Cost Reduction Using Ten Inventory Management Techniques - An Article Review

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Mark S. Miller, Thomas M. Graddy / Cost Reduction Using Ten Inventory Management Techniques/85th Annual International Conference Proceedings – 2000/

Oct. 12 2011

This article reveals about the annual investment companies make in inventory represent between 20% and 40% of invested capital. Inventory ties up cash, takes up space, requires handling, deteriorates and is sometimes lost or stolen. Purchasing can play a major role in managing the investment in inventory. We will discuss how inventory reduction impacts bottom line costs and outline ten inventory management techniques that the buyer can use to reduce inventory costs. It is very critical that purchasing management recognize the financial impact that inventory plays. For purchasing to get the proper credit cost for reducing inventory it is important to recognize its impact to the balance sheet, the income statement and cash flow. Inventories can be found under the current asset section of the balance sheet. Inventories are often also broken down into segments: raw material, work in process and finished goods. Financial analysts carefully watch changes in the year to year inventory balances. Inventory is included on the income statement in the calculation of cost of goods sold. If the inventory investment is reduced, the net income is increased. The table below shows that for every dollar that the inventory is reduced, net income is increased by the same dollar.

James Watson/ Inventory management strategies for cost reduction/ The Globe and Mail/ Thursday, Sep. 06 2012

The article explains if you've been in business for a while, you should have some record of what sold and what didn't sell throughout the year. Analyze that data. Break the inventory down into categories and try to correlate the categories with customers. Trends or patterns will likely emerge. Depending on what business you're in, these might correspond to the rhythm of the seasons, or they could relate to the financial year-ends of your biggest customers. To recover some of the cash you have tied up in “dead” inventory, mark it down for quick sale. Divide your dead inventory into the "bad" (meaning not selling right now) and the "unsellable." Be realistic and merciless. Display and price the bad stuff so that it will sell. What you paid for it is not important. What is important is that customers buy it and take it off your hands. Or you can see if your distributor might be willing to take some of that inventory back. Structure your proposal so that the distributor gets something out of the deal. Perhaps they have other clients who could use that stock. Alternatively, you might offer to try out that new range of products they've been pushing. The distributor may only be able to provide a discount on your next order, but that will at least help improve your future cash flow.

As a last resort, you may be able to donate the unsellable inventory to charity and generate a receipt for tax purposes.

There are other ways to do business without maintaining excess or unproductive inventory. You can, for instance, stock your fastest-moving items but maintain a drop-shipment agreement with the manufacturers or distributors of slower-selling products. Under a drop-shipment arrangement, the manufacturer or distributor takes care of shipping directly to the customer, and you don't have to keep inventory in stock. Inevitably, there will be items that don’t sell at full price, so you will have to eliminate them from your inventory. By planning ahead, you can set the dates for the markdown sale and eventual liquidation of stock that isn't moving. With a plan, you'll be more in control: as each sales period passes, you'll be able to measure results against the expected outcome and adjust yourbusiness plan accordingly.

Still, if dead inventory is a recurring problem in your business, there could be deep-seated problems that you may have difficulty solving. In such circumstances, it might be helpful to call in outside expertise such as that offered by BDC Consulting, which has a national network of business advisers to help you plan inventory, manage accounts receivable and improve your company's cash flow.

Khudsiya Quadr/ Can You Bring Cost Down through Better Inventory Management? /Finance daily/ February 24 2009

