How do I reduce inventory without impacting customer service?

There are a number of logistical methods available for reducing a company's investment in inventory without having to increase the number customer backorders. We break these options into the categories of product planning, purchasing and receiving, production, and fulfillment.

Product Planning

1. Minimize parts. If the engineering staff can be pursuaded to use the same components in as many products as possible, the number of parts in stock can be held to a minimum, which reduces the investment in raw materials.
2. Minimize the number of product variations. If management insists on stocking every possible variation of every product, then one option is to reduce the number of product variations. Target for elimination those product variations that are rarely used.
3. Schedule change orders. If the engineering department wants to alter a product, it usually issues an engineering change order that stops the use of one component and substitutes another. You need to time the release of each change order so that existing stocks of the component to be replaced are used up before the change order goes into effect.

Purchasing and Receiving

1. Smaller orders. You can reduce the number of units ordered per purchase, and increase the number of orders to compensate. By doing so, the average amount of inventory on hand at any time is lower than if you just placed one large order up front, and this reduces the average investment in inventory. However, this approach will not work if delivery costs are high or if suppliers are located far away.
2. Order from nearby suppliers. If your suppliers are located nearby, you can use a very small safety stock (which is used to guard against delivery delays from suppliers).
3. Use supplier-managed inventory. Have suppliers own their inventory in your warehouse until the moment when you use or sell it. This vastly reduces the amount of time that your cash is tied up in inventory ownership. This approach will likely require sole sourcing to suppliers.

Production

1. Concentrate machinery. Reconfigure the production area so that machines are as close together as possible. This means that the amount of work-in-process inventory that is in transit between machines is reduced.
2. Install conveyors. To build on the last point, once you have put machines close together, install conveyor belts between them. By doing so, you avoid the old approach of letting inventory pile up in a container until it is full, and then transporting it to the next machine. Instead, inventory flows in units of one, which reduces the overall inventory requirement.
3. Minimize the size of production runs. Schedule very small production runs, preferably only to accomodate existing customer orders. Otherwise, excessive production will lead to an excessive amount of finished goods.
4. Minimize machine setup times. It is much easier to have the short production runs just advocated if it takes only a few moments to reconfigure a machine to manufacture a different product.

Fullfillment

1. Delay final assembly. If you have many products that are slight variations on each other, then build inventory only to the point at which the variations are added to the products, and then complete them once customer orders arrive. By doing so, you avoid having committed too much of an investment in finished goods for very specific product variations that sit in the warehouse until an order arrives.
2. Concentrate slow-order items in storage. If you have a large number of warehouses, only store high-turnover finished goods in them, while retaining slow-moving items in a central location. This is a balancing act of minimizing the inventory of slow-moving items by keeping a small number of them in one place, while also paying more for overnight deliveries to continue to deliver them to customers on time.
3. Use drop shipping. If you are selling goods to customers that are made entirely by your suppliers, then pass along the customer orders to your suppliers, and have them deliver straight to the customers.

Related Topics

Drop shipping
Inventory risk pooling
NCNR inventory reduction
Reduce product options
Service parts inventory