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November 14, 2006 5 Ways To Lower Inventory Costs We have written many articles on the importance of inventory cost on your bottom line. We have said before that your inventory is usually your single largest asset on your balance sheet and can create additional cost on your income statement. Although it might be expensive to carry your inventory that doesn’t mean there are not ways to lower some of the costs by using good inventory practices. Here are the 5 best ways to lower your inventory cost taken from the article 25 Ways to Lower Inventory Costs: 1. Base cycle stock on economics. To break it down in very simple terms this means knowing how much you’re going to sell and order the right amount to satisfy that demand. In issue 84, we showed this exact concept. In this issue we said that by using historical values to calculate your safety stock you can save BIG MONEY!! 2. Control order transaction costs. a. In the office, use the computer to generate purchase orders (POs), electronic data interchange (EDI) for PO transmission, advance shipping notices (ASNs) to reduce expediting, and historical vendor performance to prioritize expediting to lower purchasing costs. We have explained what EDI is in depth in Issue 69 and Issue 70. We have said in these issues that EDI is the way large Corporations transmit Purchase Orders and send Invoices. Not only are more and more venders using EDI which will give you more business but converting to it can reduces cycle time by an average of 40% for business functions like order entry, purchasing, manufacturing, logistics, and finance. b. In the manufacturing plant, preplanning; prestaging of needed parts or materials; use of special tools or equipment; changeover initiation prior to completion of the previous run; teamwork and work division; maintaining equipment temperatures; and minimizing quality assurance/quality control work all reduce cycle stock inventory. c. In the distribution center, statistics-based inspection and checking; barcode scanning for data entry; certifying key vendors to eliminate receiving functions; and stocking forward storage locations first and reserve locations second can all reduce purchase transaction costs and cycle stock accordingly. We have written about almost all of these topics. In Issue 78 and Issue 79, we wrote about how using a food orientated software program to create a Gainshareing plan can not only motivate employees to work more effectively but also it is a way to check the correctness of your inventory by using the physical count variance report. As in regards to bar-coding, Issue 28 explains how bar codes can save you money or add to your profitability. 3. Lower inventory holding costs. Improve space utilization in the DC through narrow aisle handling equipment, mezzanines, layout modifications, or more appropriate storage modes. This has been a topic that we have frequently written about. In issue 57, we went over 10 tips to help save space in your warehouse and Issue 67 we talked about keep operational costs low in the summer time. 4. Base safety stock on customer service. Issue 83 is was completely about how to calculate your safety sock on customer service. We explained in detail how to calculate it and how in the long run it can save you money and build customer satisfaction. 5. Use routine demand forecasting Using manually edited arithmetic forecasting models to reduce forecast error will reduce overstocking, backorders, and DC returns from stores, holding inventory levels closer to only what is required to support the desired customer service level. We have not written an a newsletter on using a specific forecasting model but what we have done is for example in Issue 83 created our own forecasting model of how much to reorder by using historical values and for example in Issue 86 when we showed how a computer forecasted how much to reorder. Many companies look at inventory as an investment that can not be changed. This Statement Can Not Be More WRONG!! There are countless ways to cut inventory costs and start using the money you saved in other aspects of your business. These 5 Ways Are Just The Start To Cutting Inventory Costs To Unsubscribe
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