6 Hidden Costs of Stockouts

6 Ways to Reduce Inventory Levels

For any small to medium-sized manufacturer, the ability to effectively manage inventory can determine a company’s success or failure. Lean manufacturing principles identify inventory as one of the most critical “wastes” to be eliminated. If inventory is not constantly moving through the production process then it is a “non-value add” and needs to be removed from the system. Excess inventory ties up working capital, takes up valuable storage space, may become obsolete, and can become easily damaged.

Inventory reduction methods should always be regarded as a best practice and incorporated into the company culture. OptiProERP software has compiled a list of 6 ways to reduce inventory levels that any manufacturing enterprise, regardless of its size, can use to optimize inventory performance. Let’s explore some inventory optimization strategies.

1: Maintain Accurate Inventory Records

You can’t optimize inventory levels if you don’t have accurate records. By far the best way to track inventory is to use a computer-based system such as a manufacturing ERP solution. Just because it’s not in your warehouse doesn’t mean it’s not in your inventory. Accurate real-time inventory tracking should cover inbound from your suppliers, in-house across multiple warehouses and locations, safety stock, work in process (WIP), transfer goods (cross-docking), and outbound finished goods.

2: Establish Real-Time Reporting

The computer-based inventory tracking system you choose must be fully integrated with all other business functions such as purchasing, sales, production planning, finance, etc. Effective inventory management requires instant access to accurate data and reporting which multiple disconnected systems will not provide. Manual data transfer between accounting and inventory management, for example, is prone to errors and wastes unproductive time.

3: Automate As Much As Possible

Automating all inventory management processes reduces manual error, increases visibility, and maximizes efficiency. Use EDI for connection to suppliers, barcoding, RFID, and license plating for accurate tracking and warehouse picking. 

4: Manage Suppliers Collaboratively Not Confrontationally

Establish trust and good working relationships with your suppliers. Your end goal is to reduce supplier lead time, negotiate the best possible price, and only take delivery when required for production. Quantity discounts are not to your benefit unless you turn that inventory quickly. If it remains in the warehouse unused, then it’s tying up working capital.

The best way to do this is to provide a supplier portal into your management system and share your production planning. It requires a lot of trust from both parties, but in the long term is beneficial to both you and your suppliers.

5: Reduce Supplier Lead Time

Find suppliers geographically close to your production facility. In-house inventory can be run very lean if suppliers can deliver the same day it will be used. This is one of the underlying principles of Just In Time (JIT) manufacturing as practiced by the automotive industry.

As stated in Industry Week

“Toyota (and most Japanese automobile manufacturers, for that matter) has long employed what is called Keiretsu supplier management. One of the features of Keiretsu is that suppliers are required to locate locally to the factories they supply. One of the reasons for imposing this condition is that it all but eliminates supplier resupply transportation times.”

6: Calculate Safety Stock Based on the Customer Service Level

Safety stock is held at strategic locations within a production cell to buffer abnormally high parts rejection rates. The production cell can continue operating by pulling parts from the safety stock. If this question, “how to reduce inventory levels” was bothering you day and night, following these strategies can help manage and optimize inventory without worrying about expenses and order delay.

Finished goods safety stock operates in much the same way. It is there primarily to avoid high inventory levels and stock-outs caused by production problems or un-forecasted customer orders. The key is to optimally balance the safety stock level with the customer service level. If the customer service level is set at a 95% item fill rate, enough safety stock must be carried to meet it. If it is set to 90%, then less of a safety stock must be carried.

These are just six ways that an enterprising manufacturer can use to reduce inventory and free up cash flow. In summary, heed the words of Taiichi Ohno, the father of the Toyota Production System: “The more inventory a company has, the less likely they will have what they need.” 

If you want to learn more about inventory reduction strategies and best practices, watch our on-demand webinar: Implementing Inventory Management Best Practices.