Here are 10 concrete actions to optimize and reduce your inventory. They may sometimes seem obvious, but in practice, few companies apply them.
1) Establish Supply Chain KPIs
You can’t improve without measuring your performances. Implementing shared KPIs throughout the company is essential to optimize your inventory management. Be careful though: too many KPIs can make your animation too complex.
I recommend 2 main KPIs:
1 – Customer availability rate in %:
The priority remains to meet the needs of customers as soon as possible. It is then a question of knowing what is available to the customer (in-store, warehouse…) and know your availability rate.
Availability rate calculation = Number of products with stock available / Number of products in your catalog
Example – I have 100 products in my catalog, only 80 are available for my customers, so I have the availability of 80/100 = 80%.
This calculation is done at a T time. Thereafter, you will be able to make daily averages. This calculation is only made on the active references in the catalog, not on the end of series or new products not in stock yet.
If you do not have access to the stock in your stores, you can use the Service Rate which is widely used in industry.
Calculation: Order quantities / Delivery quantities in %.
Example: I receive an order of 100 quantities, I am able to deliver 70 quantities, so my service rate will be 70%.
2 – Stock rotation or Stock cover :
This is the average number of days that the stock takes to run out. This calculation must be done over the last 52 weeks to have a reliable KPI that takes into account seasonal fluctuations. The lower the value, the faster your stock rotates, so its rotation is efficient.
Stock rotation calculation: Average stock in value over the last 52 weeks / Average sales per day.
Example – If your average stock in 2016 is $1,000,000 and your average daily sales are $5,000, then your inventory life = 1,000,000 / 5,000 = 200 days.
It is important to calculate this KPI in value, as large quantities of products can have a significant impact on the total. Your financial asset is in value, not quantity.
Your goal will be to find the right balance between customer availability and stock rotation. This is the challenge for any company wishing to optimize its supply and inventory management.
To go further:
Consult our article: 10 KPIs for your supply chain
2) ABC Analysis
The ABC classification involves inputting all your references in a single Excel inventory management file, including the current stock in value and quantity, as well as sales for the last 52 weeks, 26 weeks, 4 weeks, and finally those for the last week.
You can now analyze your references in decreasing order of sales and then in decreasing order of stock. It is likely that the distribution of your sales will display a PARETO analysis. You can then classify your products into 3 categories:
• 5% of your references represent 40% of sales: CODE A.
• 20% of your references represent 80% of sales: CODE B (A+B = 20%).
• 80% of your references represent 20% of sales: CODE C.
The same applies to the stock, very often the same distribution is observed.
• 5% of your references represent 40% of the stock.
• 20% of your references represent 80% of the stock.
• 80% of your references represent 20% of the stock.
The aim is now to analyze the main references in terms of stock and spend most of your time and energy on it.
First of all, we must study the 5/40 (ie. 5% which make up 40% of the stock). If stock references 5/40 are not part of the 5/40 sales (CODE A), or worse, are not part of the 20/80 sales (CODE B), then it is urgent to act on these references to reduce their stock (see below).
To go further, consult our article: ABC method on Excel
3: Clean obsolete stocks
In the file presented above, it is a question of identifying all your references that have not been sold or have sold very little over the past 6 months. These references no longer have much to do in your company and in your stock records. They only take up space and penalize you financially.
• 3 solutions : Promotion – Donation – Destruction
4: Reduce the number of references
This seems obvious, but few companies question their product catalog with a sales vs. inventory cost analysis.
Take again here your Excel list of inventory management and examine your low sales 80/20 (code C) to see if it is possible to permanently delete some, or to keep only references called “without stock/out of stock“, i.e. references to order only when you have a customer who requests it.
Apple is one of the best examples in the world. This company has managed to maintain an extremely small number of references despite hundreds of billions of dollars in sales. This is one of its greatest strengths, offering maximum value on very few products. It is also clearly easier to manage inventory for Apple than its competitor Samsung, for example.
