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.