Business Management

1. What is the difference between inventory management and inventory reduction?
Inventory management is the activity which ensures the availability of the inventory items in order to be able to service customers. In an MRO environment the customer will be the maintenance and production department; in a finished goods environment the customer is the external customer. Inventory management involves the coordination of purchasing, manufacturing and demand to ensure the required availability.
Inventory reduction is the activity that minimizes the cash investment in inventory while maintaining the availability promise of inventory management. Inventory reduction focuses on identifying those items where the inventory holding is in excess, given the current actual demand and supply characteristics, and then works to reduce the cash investment in these items. This means that a significant cash release can be achieved with no change in the inventory risk profile.
2. How does the different focus of inventory management and inventory reduction impact the outcome?
Because inventory management aims to ensure availability, the focus is primarily on eliminating stock outs, where the availability promise is not met.
Inventory reduction focuses on cash and eliminating any unnecessary investment in inventory with no change in the inventory risk profile. The logic is this: any stock out triggers an action to restock and to typically overstock in order to avoid a future stock out. Therefore, opportunities exist for inventory reduction that will not increase risk. Where the inventory is already overstocked there is no trigger to take action, hence a specific program of activity is required.
Eventually, inventory management must lead to an over investment of cash in inventory as people seek to eliminate stock outs, whereas, inventory reduction results in a minimized investment of cash while maintaining the availability promise.
3. What is the difference between inventory optimization and inventory reduction?
Inventory optimization uses the existing constraints to calculate the required level of inventory for a desired level of availability.
Inventory reduction challenges the constraints to ensure that the result is an improvement to ‘what could be’, not just a recalculation of ‘what is’.
4. Why can’t we just use an inventory optimization program and gain those improvements?
Of course many companies will gain a benefit from using an inventory optimization program, however, the real issues are: is the benefit maximized, and is it sustainable?
On its own an inventory optimization program cannot achieve the same level of benefit as an inventory reduction program. This is because optimization programs just calculate the ‘what is’ and so only optimize an element of the total equation. Inventory reduction works on the ‘what could be’ and so minimizes the whole inventory investment.
With respect to sustainability, the ongoing achievement of a minimized inventory results from a change in the policies, procedures, measures and reporting that drive the inventory result. Optimization programs are calculation tools that don’t address these issues. An inventory reduction program ensures that all the relevant members of your team understand the impact of their decisions on inventory outcomes and sets up the policies, procedures, measures and reporting to ensure a sustainable result. Fundamentally, optimization is a tool that may be used in an inventory reduction program. In fact, if you use (or sell) an optimization program you should invest in our inventory reduction system to gain the long term impact!
5. There are lots of optimization programs but only one inventory reduction system, surely if your process was better, everyone would copy it?
Inventory optimization programs are very popular and have been around for many years but as mentioned above they are limited in their application. At Initiate Action we were the first to specifically identify the ‘7 Actions for Inventory Reduction’ and to promote the requirement that sustainable results need a change in culture.
Optimization is based on maths and statistics and because of this it is easy to package it as a simple software program. Our inventory reduction system is both a training and action program that educates your team and creates the culture change required to ensure that the inventory reduction is sustainable. Optimization alone does not provide the basis for the changes in inventory management that prevent the inventory increasing again. People are trying to copy the system – but why bother when you can license it!
6. So, what are the specific differences between a typical inventory optimization program and an inventory reduction system?
There are five very specific differences:
i. There are 7 actions that can be taken to reduce an inventory investment – our system applies all seven actions for inventory reduction. A typical optimization program applies just one.
ii. Our inventory reduction system focuses on cash release without impacting availability so we focus where the bulk of the investment is tied up. Optimization programs are ‘availability based’ and identify changes to improve availability across all inventory, no matter what level of investment there is. Our approach is much more effective and efficient in the use of your team’s time and energy.
iii. Optimization programs assume that your company must invest in its own inventory and calculates how much. Our inventory reduction system starts by applying what we call a ‘zero inventory mindset’. This requires that all inventory investment be justified against several criteria and any investment above zero must be justified. This justification is more than just optimization on an economic basis. This mindset difference is central to the Inventory Cash ReleaseTM System - ICRTM06 and is a huge difference between the two approaches.
iv. Optimization programs are calculators that assume that availability and demand are essentially fixed. Our inventory reduction system does not make these assumptions and directs the company to review other potential initiatives with suppliers.
v. Optimization programs are calculation tools; our inventory reduction system is an implementation program that identifies opportunities and then acts on the policies, processes, measures and reporting required for sustaining the result.