5: Accept out-of-stock on low sales
Guaranteeing 100% availability for your customers would require an infinite stock. It is, therefore, necessary to agree to reduce the stock on the 80/20 for sale (CODE C).
For example, if you are in charge of a supermarket, it is essential to have 100% availability on toilet paper. On the other hand, your customers will be less demanding on the availability on the textile shelf if you are out of stock of an XXS sized pink shirt.
If you work with an automatic replenishment or Excel, simply reduce the stock coverage of your C code, which is not strategic in terms of sales. Coverage is a number of days of stock you want to have in your warehouse, factory or store.
Replenishment Stock = Average sales x (supplier lead time + stock coverage)
You can also reduce your stock coverage on products with low sales uncertainty, i.e. products that are always sold in stable quantities are predictable. The risk of stock shortage is lower for this type of product.
6: Improve sales and purchase forecasts
A perfect sales forecast is impossible. But spending time on your forecasts right from the start is essential and will save you time and money later on. Once again, focus primarily on high-sales references CODE A, B and with a lot of stock in value.
Another point that is often overlooked is the calculation of the initial order, i.e. the first order you place with your supplier for a new product. The next orders will be replenishment or restocking orders.
The installation order can represent from 20% to 100% of the total stock. It is therefore essential not to over-stock from the beginning by taking the time to analyze how many days of stock you want to have in coverage. The shorter the supplier delivery time, the lower your installation stock should be, as replenishment allows you to adjust the stock level quickly.
7: Reduce your MOQ (Minimum Order Quantity)
You want to order 100 pieces but the supplier can only deliver in groups of 1000 pieces. This is called the Minimum Order Quantity. It may have a significant impact on your Inventory.
For example, one of my suppliers of energy drinks imposed an MOQ of 50,000 bottles per order on me, which represented more than 6 months of sales on certain references, which was not acceptable for our warehouse and cash flow.
In order to identify your main problems:
Add a “minimum order” column to your inventory management Excel file and divide your MOQ by your average daily sale. The higher the number of days of stock obtained, the more likely it is that it will impact your over-stock.
For example, your supplier requires you to order at least 1000 pairs of shoes in size X and your average sale on size X is only 10 per day. You therefore automatically have a minimum of 100 days of stock on each order, not to mention the fact that you will not have to wait until you run out of stock to reorder again.
3 possible solutions to reduce the impact of your minimum orders:
- Negotiate with the supplier
- Change supplier
- Replace/Remove product
8: Reduce your supplier lead times
Your stock level depends a lot on your supply lead times. If you order from France to a Chinese supplier, you will have to place a much larger order to fill your container, optimize costs… compared to a regular order from a French supplier.
Simplified calculation : Desired stock = Sales forecast x (supplier lead time + stock coverage)
So, the more you reduce supplier delivery, the more you reduce stock. Once again, focus on your 20/80 stock.
3 Solutions :
- Negotiate with the supplier
- Change supplier
- Replace/Remove product
9: Centralize your inventory
If you have several stock levels (ie. warehouses, stores, factories…), it is natural to want to put the stock at all levels. This is actually a mistake, especially for low sales.
Therefore, I strongly advise you to centralize as many references as possible on a single stock level. This does not apply to high sales and bulky products that are very expensive to transport.
Be careful, it is easy to estimate the “transport cost” saved, much less the cost of inventory, which includes financial, logistical, productivity loss, promotion, destruction or other costs. We must always think in terms of full costs.
10: Automate your replenishment
The “fear of missing” is a natural feature of human beings and will therefore always tend to overestimate their needs.
If you process your inventory management manually, it is strongly recommended to automate your replenishment on your inventory management Excel or on an ERP-type inventory management software.
You will only manage certain parameters by exception and the management software will do the rest.
For more information, see our Inventory Management Software page.
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Founder of AbcSupplyChain | Supply Chain Expert | 15 years experience in 6 different countries –> Follow me on LinkedIn