How to reduce inventory 10% in 90 days
In distribution, managing inventory is a beast. Competition is relentless and supply, wickedly unpredictable. So you stock up. At some point, executives notice the high cost of this and demand an urgent inventory reduction. You start to sweat. Service levels and sales can’t suffer because you’re also on the hook for that. More sweat. So what do you do? You listen to today’s episode… which offers prescriptive strategies on how to reduce inventory 10% in 90 days.
Jeff Ritter, seasoned LifeLine Consultant at Blue Ridge, and Dan Craddock, PlanningPosts evangelist join the show to explain how to reduce inventory in both manual planning environments and those where advanced supply chain planning tools are in use — such as machine learning-based analytics, automated demand forecasting and replenishment optimization solutions, and even price optimization solutions — to work better and faster.
Episode 12 Show Notes
Will: Welcome back to the PlanningPosts Podcast. I’m Will Haraway, your guest host and host of Supply Chain Now Radio.
The theme and feel of today’s podcast will be Urgency! It is about a challenge thrown at every inventory planning team every year or two.
You just got your first cup of coffee…. You and your team just sat down to place orders when your CEO walks into the department and makes the announcement:
“WE NEED TO DROP INVENTORY 10%. AND… WE NEED TO DO IT IN 90 DAYS.”
I believe all of our listeners who have spent any time in or around the inventory planning profession have heard these words, and you are probably having some P.T.S.D. over it right now. You have been there.
Alright. So YOU NEED TO REDUCE INVENTORY 10%. Don’t worry about why; someone has decided that for you. You need a plan. We are here to help. And I have two guys here who are chomping at the bit to give you that plan.
You’ve heard of the company College Hunks Moving Junk? Well today we have Inventory Guys Reducing Supplies. Welcome again, Jeff and Dan!
Dan: Thanks, Will… Proud to be an Inventory Guy and I love this topic because it is so real. We have all been there and this is a perfect chance to help our community put a plan together BEFORE that next bold request happens.
Not only have I been in this spot, but I’ve had the chance to work with Jeff in this spot over the years……
Jeff, what reaction do you have when you think of those times that this request came up?
Jeff: [says hello and shares his reaction and quick memories]
Will: Guys, this is clearly a common request and a hot topic. What’s the best way to share great information with our audience, since people are on different systems and strategies?
Dan: Jeff and I talked about this and we are going to approach by splitting the audience into two groups, even though we want everyone to listen and learn from all of it:
The first group we’ll call the manual planners. They’re using things like an ERP solution, spreadsheets or other manual process to plan.
Our second group is the advanced planners. Pretty self-explanatory, but just in case you had too many beers last night or something… They’re using an advanced supply chain planning solution (of any level or sophistication).
We’ll give strategies for each group here.
Will: Sounds good. And don’t forget that this request is unique because there is an urgent timeframe of 90 Days!
Dan: Yes, great point. So we will focus on the 90-Day Urgent moves, and along the way share just a few long-term ideas as well.
Jeff, I know you have been on inventory planning teams of both types of audiences in recent years… So you will have great insight.
For those with advanced Supply Chain Planning tools, sit tight. This first section can be helpful to you, also.
Will: Okay, guys we have inventory teams still making it happen, even with limited access to tools. They are using a basic buying report… What can they do here?
Dan: Will, I watched Jeff Ritter live through this at a young, growing distributor a few years ago. I’ll just highlight our ideas and let Jeff elaborate from his real-life experience.
Ok, so we only have 90 days… Let’s start with 3 areas of focus to make it happen in the next 90 days:
1st Step: Number 1 might surprise you! Do you remember in the movie The Hunt for Red October, at the end, when one Russian sub is trying to sink the other? They fire a torpedo and Sean Connery calmly turns his sub right into the firing line! Everyone thinks he is crazy, but he knows that it will disrupt the timing of the oncoming missile.
We are going to do the same thing!
Everyone else is trying to reduce inventory by not touching the A items. We are going to attack and reduce the A items.
For these companies who have not yet moved to an advanced solution, their biggest opportunity is in reducing the safety stock of the A items. These items are the smoothest moving items because they have so many customers. Most distributors are keeping way too much safety stock and the largest inventory reduction opportunity is here.
A little safety stock analysis can be done and your methods adjusted to reduce several days of inventory.
Jeff: Dan, that is so true. After spending some years with one of the best inventory teams in the world with an advanced Supply Chain Planning solution, moving to a growing company without a solution….it was very clear that they were loaded with inventory on the top items……blah blah and some more.
2nd Step: That leads us to the next big opportunity, and that is removing or reducing that Lead Time Cushion. When you don’t have the tools, you round up. You apply cushion.
It is very normal for inventory analysts out there to exaggerate the lead time out of fear. That fear can be very expensive.
