Strategies for Reducing Inventory: Key Considerations by Type and Process

In our last blog,  “Inventory Fundamentals: Understanding Four Essential Types” we made a deep dive into inventory types, so now we will explore steps that can be taken to reduce stock levels for each of these inventory types.  We’ll describe various methods that can be employed to reduce the amount of stock that is held; some of these require a change in operational business processes, not just a change in planning processes. 

Reducing Cycle Inventory

In order to decrease cycle inventory, lot sizes must be reduced; this means ordering just enough product to cover short-term requirements while  minimizing stock on hand. What follows are a few common  strategies for decreasing Cycle Inventory.

Optimizing the Deployment Replenishment Process

When deploying products from a central hub to satellite warehouses, consider following these two strategies:

• Review LTP Shipping Quantities: Assess minimum shipping quantities to identify when it's more efficient to ship less than pallet quantities.
• Dynamic Shipment Lot Sizing: Implement dynamic lot sizing to adjust replenishment quantities based on current inventory needs. If you do not have to ship by pallet, consider distributing products in smaller increments such as by layers or cases.

Streamlining the Production Replenishment Process

Production lot sizing is crucial in minimizing costs and for balancing changeover versus holding expenses:

• Optimal Lot Sizes: Calculate the Economic Lot Size (ELS) where changeover and holding costs are balanced. Use a modified Silver-Meal heuristic for time-varying demand, as is typical in the beverage industry.
• Operational Changes: If reducing lot sizes increases changeover costs, consider changing operational processes or equipment to reduce changeover time and costs.
• Batching Constraints: If optimal lot size is lower than minimum batching requirements, consider these options:
  • Run the same ingredient batch into different packages on available lines.
  • Consolidate production to a single plant.
  • Negotiate with the ingredient supplier to lower the minimum batch size for products in which added transport cost from another plant is greater than the savings in cycle inventory cost.

Improving your Purchasing Replenishment Process

Reducing purchase order lot size typically concerns  supplier negotiation:

• Supplier Collaboration: Work with suppliers to enable purchase shipments in less than pallet or truckload quantities. Enabling such flexibility can greatly reduce your inventory costs.
• Centralized Mixing Warehouse: Consider implementing a mixing warehouse that holds products from multiple suppliers. This setup can fulfill diverse orders efficiently, particularly for satellite locations.

Reducing Safety Stock

Safety stock is strongly influenced by lead times and planning cycles. To manage safety stock effectively:

• Focus on Reducing Total Guard Days: Understand that Guard Days are defined as Lead Days added to Planning Cycle Days for Lane by SKU combinations. Reducing either effective Lead time or Planning Cycle can minimize safety stock requirements.

Forecasting Demand

Accurate demand forecasting is critical to managing safety stock lower. Focus on:

• Understanding Demand Patterns: Recognize that demand can be unpredictable, especially for heavily promoted or seasonally popular products. Improved forecasting and data collection methods can help to mitigate uncertainty.

Inventory Positioning and Execution

It’s essential to accurately record both inventory level and location. Implement the following processes to help make inventory levels more accurate:

• Regular Inventory Checks: Ensure planners have up-to-date information detailing inventory levels and scheduled production runs. Timely and accurate information prevents stockouts and excess inventory.
• Increase frequency of Inventory Checks: Moving from once-a-week to twice-a-week or once-a-day inventory counts reduces the planning cycle and stock uncertainty.

Execution to Plan

When creating a plan for replenishment more than a few days in the future, the planning process must project inventory out to a future date based upon all scheduled and forecasted events such as production, receipt of in-bound goods, scheduled to deploy, etc. Such longer-range replenishment plans are not typically fully executed on time or in the amounts scheduled.

• Execution to Plan: Regularly review and measure production and replenishment plans to ensure they align with actual inventory levels and demand forecasts. Safety stock calculations should account for variability of demand and supply which can be inferred from Execution to Plan measures.

Centralized vs. Decentralized Inventory

Consider the trade-offs between holding inventory at satellite locations versus centralizing stock in a distribution hub. To the extent that a company does not forward-place certain products closer to the customer, risk of distinct location inventory variances can be “pooled” to a single hub location where the “pooled” hub inventory can be used to supply many separate locations.

• Pooling Risk: Centralized inventory can pool risks across multiple locations, minimizing overall safety stock requirements.

