Inventory Reduction
The Value
Inventory reduction initiatives can directly lower COGS and working capital. Depending on the amount of inventory eliminated, these initiatives may also lead to asset reduction, which in turn can increase asset utilization. Successful initiatives identify excess inventory of 4 to 10 percent, excluding inventory allocated to provide increased service levels. Realistically, some organizations can expect even greater reductions Savings in carrying costs can typically be estimated at 12 to 16 percent of the COGS value of reduced inventory, which is considered a one-time savings in working capital. However, changes in planning, integration and safety stock ensure minimized inventory over the long haul. These savings can easily contribute to an organization's cash flow, profitability and flexibility.
The Process
The most effective means of reducing supply chain costs is through inventory reductions. Some companies argue that inventory should be maintained at higher levels to improve customer service. In reality, the right mix of current inventory. elimination of old and obsolete inventory, tight integration with demand planning and identification of appropriate safety stock targets can lead to even higher levels of service.