How to Trim Excess Inventory to Improve Profits
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For most companies, carrying inventory is a fact of life. But do you know just how much this "fact of life" is costing you annually? Inventory costs vary by product, for instance, a food retailer's inventory needs will vary drastically from those of a metal products distributor.

According to an article titled "Start 2006 Right by Trimming Excess Inventory to Improve Profits" by David Rubin and Rose Anne Slawson of Cohn Consulting Group, "leasing, depreciation, utilities, materials handling equipment and labor expenses related to the handling of inventory add up, many times to almost 40 percent of the value of the inventory". The inventory bill can really add up, especially for large companies. "Best in class firms employing traditional strategies have carrying costs of 10 to 15 percent. This accounts for hundreds of billions of dollars a year in inventory carrying costs a year." Through the success of big name businesses such as Dell, we've seen the advantages of inventory management and the turnaround in profit thanks to proper inventory management. Okay, we've read many, many articles about how these companies used inventory management as their secret weapon, but how do the rest of you do it?

According to Rubin and Slawson: Set a goal. Calculate your inventory carrying costs and turnover stats. Find a benchmark within your industry or which carries your type of inventory against which to compare yourself.

Classify and Customize. Examine your reasons for the level of inventory you carry. Segment your inventory by category and assess the average and maximum levels for each type of category. Employ accurate forecasting models to determine the proper sizing of buffer inventories and most other inventory types.

Inventory management software systems are useful to analyze acquisition cost, demand, seasonableness, order frequency, and available discounts, and can help you assess the cost of ordering, receiving, and carrying inventories. Safety stocks are inventories which are held in order to prevent stock-outs which occur due to production or delivery problems. The collection of historical data of past performance of production and delivery processes can be collected and adjusted to assist in determining an adequate amount of safety stock. Seasonal /cyclical stocks are inventories held to cover variations in demand and to take advantage of volume purchasing discounts. This stock does not usually account for a large amount of inventory. Generally, it is more cost effective to weather an inventory shortage than it is to carry inventory for an entire year.

JIT and Vendor-Managed Inventory. Just in Time (JIT) inventory system is designed to ensure that materials or supplies arrive at a facility just when they are needed so that storage and holding costs are minimized. The JIT system tends to work well for companies with high-value, large volume inventory with a consistently high turnover rate and when goods are sourced from domestic suppliers with short lead times. Vendor managed inventory is a process in which suppliers maintain ownership of the inventory until it is distributed. Either of these above processes or any pairing of one of these with another inventory management system may be a practical approach for your company.

In our global business world, inventory management is a very real concern and a valid opportunity for finding ways in which you can trim corners in your overhead budget. Rubin and Slawson stated, "effective inventory management requires accurate forecasting models, inventory management software, and JIT strategies. Maintaining an optimized stock of inventory can be a key source of competitive advantage for service-focused firms."

-Based on the article "Ring in the New Year. Start 2006 Right by Trimming Excess Inventory to Reduce Costs." By David Rubin and Rose Anne Slawson
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