Inventory management is, in essence, a careful balancing act. Excess inventory will tie up your working capital, increasing borrowing that could be used for investment or growth. But cut your inventory too far, or in the wrong areas, and you risk losing sales.
Despite continued economic uncertainty, our research across seven industry sectors shows that inventories are actually rising faster than sales in the majority of companies. On average, we find potentials for reducing inventories by 25%, releasing cash for other initiatives and investments.
Many organisations claim they have 'addressed' inventory management. The reality is that inventory improvement programmes often yield poor results, or unsustainable inventory levels that revert to original levels as soon as the work has been completed.
Our work with leading multinational manufacturers has shown that, by focusing on four areas, businesses can optimise their inventory to release cash, reduce delivery lead times and minimise stock-outs.
Address the root cause of excess inventories
Many organisations fail to achieve sustainable inventory improvements because they place too much emphasis on simply reducing stock levels quickly. The aim should be to optimise inventory levels. Typically, this means that although overall inventory is reduced, stock levels of some parts may actually increase or the parts may be held in a lower cost state, eg as work-in-progress or as raw-materials. Even the effect of these actions to optimise the inventory can still be short term. In our experience, driving sustainable inventory improvement requires fundamental changes to address the inefficient processes and structures that cause the inventory excesses in the first place.
Ensure adequate support for initiatives to optimise inventory levels
Inventory management improvement initiatives often fail because organisations do not build a compelling case for change that engages key stakeholders in the solution. Input into optimising the inventory is needed from all areas of the business, as well as from customers and suppliers, to ensure that the supply chain continues to deliver appropriate levels of stock and product availability at the lowest overall cost.
Develop effective performance metrics for inventory control
Pursuing inventory reduction programmes without optimising inventory levels can be risky and result in insufficient stock to meet customer demand. To avoid this, we recommend the use of effective performance metrics that send the correct signals to the inventory controlling functions and senior management. These metrics should be capable of reflecting the trade-offs within the business between minimising costs on the one hand, and meeting customer demand within the shortest possible timeframe on the other.
Enhance the agility of the supply chain
Many organisations believe the myth that more inventory will reduce the risk of stock-outs. However, in our experience, high inventory levels are typically a sign of poor inventory management. Organisations often face the wrong type of inventory in the wrong place and at the wrong time to meet demand. This risk can be addressed by taking action to dynamically manage the levels of inventory to improve the agility and responsiveness of the supply chain.
There are significant benefits from optimising inventory levels, for example 2-8% revenue growth, 2-10% supply chain cost reduction, 10-40% reduction in inventory levels, 5-15% reduction in assets required. PA has transformed the inventory management practices of leading organisations such as IMI, maximising product availability while minimising supply chain costs and working capital requirements. Our pragmatic approach to inventory management means we tackle issues at their root cause, and the solutions we develop have a lasting impact.
For example, we delivered an 11% inventory reduction for Eurocell, also identifying additional savings of 90% in transit and 25% in holding inventory. Our clients include some of the world's largest international organisations in the manufacturing, retail, and petrochemical sectors, as well as government departments.