Keur Knowledge Centre Article # 2019/02
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Zero Inventory & Sales
It is possible to hold Inventory in 3 different forms –
1. Raw Materials & / or Bought Outs
2. WIP (Work In Process)
3. FG (Finished Goods)
Many companies target to work with zero
inventory in all 3 forms, as it would give following
benefits:
1. Cash will not be trapped in inventory
2. No risk of obsolescence, pilferage, expiry,
write offs & damages.
Let’s examine under what circumstances can a
company work with zero inventory in all 3 forms.
In order to make a sale, a company must buy
materials, manufacture requested product &
transport it to where client wants. Thus,
delivery lead time = purchase lead time + production
lead time + transportation lead time
For eg. If purchase lead time is 30 days, production
lead time is 7 days & transportation lead time is 3
days, then delivery lead time = 30 + 7 + 3 = 40 days
To work with zero inventory, delivery lead time as
calculated above, should be acceptable to client. In
above example, it means, client should be ready to
wait for 40 days after placing order, to receive
goods. If competition is delivering in less than this
time (say, 15 days), client may decide not to wait
for 40 days & may buy from competition.
Thus, companies are forced to reduce their delivery
lead times, to levels acceptable in market.
There are 2 ways to reduce delivery lead times.
1. Reduce one or more of purchase /
production / transportation lead times
2. Keep inventory
There is a limit to how much one can reduce
purchase / production / transportation lead times.
Further, to achieve this, may take some time.
Keeping inventory, is a quick way to reduce lead
time. In which form to keep inventory depends
upon how much reduction in delivery lead times is
required.
In above example, keeping material inventory will
remove 30 days of purchase lead time from delivery
lead time. Thus, delivery lead time= 0+7+3 = 10 days.
Keeping FG inventory will remove both purchase &
production lead time from delivery lead time. Thus,
delivery lead time = 0+0+3 = 3 days
Keeping FG inventory at location where customer
wants will enable same day delivery.
How should you proceed?
1. Decide lead times in which you want to
deliver your products (based on business
conditions – customer expectations,
competition, your strategy etc)
2. Decide in which form to hold inventory, how
much qty of each item & where (locations) so
as to achieve desired delivery lead times
3. Launch improvement projects to reduce lead
times of your supply chain (procurement,
production & logistics) so that in future, you
will be able to work with lesser inventory
Word of caution:
1. Deciding inventory targets based on
industry bench mark or ones own historical
data without giving due consideration to
delivery lead times can negatively impact
sales