Strategy
How much safety stock inventory should you keep to maintain your desired level of customer service? There are a couple of ways you can go about determining the inventory levels that will ensure high customer service rates.
Many companies focus on keeping an adequate number of extra inventory units on hand for each item. This technique utilizes the service level factor to compute the safety stock level required to maintain a given level of customer service. The trouble is, these companies often use a one-size-fits-all safety stock policy to achieve the same customer service rates for each item. To achieve these rates for rarely-sold “C” items, they’ll have to carry a relatively large amount of safety stock because these items have a great deal of demand variability for which to compensate.
Why make that kind of investment in extra stock for less-important items? Why not instead aim for a slightly lower customer service rate on your “C” items? Meanwhile, you’ll be better able to maintain adequate inventories for your “A” items so that you can achieve your highest fill rates in this category.
Other companies determine their inventory levels according to a safety time strategy. In other words, they aim to keep a certain number of months’ worth of forecasted demand as safety stock inventory. When companies aim to keep, say, three months’ safety stock for all items, they may be overinvesting in stock for “A” items that have less demand variability, while not keeping enough inventory of highly variable “C” items.
Think about it, though: your “C” items represent a small portion of your overall sales. Keeping four months’ stock, instead of three, would represent a relatively small increase in units yet ensure a higher fill rate. You could more than offset this increase by trimming your safety time for “A” items to two months—yet you wouldn’t be endangering your customer service levels for these less variable items.
Rather than utilize a one-size-fits-all safety stock strategy, fine tune your strategy by ABC Classification. Utilize a different strategies for A items, B items and C items. The results will be lower inventory and higher customer service.
So, step two is to develop your safety stock strategy. I’ll be back soon with a third tip on reducing your inventory. But if you’re eager to get the full story, download our free white paper, “Five Things You Can Do This Week to Reduce Inventory.”