Every company has inventory problems, whether they are recognized or not. Surplus, obsolete materials, just-in-case safety stocks, material stored in the wrong warehouse, material that is not quite good enough to use but is too good to throw away and items approaching their shelf-life limitations all contribute to the problem.
These inventory problems represent waste. They tie up company money, require material handling and consume valuable space. Perhaps, most importantly, inventory problems make the warehousing operation larger and more complex, and therefore costlier than necessary.
The following systematic process can help companies assess the size of their inventory problems and find ways to limit their impact.
1. Define the problem
Start with the idea that all inventory is a problem unless there is financial justification for it. Then list the categories of inventory problems that may represent the biggest losses, for example:
- Incorrectly located material
- Obsolete material
- Defective material
2. Determine the value for each category
For example, measure the overstock by the number of weeks or months of supply on hand, and determine the value of these categories. Each measurement can define the borderline between justifiable and inventory problems.
3. Develop auditing and reporting procedures to track the problem
Set up a process or a procedure that will automatically and regularly measure the amount of inventory problems on hand. Be sure that the measurements provide breakdowns by location, product line, age of the stock, reason for the problem and so on. Also, provide an evaluation tool that will be able to pinpoint the details underlying the measurement.
4. Establish inventory problem levels as a standard performance measurement
On a worldwide basis, North American business is often criticized for its lack of patience. Its focus on short-term results leads to a tendency to develop short-term solutions and to abort a project if these solutions do not deliver the desired results quickly. This situation can be avoided by ensuring that inventory problem levels are as important as productivity and short-term sales. As a result, they should be a formal part of the measurement of the business operation.
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5. Create a short-term cure
The short-term cure is usually simple to define but difficult to execute: get rid of the problem stock. The organization will have to accept the short-term, one-time cost of disposing of the problems. Although this may be difficult, it has to be done. This task is easier to accomplish if the organization already has an established reverse supply chain.
6. Plan and schedule the disposal of problem stock
Creativity is essential in developing ways to dispose of problem stock. Disposal ideas, depending on the product can include:
- Selling the problem stock to customers, brokers or inventory clearance houses at discounted prices
- Reworking the stock
- Using for substitutions
- Disassembling and reusing components
- Transferring intra-company
- Using for R&D, i.e. new product designs
- Using for training
- Sending to scrap
It is often necessary to lessen the impact of inventory problems on the business and allow costs to be absorbed at appropriate times. This strategy may change as more organizations adopt circular supply chains in response to diminishing resources.
7. Determine the causes of the inventory problems
Identify how the problem was created in the first place by using the root cause analysis method, for instance. Prompt monitoring and disposal of inventory problems help limit the cost, but the real objective should be to prevent inventory problems from developing at the outset.
8. Look for problems
Identify situations that can cause inventories to become a problem. Check for:
- Over-optimistic sales forecasts
- Unplanned, quick-fix engineering changes
- Poor communication among warehousing, purchasing, scheduling and production departments
- Market and technology changes
- Vendor and production failures to meet schedules
- Incorrect lot sizing and/or ordering policies
- Excess safety stocks
- Inaccurate inventory data
- Poor production planning and/or unrealistic scheduling
9. Develop a long-term cure
Inventory problems will continue to exist, and the magnitude of the problems will not be reduced until long-term cures are adopted. These cures will most likely emerge as the causes are defined. In some instances, implementing the cures may involve substantial change to existing business processes; in other instances, the cures may be relatively easy to implement.
The basic principle for managing inventory is economic efficiency.
If inventory is the cheapest way to meet a challenge or solve a problem, then the inventory is justified. However, if there are other alternatives that cost less to implement, then the inventory is a problem, and it should not be kept.
A long-term outlook and a willingness to dig into the details and analyze the situation will result in a more efficient and successful business.
All organizations, whether a supplier of raw materials, finished goods to distributors or retailers, deal with problem inventory. The challenge for foreign suppliers is the distance between themselves and their customers. Depending on their contract agreements for inventory management, foreign suppliers need to compare the cost of transporting their goods back into their inventory with the cost and potential value that can be gained by contracting reverse logistics services from a third party provider. Of course, if foreign suppliers are using VMI or JIT models, the risk of potential inventory problems is minimized.