Case Study: Inventory Management

How do we reduce inventory levels?

A manufacturer of computer peripheral devices was looking to improve its balance sheet and P & L by reducing inventory and the associated carrying costs, while improving customer service. The products required to support different customer channels varied from expensive long-lead time engineered systems to relatively low-value standalone units that supported personal computers. The company needed to completely revamp its inventory, manufacturing and product support policies, procedures and practices to reflect the dramatic and fast changes to its product line.

The two main questions that needed answered were:

1. What would the impact be on profit from the disposal of obsolete inventory in order to improve the balance sheet?

2. How do we institute a program to prevent the buildup of obsolete inventories by disposing of slow movers on a regular basis?

Establish performed a logistics cost/performance bench-mark for all of the divisions showing that inventory carrying costs were extremely high. The bulk of the problem was in inventory management, there were problems managing the broad mix of products required as well as large amounts of obsolete and slow-moving inventory.

A cross functional team was formed that included members from Operations, Marketing, Sales and Finance to evaluate and dispose of excess and obsolete inventories.

The process of creating inventory was benchmarked to “best-practices” to identify improvement opportunities in purchasing, materials management, inventory planning and management, and the manufacturing operations.

In purchasing and materials management it was recommended that the total purchasing power of the corporation be leveraged to obtain more favorable purchasing and consignment agreements by centralizing the purchasing function. At the same time, local materials management functions could be strengthened to improve requisitioning and materials usage and upstream supply chain partnerships were established to improve material flow and reduce purchased parts inventories.

In inventory planning and management, a centralized logistics function was recommended. Written policies and procedures were developed for inventory planning, management and reporting, and a new forecasting and inventory planning business process and information system was implemented. All inventories are now managed more intensively to avoid excess and obsolete inventories and active inventories are deployed and re-deployed based on well defined forecast requirements.

The promotion process was also brought under control to avoid sudden unanticipated demand on the plants, and manufacturing performance criteria was changed from lowest unit cost and high absorption to meeting the schedule in time and quantity to improve customer service levels.