Inventory reduction strategy
Many markets and companies are recovering from the disruptions COVID-19 has caused. Markets are opening up again and production facilities have resumed production. Faced with a high uncertainty on how the economy and markets will recover, CEOs are forced to cut costs and free up money by reducing stock. On the other hand it is increasingly important that customers are served at the desired level, thus a solid stock reduction strategy is required. This brings us to the question of this blog: inventory reductions, what are do’s and don’ts?
Don’ts!
Focus on overall lowering safety stocks. I more and more hear companies start to decrease their safety stock levels across all items with a certain percentage, even up to 30%! Don’t do it. It will definitely lead to lower service levels – amplified by the increased demand and supply uncertainty that most companies currently face – and a further increase of the bullwhip in the supply chain, with all its well-known consequences.- Set target (safety) stock levels using forecasts from stationary statistical forecast models. Demand during the pandemic is definitely not stationary. What to do instead? See number 4 in the list of do’s!
- Spend time on modelling the impacts of the epidemic itself, how long recovery will take and if and when a “second wave” can be expected. Leave it to the experts!
Do’s
Increase production flexibility/decrease lot sizes. Creating “flow” and reducing lead times in your supply chain by lowering lot sizes will lead to a lower cycle stock, but make sure operational costs only grow marginally!- Reduce complexity/diversity product portfolio. Make sure you can deliver your important (A) items and reduce the number of unimportant, less value adding (C) items. A nice example from the pasta industry can be found here.
- Reduce stock of slow/non-movers by writing them off, increase sales/marketing activity or stop production. But make sure you identify the real slow/non-movers!
- Forecasting: extract real business drivers and underlying demand pattern and use them to forecast the “rubber duck” or “bathtub” curve.
- Create E2E-visibility of stock levels across the supply chain. In multiple projects lately we identified many quick wins: double safety stocks in the supply chain were removed, and/or stock was balanced over locations having under- and overstock.
Need help for a quick start?
Is it that simple, just follow the above guidelines? No, every situation requires a tailored approach and not every “do” might be that effective. As a first step, it is important to know how your “inventory pie” is divided over the different sub inventory types (safety stock, cycle stock, strategic stock, transit stock, etc.) and across the supply chain. Based on that, take actions on the most promising stock type(s) and location(s). A nice example of how an inventory dashboard creates such insights, can found here. Please feel free to reach out to us if you would like to discuss what your company needs as a first step, our experts look forward to support you along this challenge!