Three Ways to Prevent Excess Inventory

May 30, 2014
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ID-100260357Inventory levels greater than the amount needed for production or sales now is excess. Excess can mean you don’t need for the inventory at this time, or that you have no need for the inventory at all. Excess inventory is to be avoided because it takes money to buy or build inventory. Many companies borrow to support their short-term cash needs. When you borrow, you pay interest. Every dollar paid in interest comes right off the bottom line.

 

 

The  Inventory Quality Ratio methodology, www.InventoryPerformance.com, defines three steps to prevent excess.

1. Identify the excess, item by item

2. Find the root cause of the excess

3. Permanently  fix the root cause

 1. Identify the excess, item by item – Extract a list of parts from your inventory system identifying which individual parts have excess and to what degree. This is not as straight forward as it may seem. Most systems identify excess as inventory beyond its total requirements. A better definition is inventory beyond its current requirements. Excess can be inventory that has a future requirement but it was bought or built too early. Inventory that was bought or built too early represents cash you spent too early impacting cash flow. The list of excess items you create must be sorted by value of excess. You are likely to have hundreds, even thousands of parts that need to be addressed. You want to work the ones that will have the biggest impact on your excess levels first.

 2. Find the root cause of the excess – If you want to avoid excess inventory, you have to understand the root causes that created it and take steps to eliminate them. Some typical root causes of excess inventory include:

Not adjusting order quantities and due dates when requirements change

Accepting orders early from suppliers

Planning factors that are either out of date or just plain wrong

To identify these root causes, you must look at each item, which why it is important to work your list in order of the monetary value of the excess. Starting with the item at the top of your list, identify how the excess inventory was created. Did you create a purchase order for a certain due date then not adjust that date when the demand changed? Did your supplier deliver earlier than that due date? Did your planning factors cause you to order more or order sooner than you should have? For example, are your safety stock values correct? Do you have so much variance in demand or supply that you need that level of safety stock. If you do not have high levels of variance, reduce the safety stock level to a more reasonable level.

3. Permanently  fix the root cause – Once you have identified the root cause of your current excess, you must change processes, people, and systems to correct that root cause. Correcting some root causes can address many items at once. For example, making it clear to suppliers that they are expected to deliver on time and not early will affect all supplied parts. Other root causes will impact one item at a time. The safety stock example is one of these. You have to check and fix safety one item at a time.

Instead of trying to figure out how to reduce excess after it already exists, avoid excess in the first place by identifying the root causes of excess and correcting them on a regular and ongoing basis.

SPECIAL OFFER TO READERS OF THIS BLOG
If you would like a free analysis of your current inventory including your opportunity to avoid excess inventory, go to www.InventoryPerformance.com and click on the “FREE analysis of your inventory” box.

“Image courtesy of Stuart Miles / FreeDigitalPhotos.net”

 

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