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Strategies for Managing the Real Cost of Inventory
In the case summarized in the table "The
Real Cost of Inventory" we see that a lot of things have been overlooked to
result in an inventory carrying cost of about 29% per year or about $750,000. A third to a
half of this is wasted and the company should be making $350 to $450,000 (4% of sales)
pre-tax profit instead of $100,000 (1%). What had been viewed as a competitive advantage
was actually sinking the company.
Here are specific actions that reduced the negative cost of
inventory in this case and maybe you can use as well. In this case, the annual savings are
about $400,000 per year and within 9 months an additional $750,000 in cash are freed up
for other uses. This is extremely beneficial to say the least.
Action |
Impact |
$ Savings |
Reduced inventory by $750,000 by the
following tactics:
 | Trained management in inventory management. |
| Measured inventory in terms of numbers of turns per year - manage on that basis. |
| Sold off slow-moving goods |
| Reduced minimum order quantities |
| Coordinated inventory with sales & operations |
| Created and use weekly inventory status reports. |
| Discontinued some products that weren't selling well enough to be worthwhile |
|
| Reduced interest cost |
| Reduced damage & spoilage by 50% |
| Eliminated outside warehouse space |
| Reduced overtime by 80% through more efficient space and time utilization |
| Eliminated cost of handling excess inventory |
| Reduced one warehouseman and one half clerk
|
|
| $67,500
|
| $19,000
|
| $54,600
|
| $49,900
|
| $7,500
|
| $27,000
|
|
| Improved customer service through fewer errors and delays. Stocked the
right product instead of slow-moving products.
|
|
| Increased customer retention by 50% |
| Set the stage for a future price increase based on exceptional service. |
|
| $25,000
|
| ?
|
|
| Stopped wasting management and supervisory time. |
|
| Redirected resources to cost & quality improvement programs. |
|
| $25,000
|
|
| Rearranged warehouse space to reduce the possibility of accidents and
conducted safety training.
|
|
| Improved safety reduced the cost of insurance and employee turnover. |
| Eliminated equipment & property accidents |
|
| $36,000
|
| $18,000
|
|
TOTAL SAVINGS* |
|
$404,500 |
*Some of these savings, such as the workers compensation insurance rates and the cost
improvement program, take some time to take effect. The balance can be achieved within 9
to 12 months.
Here are ten additional strategies for reducing inventory cost.
Get
your costs and
bottom line profits under control
now
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