Having effective inventory is one way to minimize working capital and increase profitability. There are five keys to maximize inventory effectiveness:
- Inventory visibility management
Company must be able to see the entire picture of its inventories, from in-transit inventory to inventory stocked in various warehouses. Company must segment the inventory (ABC principle can be used) and decide the number of days of inventory outstanding that must be reduced. Note that it should have minimal impact on service levels. A global engineering company increased its material inventory cycle increased from 12 to 17 and reduced its working capital totaled $31 million by implementing a centralized Web-based real-time tool to see their inventory, electronic Kanban, and analytical model to recalculate safety stocks and ordering quantity.
- Better visibility in material scheduling
Stock pileup traps valuable cash. This may occur when communication between the engineering, procurement and planning teams is bad. Careful planning is imperative to ensure that the inventory of old parts is depleted by the time the new parts arrive. A heavy equipment manufacturing company reduced raw material inventory by 8 percent by implementing an automated and intelligent workflow-based tool.
- Inventory classification and segmentation
Analytic Hierarchy Process can be used to do multicriteria segmentation and classify the parts into top priority, medium priority and low priority segments. Then, company can decide which product should have more reserve and which should not. A global industrial company reduced its on hand inventory by 27% by using multicriteria approach to classify its inventory.
- Demand forecasting
Accurate forecast means better inventory planning. To get an accurate forecast result, market intelligence can be incorporated in addition to choosing proper forecasting method. Depending on the demand pattern, various forecasting methods can be combined and then corrected manually. A motor manufacturer improved its demand forecasting accuracy by using best-fit forecast models and 20 strong exception-management rules.
- Service level planning
Company should balance service levels with inventory investments to achieve targeted service at minimum cost. Many companies try to do so by reducing the cost of carrying inventory. However, doing so recklessly can lead to the increase of ordering cost or being out of stock. A holistic approach that minimizes total inventory-relevant cost (summation of carrying, stock-out, and ordering cost) should be pursued. A global company once used statistical analysis model, changed its outdated rule of thumb, and managed to improve service levels from 80% to 90%.
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