18 Targeted Inventory Reduction Strategies for Supply Chain Professionals 3

Inventory comprises an important part of current assets, particularly in manufacturing industry. A lot
of cash flow is committed to inventories so as to ensure a smooth flow of production to meet a
demanding customer service level. However, maintaining inventory also involves holding or carrying
costs along with opportunity cost. Therefore, identifying inventory reduction strategies becomes
critical for supply chain and operations professionals.

Inventory management therefore plays a crucial role in balancing the benefits and disadvantages
associated with holding inventory. Efficient and effective inventory reduction strategies go a long
way in the successful running and survival of a business firm. As Apple CEO Tim Cook says:
Here is List of Inventory Reduction Strategies you can Try to Improve Inventory Turns

1. Reduce Total Supply Chain Lead Times

A reduction in total supply chain lead-time will lead to products / materials not being held in stock for
a long time. Both a reduction in supplier lead-time and manufacturing lead-time will contribute to
inventory reduction. To reduce lead-time the throughput, WIP and cycle time will need to be
measured in order to get a realistic estimation of a reduction in lead-time. This in turn will reduce the
risks related to holding inventory for longer periods of time.

The easiest way to understand total supply chain time is to perform high-level supply chain mapping.
Starting from up steam of supply chain and map out the average lead-time to down stream of supply
chain. I have found this exercise very useful to present visually to the team involved to show how
much inventory we should be carrying at each stage of supply chain.

2. Reduce Manufacturing Lead Time

Whilst I have seen a lot of focus in reducing the total supply chain lead-time and/or supplier lead-
time, there is, however, not enough focus in reducing the internal manufacturing lead-time.

When considering the planning method you are using, you should consider manufacturing lead-time
in the total planning lead-time. For example, if you are using MRP and have 20 days of manufacturing
lead time, it will take this 20 days into account to order raw materials for given supplier lead time.
Similarly, MRP will be asking you to release work order 20 days before it is supposed to complete for
sell or subsequent operation and will be driving 20 days’ Work in Progress (WIP) Inventory.

So, if you reduce this lead time of 20 days to 5 days in your MRP system, then MRP will only ask you
to release work order 5 days before it is supposed to complete for sell or subsequent operation,
therefore, reducing WIP inventory by 15 days!

If you don’t trust me try it for few items and you will see! However, I must admit this is one of the
difficult inventory reduction strategies to implement.

The Best way to know what is your actual Manufacturing lead-time is measure the time when work
order is released and when it is completed or if you have lean experts in business perform the Value
Stream Mapping. And try to work with production folks to reduce this manufacturing lead-time!

3. ABC Analysis to Identify MTS/MTO Changes

Using Pareto ABC analysis will help determine which inventory is used most often. In very simple
terms A is the inventory that is used the most, B- product that are important but are used less
frequently and C these are products that are rarely used. “A” classification products are ones that are
used frequently and can therefore be ordered in a small quantity, or be delivered Just in time and will
require less safety stock, and C products can be ordered less frequently but with more safety stock
kept. In my experience this is the most effective method of inventory reduction and fast!

There are many benefits of ABC analysis, but for me the biggest benefits are to identify your Made
to Stock (MTS), Assemble to Order (ATO) and Made to Order (MTO) items. Since A items are your
runner and repeaters, they should be MTS items with adequate safety stock.

B items can be treated as ATO by only carrying raw materials in stock and C items should MTO. This is
a must-have initiative for any business who is devising inventory reduction strategies