In my experience, if you sit with an inventory team, and ask each professional to find 10 suppliers where THEY KNOW they have significant cushion, they will show you the lines very quickly.
So, find the lines where you know there is cushion, and you know there is opportunity!
Will: Guys, both of those sound pretty big. Is it possible that these two moves can really help companies reach the 10% goal in just 90 days? Or should they go deeper?
Dan: Each one of these opportunities can actually give you the 10%, depending on the company and the current methods.
3rd Step: The 3rd opportunity is to remove Fixed Cycle Buying whenever possible, and especially where you are hitting a bracket like a truckload. You might want to check out this article that clearly highlights the 20% or more reduction that is possible on those lines that have Fixed Buying Cycles.
I have to buy on Wednesdays, I have to buy a truckload, A truckload is 10 days’ supply. Any way you do the math, you are building up excess inventory.
So Will… Lower safety stock on A items, Reduce Lead Time Cushion, and remove Fixed Cycles where possible. Big results, Big success, Inventory Heroes!
Will: Guys, those sound like really logical moves… all with a chance for impact within 90 days… I just have to ask, how much longer would it take to implement an advanced solution and ensure that you see (and maintain) these results?
Dan: Will, I have been doing this for 35 years and if you are willing to watch for results 90 to 120 days from today… you can make this happen. Implementations are quick and smooth and deliver year after year.
Advanced supply chain planning tools let you fix these 3 areas plus many many more, so the results are very deep, very rich.
Reducing inventory with ADVANCED supply chain tools
Will: Okay guys, what about those companies that DO have access to advanced supply chain planning tools and capabilities like demand planning, integrated business planning (IBP), replenishment optimization, and price optimization solutions? Where do they turn for 10% in 90 days?
Dan: Let me start and frame it up for our community out there. For those with advanced planning solutions of any type, Jeff and I have 5 suggestions.
Of course, they should already have the proper safety stock on the A Items. Obvious… So we will skip that one. We’ll start with these 2, which mirror the first group:
1st Step: Remove or Reduce Lead Time Cushion
2nd Step: Eliminate Fixed Cycle Buying where possible
Dan: Jeff, what do you see out there as you work with numerous companies now?
Jeff: I am always surprised at how much more inventory people hold on those fixed cycle lines. I was guilty of not realizing the impact. Whether it is the supplier that requires it, or just encourages it… Or your own transportation team asking for it, you should always fight it with real financial knowledge.
Also, adding a little cushion is often too easy for an analyst, and they need to understand that each day is One Additional Day of unneeded Safety Stock Inventory. They need to know what is the value of ONE DAY.
Will: The Value of One Day of Inventory. That sounds like a number every analyst and every executive should know.
Dan: Absolutely, Will. It should be considered a key financial element for every leader.
Alright, let’s hit the final 3 suggestions for advanced planners.
3rd Step: Avoid Buying Multiples. Undisciplined buying multiples can fill warehouses.
Everyone out there, this one is big! Do you know what your average Buying Multiple is in Days supply? Do you know the number by various forecast range or item type?
High Buying Multiples in Days can cause you to ‘top-off’ your inventory every time you buy.
We have seen incredible inventory reductions this year from companies who got smart about this area. For many companies, your Buying Multiples strategy is actually driving your replenishment and your inventory levels. [If you don’t believe us, see our article on Order Cycle Optimization.]
4th Step: Buy Later! The key to lowering inventory is not to buy less; it is to buy later.
Many analysts are placing orders too early for a number of reasons. Fixed cycles buying is one; but often the line is out of balance, or they react to one key item being in trouble.
When you buy early, you always ‘top-off’ the inventory and never allow the lower levels that are possible. For many, this is their biggest area of opportunity!
Jeff: Yeah, I see both of those that Dan just mentioned as huge opportunities…even for the teams I consider very strong.
5th Step: Watch over the next 3 months and forego some of the brackets that cause you to add many days to your orders. Let the items deplete down toward their own Low Stock Points. It is the same idea as watching your spending at the end of your month. You have to sacrifice where possible.
Will: Guys, I was hoping we could give real solid ideas to the community and I think these are solid moves that will have the impact. I’m excited for our listeners.
Dan: Absolutely. We are referring to several key concepts, and by now there is so much content on PlanningPosts to support what we are talking about. I would urge everyone to subscribe, dive in, and take advantage of it.
Will: Yes, everyone definitely check it out and share it. There’s so much there and it’s growing every week. There are a lot of people out there getting smacked with the inventory reduction requirement. The site addresses how to do this.
Guys, what’s impressive about these ideas is that the companies don’t sacrifice service with any of the moves. That keeps every executive happy. There are certainly more moves to make, but URGENCY is a great place to start. 10% in 90 Days! Easy peasy.
Will Closes: I want to thank Jeff and Dan here… If you have any questions or want to talk more with us about your inventory reduction challenges, reach out to us now. Thank you / goodbyes…