Prescription #1:

Suppress Your Inventory Appetite and Run Lean

Unless you've been vacationing on Mars lately, you know that one of the most challenging consequences of the economic meltdown has been the extreme tightening of credit. The credit crunch first hit Wall Street, then—as anyone who watched a political ad knows—Main Street, and now it is finally impacting Commerce Street. Businesses of all sizes are finding it difficult and more expensive to borrow money even for basic operations, like financing inventory.

Therefore, we're administering our first prescription: suppress that inventory appetite! We're giving you three exercises you can do today to reduce your appetite for inventory and improve your fiscal fitness—while maintaining customer service.

Better Manage Your Slow Movers: Slow movers are the bane of inventory management. You have a lot more of them than you like, but you can't get rid of them because customers expect certain products to be available. Like cholesterol, the key is to determine the "good" slow movers from the "bad" slow movers, and then use inventory replenishment techniques to optimize the mix.

We suggest categorizing slow movers based on profitability (value) and cost. Each combination of traits has to be treated differently. For instance, you want to maximize low cost/high profit products, whereas the high cost/low profit items are the ones you should strongly consider sunsetting, if possible.

At Manhattan Associates, we worked with one retailer to quantify the value of an approach like this. The company determined that 68 percent of its SKUs were slow movers. After further classification and optimization of the different slow mover categories, the company not only reduced inventory levels, but also increased revenue and profitability due to greater availability of high value and high profit products. The bottom line: an increased contribution to profit of more than $1 million across a 500-store network.

Decrease Lead-Time Variability: Imagine if your boss came into your office and said: "You are going to make the same exact salary next year as you do this year, but I am not sure exactly when I can pay you." Your natural reaction would be to keep more cash in your checking account to account for the variability of payments. Businesses manage inventories in much the same way. If you average 36 days on supplier-to-DC delivery time, but that time varies by six days either way, then likely you are carrying excess safety stock to account for the variability.

The business case shows the benefits of reducing variability are compelling. For example, for a $3 billion organization, a reduction in lead-time variability from six to three days can mean an inventory reduction of more than $18 million and a carrying cost reduction of $2.7 million. Now that's healthy!

Implement Postponement Practices: Postponement is the art and science of delaying final assembly and/or kitting until the last possible moment in the production cycle—ideally as close to the timing of the sale as possible. The greater the postponement, the less inventory you have to carry. You'll also likely experience lower transportation costs, since you're not shipping as much. In one case, an electronics components manufacturer achieved a 50 percent reduction in inventory and a 15 percent reduction in sourcing costs through increased postponement.

So that's it for prescription number one. The treatment: suppress your appetite for inventory by managing slow movers, reducing variability and implementing postponement. The benefits: you'll run leaner with less inventory and healthier financials. If you'd like a more complete check-up, please call +1 877.596.9208 or email us.