Production Process

Revisions to production schedules occur throughout the week , and any need for schedule revision should be reviewed at least daily. While the lead time for production scheduling is inherently “fuzzy”, the sooner the  upcoming run, the more likely that it will not be cost effective to reschedule it. This is primarily due to constraints in raw materials, labor or complexity of rescheduling batching of other products, so enabling flexibility is key to effectively reacting to unplanned situations.

Flexibility in Operations : Reduce effective lead time for production orders by creating a production schedule that is easy to adjust.  You can do this by

• Keeping raw materials available.
• Maintaining flexible labor arrangements.
• Allowing for adaptable batching processes.
• Implementing a frequent planning review process.

Cost and Time Efficiency : Push to reduce the cost and time associated with package changeovers on swing lines.

Reducing Pipeline Inventory

To effectively reduce pipeline inventory (stock that is in transit between locations), companies should  focus on two key strategies: 1) minimizing travel time,  and 2) optimizing sourcing locations.

• Minimizing Travel Time: To lower pipeline inventory you must streamline the logistics of product movement, which  involves analyzing transportation routes to identify inefficiencies or delays. Implementing route optimization software can ensure that products are transported in the most efficient manner possible, reducing both transit times and costs. Collaborating with logistics partners to schedule deliveries during off-peak times can further enhance transport efficiencies.
• Sourcing Closer to Demand: Finding suppliers or production facilities closer to demand endpoints can significantly reduce pipeline inventory levels. By sourcing materials or finished products from nearby suppliers, businesses can reduce the time that goods spend in transit, allowing for quicker replenishment and reducing the overall inventory requirements. This approach not only enhances responsiveness but also lowers shipping costs, leading to a more efficient supply chain.

Reducing Pre-build Inventory

Pre-build inventory refers to stock that is produced well in advance of requirement, often to meet anticipated spikes in demand while mitigating production capacity constraints. While pre-building inventory can ensure that products are readily available, it can also lead to excess stock if not managed carefully. Here are some strategies for avoiding creating unnecessary pre-build inventory:

• Exploring Alternative Sourcing Options: One way to manage pre-build inventory is to seek out alternative suppliers who can provide products or raw materials with shorter lead times. Sourcing flexibility can allow companies to produce goods on a just-in-time basis, thereby minimizing the need to hold large amounts of pre-build stock. However, it is important to weigh benefits against costs, as changing suppliers or sourcing locations can lead to higher transportation costs or may require adjustments in production processes. Areté’s Tactical Replenishment Planning solution is designed to create scenarios that make alternative sourcing decisions more transparent and efficient.
• Considering Seasonal Variability: At some points of the year such as peak seasons or during promotional events, the demand for specific products will fluctuate significantly. This is especially true in the beverage industry, where seasonal sales can spike abruptly. Companies must be aware that during peak periods, many contract vendors will experience capacity constraints, making it challenging to source additional products quickly. It is prudent to secure agreements with multiple suppliers ahead of peak seasons to ensure flexibility and avoid stockouts, even if it means incurring slightly higher costs.
• Balancing Cost and Capacity: When looking for alternate sourcing options, it is essential to consider not just the immediate cost but also the long-term implications of vendor capacity and reliability. Engaging with suppliers who can accommodate fluctuating demand without substantial lead times can be very beneficial overall. Maintaining a diverse supplier base can also provide a buffer against unforeseen shortages, ensuring that you can meet demand without relying on pre-build inventory.

Summary

Simply reducing inventory without improving processes often leads to lower customer service levels across the board. The key to effectively reduce inventory  is to enhance both planning and operational processes:

• Improve Planning: Focus on accurate forecasting, pooling inventory, shortening planning cycles, and setting intelligent safety stock levels.
• Optimize Operations: Work on reducing lead times and improving flexibility in production and sourcing processes.

Keys to Lowering Inventory Level

Cycle Inventory

• Reduce order lot sizes.
• Decrease production changeover costs.

Safety Stock

• Improve and enhance demand forecasting.
• Utilize pooling strategies.
• Shorten planning cycles and lead times.
• Improve inventory positioning and execution.

Pipeline Inventory

• Minimize travel time.
• Seek closer sourcing options.

Pre-build Inventory

• Explore alternate sourcing options.
• Increase production capacity.

By implementing effective strategies, companies can lower inventory levels in key areas while maintaining or even enhancing service levels. Thoughtful process improvements will help balance operational costs and customer satisfaction.

The next blog in this series, Optimizing Beverage Production Lines: Exploring Sistering and Cousining, will explore two innovative ways to optimize production scheduling for beverages. Please subscribe to our blog to be notified as soon as the next in this series is available to you!