Untouched Inventory

Finding Opportunity Through Inventory Analysis

Effectively planning and managing inventory is a core competency for any successful distributor.  Excessively high levels of inventory can cause unwanted pressure on cash flow and operations.  At the other extreme, running inventory too low hurts service levels and creates the risk of losing customers. 

The challenge of planning and managing inventory levels, therefore, is finding the right balance between responsible levels of inventory while managing the risk of service failures (backorders). 

Low inventory levels are easily identified by your customers and sales team by their direct impact on service levels.   

Excess inventories, however, tend to stay hidden until their cumulative effect is hurting the business.  It is not uncommon for a portion of this accumulation to be related to emotional reactions from prior service level failures or fear of service failures to certain segments of products or customers.   A matching reactionary response to excess inventory can trigger the start of a “pendulum effect”, alternating between service level issues and excessive inventory.

This is where proper analysis can be used to overcome emotion in making intelligent decisions regarding inventory investment.  In other words, it is important to be able to identify pockets of excess inventory and develop a measured response that reduces inventory without threatening service levels.

In this article, we introduce a valuable measure called Untouched Inventory that can help you analyze inventory investment and find inefficiencies that represent opportunities for improvement.

What is untouched Inventory?

Untouched Inventory is a measure of the lowest level of inventory an item has attained over a given period of time.  The financial impact of untouched inventory can be measured by multiplying the untouched inventory quantity times each item’s cost and accumulating this across all items.

For example, the measurement could be set to collect all on hand balances of every item over a 90 day period.  The Key Performance Indicator (KPI) would return the lowest actual on hand balance in units and cost reached over those 90 days. 

Theoretically, it could be stated that this amount of inventory was never needed over that time frame and therefore could have been eliminated without causing any service failures! 

Untouched inventory values can be analyzed by rolling them up to various summary levels such as warehouse, buyer, ABC code, product lines, etc.   This is the first step in putting this new KPI to work in your business.

How can measuring untouched inventory help?

The untouched inventory KPI identifies pockets of excess inventory and allows you to formulate an objective and measured response:

°         “Stop the bleeding”: 

o        Identify the root cause of the excess

o        Adjust replenishment strategies and processes accordingly

 

°         If the excess will linger too long, consider options for cutting the excess:

o        Return excess to vendors (where applicable)

o        Balance excess across warehouses to minimize depletion time

o        Create targeted marketing programs and sales promotions

o        Initiate sales team incentives

By targeting the excess, inventory can be reduced without hurting the service levels of items that were properly stocked.

How much is too much?

Some untouched inventory is needed to maintain service levels. It is the excess untouched inventory that offers the opportunity to reduce and/or reallocate inventory investment. 

So let’s take an even more conservative view of the Untouched Inventory KPI.  A portion of the untouched inventory represents unused safety stock.  Assuming the safety stock quantity is based on the items’ historical volatility, it should not be considered excess.   If we deduct the safety stock from the untouched amount, we have a service-level friendly measure of excess – revealing inventory that you never needed, even for back up and “peace of mind”.

Conclusions

By running through this simple analysis, you can identify areas where investment in inventory is excessive.  The analysis provides a framework for adjusting replenishment strategies and re-allocating or reducing the inventory.  This targeted approach is significantly more effective than across the board cuts and creates the possibility of ‘smarter’, directed initiatives supported by historical data.

Recent analyses performed by OverDrive Solutions revealed that, in most companies, inventory level values could be reduced by 10% to 30% without affecting service levels!  This is just one of over 30 KPI’s available in our Inventory Management solution.

If you are interested in these concepts or would like to have an Untouched Inventory analysis conducted for your organization, please contact Mike Parolini at MParolini@overdrivesolutions.com or call 702-476-0878.