This is a review of a white paper entitled “Inventory Reduction: Getting Traction for Fast Track Results” from R. Michael Donovan & Co.
The white paper begins by stressing today’s executives’ interest in reducing inventory levels, saying that “the old ways [of keeping large inventories] caused erratic and long lead times, high costs and unnecessary cash consumption.” Though the white paper uses the term “the old ways,” many organizations are still plagued with too much inventory as the white paper attests that many organization’s past efforts to reduce inventory were “ill-fated” and ended up bringing about unintended consequences such as “decreased customer service; lower productivity; lost sales; lower profits; and, ironically, more cash unnecessarily consumed.”
So, how does one go about decreasing inventory?
According to the white paper, not by using traditional inventory metrics such as inventory turnover or days of inventory. Instead, the white paper recommends a methodology called IQR. Maybe I read through the white paper too quickly, but it wasn’t clear to me what IQR stood for.
The IQR process involves identifying, for each part number, an optimum inventory value. Then, it requires you to classify inventory into four categories: Active (where the optimum inventory value matches the amount of inventory you actually have for that part number), Excess, Slow Moving, and No Moving.
Here is where my problem with the white paper’s methodology starts. Does “Active” mean exactly the right value? Is there an acceptable range? Is +/- 10% sufficient?
Moreover, the white paper offers no criteria for what constitutes the difference between Excess, Slow Moving, and No Moving. While this doesn’t appear to matter at first due to the white paper’s calculation of IQR (sum of Active values divided by total inventory value), it does later.
You see, a case study near the end of this white paper attempts to demonstrate how IQR is used to prioritize inventory reduction opportunities. But, more confusion ensues when the case study ends up listing seven categories – Active 1, Active 2, Excess 1, Excess 2, Excess 3, Slow Moving, and No Moving – then said that “the biggest inventory reduction opportunity is clearly in the Excess 2 category with $26,879,000. or 49% of the $54,965,000. total inventory.”
It would have been helpful to know the criteria used to determine the common characteristics among all of the items included in “Excess 2,” but none were found. Instead, the reader is left to guess. The case study closes with quantified inventory reductions but doesn’t mention any specific techniques used to achieve the results.
Then, a second case study is presented with no mention of the use of IQR but a mention of an inventory reduction technique: “a pull system for inventory replenishment was designed to replace MRP push methods.” A 65% reduction in inventory leads you to believe that this company didn’t prioritize certain items. They just tried to reduce inventory across the board, which would conflict with a tenet from the white paper stating, “Separate the vital few from the trivial many. Do not attempt to tackle every suggested ‘defer’ action.”
So, as you might imagine, I was a little disappointed with this white paper. Maybe if you’re smarter than I am, you can draw helpful conclusions for yourself by reading it firsthand. If you have that type of appetite, then go ahead and get your own copy at R. Michael Donovan & Co.’s website (registration required).
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Recommended Reading
- Impact of Inventory
- Inventory Purchasing
- Profitable Inventory Management and Control
- Inventory Turnover Ratio
- Purchasing and Inventory Management
- Myth: Learning Inventory Management Is Painful
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