{"id":2904,"date":"2010-06-09T17:57:00","date_gmt":"2010-06-09T17:57:00","guid":{"rendered":"https:\/\/www.certitrek.com\/nlpa\/2010\/06\/09\/whitepaper-wednesday-inventory-reduction\/"},"modified":"2021-07-27T08:47:47","modified_gmt":"2021-07-27T12:47:47","slug":"inventory-reduction","status":"publish","type":"post","link":"https:\/\/www.certitrek.com\/nlpa\/blog\/inventory-reduction\/","title":{"rendered":"Inventory Reduction"},"content":{"rendered":"

This is a review of a white paper entitled \u201cInventory Reduction: Getting Traction for Fast Track Results\u201d from R. Michael Donovan & Co.<\/p>\n

The white paper begins by stressing today\u2019s executives\u2019 interest in reducing inventory levels, saying that \u201cthe old ways [of keeping large inventories] caused erratic and long lead times, high costs and unnecessary cash consumption.\u201d Though the white paper uses the term \u201cthe old ways,\u201d many organizations are still plagued with too much inventory as the white paper attests that many organization\u2019s past efforts to reduce inventory were \u201cill-fated\u201d and ended up bringing about unintended consequences such as \u201cdecreased customer service; lower productivity; lost sales; lower profits; and, ironically, more cash unnecessarily consumed.\u201d<\/p>\n

So, how does one go about decreasing inventory?<\/p>\n

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\u2019t clear to me what IQR stood for.<\/p>\n

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.<\/p>\n

Here is where my problem with the white paper\u2019s methodology starts. Does \u201cActive\u201d mean exactly the right value? Is there an acceptable range? Is +\/- 10% sufficient?<\/p>\n

Moreover, the white paper offers no criteria for what constitutes the difference between Excess, Slow Moving, and No Moving. While this doesn\u2019t appear to matter at first due to the white paper\u2019s calculation of IQR (sum of Active values divided by total inventory value), it does later.<\/p>\n

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 \u2013 Active 1, Active 2, Excess 1, Excess 2, Excess 3, Slow Moving, and No Moving \u2013 then said that \u201cthe biggest inventory reduction opportunity is clearly in the Excess 2 category with $26,879,000. or 49% of the $54,965,000. total inventory.\u201d<\/p>\n

It would have been helpful to know the criteria used to determine the common characteristics among all of the items included in \u201cExcess 2,\u201d but none were found. Instead, the reader is left to guess. The case study closes with quantified inventory reductions but doesn\u2019t mention any specific techniques used to achieve the results.<\/p>\n

Then, a second case study is presented with no mention of the use of IQR but a mention of an inventory reduction technique: \u201ca pull system for inventory replenishment was designed to replace MRP push methods.\u201d A 65% reduction in inventory leads you to believe that this company didn\u2019t prioritize certain items. They just tried to reduce inventory across the board, which would conflict with a tenet from the white paper stating, \u201cSeparate the vital few from the trivial many. Do not attempt to tackle every suggested \u2018defer\u2019 action.\u201d<\/p>\n

So, as you might imagine, I was a little disappointed with this white paper. Maybe if you\u2019re 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.\u2019s website (registration required).<\/p>\n

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Recommended Reading<\/strong><\/p>\n