Quickly reduce your inventory to optimize your working capital requirement

Despite the significant increase in the competence of supply chain teams and new planning tools, the difficulty in keeping up with changes in the business persists. Organizations have clearly strengthened their Supply Chain departments with demand planners, supply planners, buyers, and competent physical distribution managers, equipped with efficient planning tools.

However, despite these advances, we continue to observe obstacles to excellence. They are often related to staff turnover and the loss of tool-related knowledge. We have also observed a multiplication of these tools. For example, at a company in the cosmetics sector, the fact that each stakeholder has their own tool (forecasting, one tool per planning horizon, distribution, and transactional tracking) creates silos that are difficult to coordinate. However, good management of material and information flows requires an end-to-end view and synchronized actions.

How to simply assess inventory optimization opportunities in your organization?

For the Supply Chain Director, the Operations Director, or the CFO, it is difficult to understand all the parameters used to manage inventory levels. The assessment is often done empirically, based on the past or to meet a year-end financial target, which is not always aligned with business needs. For example, a 2-month coverage is chosen, but without an objective justification.

Regarding service level, the problem is generally due to a lack of consistency between the service promise and the inventory level needed to achieve it. Time needs to be dedicated to working with the sales team to reach a good compromise between the promised lead time and the resources needed to meet it.

As for a healthy inventory level, it's much simpler: just look at the minimum stock of each item over the previous year. Multiplying that value by the production cost gives a first estimate of the expected inventory reduction. In fact, many people confuse the importance of setting a safety stock with managing it. Safety stock is meant to reduce a risk. You need to accept drawing it down and not overreact; it's normal for inventory to sometimes be close to zero. If that never happens, the inventory level is too high. However, it's important to exclude strategic inventory from this analysis.

How to quickly identify the source of excess inventory for certain products?

Excess inventory generally has four causes:

1. Forecasts for key products are inaccurate;

2. The safety stock calculation (a common method based on the Gaussian distribution) does not account for forecast bias;

3. The complexity of the product line and multiple storage locations increase inventory, especially for low-turnover items;

4. Safety stocks were assigned empirically, "just in case."

How to go further?

To convince your teams of the relevance of an optimization, we involve them in a quick, three-step diagnostic:

1. We segment your inventory (cycle stock, safety stock, strategic or regulatory stock, obsolete stock, distribution stock, etc.);

2. We classify your products based on their value and demand frequency;

3. We model, using our software (APS), the ideal inventory level for your key products, according to the desired service level.

   
   

This modeling makes it possible to quickly estimate a target inventory level and then identify, together with your teams, the actions needed to achieve the defined goals.

For more information or a presentation of this approach, feel free to contact us!