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Reducing inventory to improve costs

The economic crisis is showing signs of falling behind, but that does not mean money is piling up, let alone that it is time to loosen control and the urge to cut back unnecessary expenses.

Inventory management is one area where it is always possible to improve. Depending on the type of product your company works with, the wrong inventory level can become a huge problem. Adequate inventory levels have a direct impact on cash turnover and costs, and it is always a good time to improve your inventory management further.

Given that inventories exist to meet future demand, usually unknown, one should focus on improving inventory management, demand forecasting, and quality assessment systems.

Lower inventories will also bring positive results to other areas:

– less space required, therefore a smaller and cleaner warehouse;

– less maintenance and handling, reducing the likelihood of breakages and breakdowns, and even less personnel expenses;

– less obsolescence, faster turnover, newer stocks;

– less risk from price fluctuations, to name a few advantages.

However, before you spend more money on something that should save you money, start with simple steps. Reconnect with your customers, knowing their inventory and purchasing practices, influencing them to adapt to what suits you in terms of frequency, freight and differentiated prices. With almost zero cost, it can provide very interesting effects.

In addition to customers, analyze the supply of raw materials and products. Is your vendor reliable? Do you have a “backup” supplier, if the former cannot meet you, and even to compare prices?

Then, identify the elements that contribute to the increase of inventories from the standpoint of inventory management models and forecasting models and what the software takes into account:

– Delivery lead time: in how many days can your supplier deliver the ordered products (or, if you do not work with the final customer, on how many days do you deliver to your customer)? Keep in mind that if you save one day waiting for the products, it represents one day less in inventory operations that need to be maintained;

– Variability and reliability of delivery: can also be understood by the technical terms standard deviation or variance, which the software uses. They mean the reliability that the delivery will be made within the stipulated time frame.

It’s no use making deliveries, on average 7 days after the order, if in one month the delivery takes place in 4 days, but the next takes place in 10 days. This variability is taken into account by the software, and will raise the safety stock level.

– Poor demand forecasting: it is currently possible to make good demand forecasting with relatively limited resources. State-of-the-art software will make excellent predictions, but this comes at a price. Still, this does not mean that it is not possible to predict demand, but one must always be aware of the forecasting error and whether the model is compatible with reality if no significant changes have occurred in the market.

– Forecast variability: as with the variability of deliveries, forecast variability has important impacts on the volume of inventories. Very volatile demands will require greater inventory, and therein comes into practice what I have previously called reconnection with your customers. Understand the reasons for the variability and trying to influence them, with freight or different prices, so that they adapt to your strategy.

By focusing on these items, you can decrease inventories, improve product flow and thereby lower your operating costs and increase working capital.

Good luck and good work!

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