INVENTORY [ INSIGHT ]
by Tracey Smith President, Numerical Insights LLC tracey@numericalinsights.com
Simple Math, Big Impact: Common Sense Inventory Strategies
As a mathematician/engineer, I love advanced analytics as much as the next person. But as a practical person, I can assure you that you don’t need advanced analytics to make substantial improvements for your company. All you need is basic algebra and some time to think.
some of its products, components and raw materials created situations where the changing regulation left it with inventory it could no longer use. The company discovered that for SKUs with a medium to high risk of changing, it’s better to pay a higher unit cost to avoid the risk of orphaning a lot of inventory. [An orphan is a SKU that is no longer used in any of the company’s bills of materials.] The nal change mitigated the risk of inventory coming from far away. The company found a domestic warehouse willing to store components that it used and that other manufacturers also used. The warehouse ordered the quantities required to ll an overseas container so each manufacturer didn’t have to. Additionally, these items were kept at the third-party warehouse and each manufacturer was billed for the product only once it was shipped from the warehouse to the manufacturer. With this process, each manufacturer could reduce the amount of inventory stored at its own location, reducing the cost of inventory and freeing up cash ow. You don’t need complicated analytics to impact the bottom line. Sometimes, you just need to make simple changes to your inventory strategy. n
up in inventory and it was carrying large amounts of what I call “the wrong inventory.” COMMON SENSE STRATEGY CHANGES The company made several changes to its inventory strategy. First, it looked at the lead times of its raw materials and components and compared those to the lead times into production. Suppose the production team is planning new production runs for 12 weeks from today. If a component purchased from a supplier has a lead time of 4 weeks, there is no need to keep it in inventory. It can be ordered on demand as soon as any nished good requiring it is placed on the production schedule (12 weeks from today). Four weeks is less than 12 weeks. Easy algebra. The second change the company made was to move away from buying large volumes of components in the interest of getting volume discounts. Constantly changing regulations on
Allow me to tell you the story of a beauty company that did just that. This company not only sells beauty products, but it also manufactures what it sells. As such, it has SKUs for nished goods and SKUs for raw materials and components. It has a few hundred SKUs to manage. The norm for this company was to stock all raw materials and components. Some of these SKUs came from domestic sources, others from far away. For items that came from far away, the challenge was always the long lead times and the high order quantities needed to “ ll a container.” It was not unusual for these containers to arrive late. With several key components coming from faraway countries, high-demand products would go out of stock for weeks at a time, resulting in millions in lost sales. For components that came from domestic suppliers, the company based its purchase order quantities on tiered pricing. The more you buy, the more you save. The result was a cash ow crunch. Too much money was tied
78 Inbound Logistics • January 2025
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