JRW Q&A – Inventory Reduction

Our customer relationships range from purchasing experts to PhD’s in food science. Given this broad range of experience, we thought a post on some common supply chain principles may be of value to our audience.

In this week’s post, we highlight inventory reduction and important terms associated with the practice.

William Patton, JRW Birmingham, AL

Inventory

Inventory is a metric for the goods and materials held by an organization to support production, maintenance or sales and customer service.

We typically find that customer’s who have not had time to focus on best practice purchasing procedures keep higher inventory levels than needed as an extra precaution to ensure customer demand is met and that revenue streams can run without interruption.

Inventory Reduction

Inventory Reduction is the active process of reducing the amount of inventory an organization holds. Companies strategically focus on this for a variety of reasons some of which include freeing up cash, creating more storage space, and reducing costs associated with inventory like leases and insurance.

The food ingredient space often achieves this by reducing demand variability, improving forecast accuracy, reducing order sizes, reducing supplier lead times, improving supplier reliability, and eliminating obsolescence. Check out this great link.

Why is this important? Reducing inventory helps companies free up cash and also take advantage of new opportunities and investments. It provides more control and clarity on the efficiency of their operation.

Carrying Cost

Carrying Costs are all the costs associated with holding inventory. This includes the capital costs, inventory service costs, storage space costs, and inventory risk costs. For a more comprehensive and company specific breakdown of each of these categories, click here to speak with a specialist.

Why is this important? Reducing carrying costs has a direct impact on a company’s profitability. Because of this, companies often use it as a leading metric in procurement and supply chain’s performance evaluations, KPI’s, or goals.

Interest Rates

Interest Rates are the proportion of a loan that is charged as interest to the borrower. Most companies do not have the free cash to finance all the inventory needed to meet production and customer needs. As a result, borrowing money to finance inventory is a common practice. As rates go up, it becomes more and more expensive to do this.

Why this is important? Efficiencies and reduction becomes more accretive to the bottom line when interest rates rise. For that reason, a company’s ability to reduce their carrying cost can create significant competitive advantages.

Cash Flow

Cash Flow is the total amount of money moving in and out of a company. It represents the liquidity of an organization.

Why this is important? Cash flow allows organizations to make decisions and adapt to changing markets. It creates a competitive advantage and reduces opportunity costs. As a result, this liquidity allows business owners to invest in new technologies, purchase new assets, hire more employees, and expand into new territories.

 

If inventory reduction is important to your organization reach out here to see case studies and potential for your organization.

 

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