This article showcases about cost cuttingandcost reducing, with regards to the overall supply chain network. The most effective way of cost reduction in supply chain is through the collaborative effort of the whole organization. As discussed previously, the supply chain has various areas where cost reduction can be done, but for this blog, I want to focus on cost reduction with better or best inventory management processes and practices. Basicallyinventorycan appear in a variety of forms, such as raw material, goods in process, and finished goods.And each form represents funds (money) that are tied up until that inventory is "used up" by company as sold goods. Similarly, in retail stores, any stock on the shelves represents dollars tied up until it sells. In other words, inventory is anything holding up operating funds.The main objective of a supply chain is to have the right inventory, at the right time, at the right location with the right quantity. To achieve this objective, it’s key to have a proper inventory management process in place within the organization. There are numerous ways to achieve this without driving up the cost of operations or the cost of inventory. Most importantly, such strategies will help the organization reduce the cost associated with inventory. There are some common techniques and some unique business processes which can be implemented to achieve cost reduction and help with the better management of inventory. Many organizations should implement the following ten practices to reduce inventory costs: 1. Conduct periodic reviews and audits of various inventories being held in-house. 2. Analyze the usage and lead times of on-hand and order book inventory. 3. Reduce safety stock based on customer demand. 4. Use80/20 rule(ABC approach) for inventory control.5. Improve cycle counting techniques for inventory management. 6. Use vendor managed inventory or implement vendor stocking programs, which means supplier are managing inventory with the organization. 7. Usecollaborative planning and replenishment(CPFR) business processes and IT standards to collaborate among multiple parties in the supply chain network. 8. Improve the forecast of each product at the item level, i.e. use a variety of demand forecasting arithmetic models. No single set of algorithms fits all customers’ forecast or product families. 9. Communicate demand/hard orders to suppliers for better delivery of inventory. 10. Implement new inventory software which usesinventory quality ratio methodologyandmulti-echelon inventory optimizationtools.

Thompson, Kevin Mark / Reducing cost through inventory management/ Massachusetts Institute of Technology/:1996 This article explains about Inventory management involves the control of the current assets, namely raw materials, work in process and finished goods. The main objective of inventory management is to minimize the total cost- both direct and indirect, which are associated with holding the inventories. A reduction in the excessive inventories has a favorable impact on the company’s profitability.

Main purpose of inventory holding inventory is cost effective and helps achieve sales at competitive prices. The other objectives of holding inventories are:

  • To ensure prompt delivery.
  • To avail quantity discounts.
  • To reduce the order cost.
  • To avoid production shortage.
  • To achieve efficient production runs.

Costs associated with holding inventories.

  • Material cost.
  • Ordering cost.
  • Carrying cost.
  • Stock Out cost.

Each of the above mentioned costs can be controlled through efficient inventory management techniques. Economic order quantity (EOQ): This refers to the optimal ordering quantity that will incur the minimum total cost (order cost and carrying cost) for an item of inventory. With the increase in the order size, the ordering cost decreases but the carrying cost increases and the optimal order quantity is determined where these two costs are equal. The company should also keep an eye on the level of safety stock and the lead-time associated with the orders made.The ABC system: This is also referred to as “always better control”. It is a selective inventory management technique. This is used when there are varied items in large quantities are involved. In this system, the items are segregated into three groups, namely A, B, and C. The items falling in category A are those that involve the maximum investment. Likewise, the items that require minimum investment are classified into group C.

Advantages this approach helps in selective control of inventories.

  • It helps in pinpointing the obsolete stocks.
  • It reduces the clerical costs and results in better inventory planning.


  • The gradation of the items may include many subjective elements
  • The results should be periodically updated.

Amarita Bansal/ Reduce Costs through Inventory Management/ Indian Financial Journal / June 1, 2013

The article explains about how inventory management can play a large role in your success. Whether you're a small business owner or a franchisee, efficiently managing your inventory system will not only make your inventory flow more smoothly, but also help reduce your costs. Regardless of industry, people rarely spend enough time managing their inventory, says Shawn Casemore, president and founder of Casemore & Co., an Ontario-based business that partners with clients to improve operational performance. Consider these steps to prepare and maintain an efficient, cost-effective inventory system. This can lead to extra inventory costs. "You'll end up having to clearance it or sell it at a discounted rate," Felt says. Reduce inventory where possible to mitigate costs, Casemore says. To achieve this, you might consider a vendor-managed inventory system. A good solution for low-value, consumable items, this system is an arrangement with a vendor who will replenish your supplies, but they don't charge you for them until you've used them. According to Casemore, if your vendors can do this, you should consider outsourcing to them. Position Inventory Properly How you store, organize and position inventory in a warehouse can increase the efficiency of your inventory system. For example, keep your fastest-moving inventory up front, making it easier for those pulling the items. When warehouses are organized, everything has a flow, says Ben Philbrook, managing partner and director of operations at Chase Canopy, a tent and special event rental company, with locations in New England. Philbrook says it's important to have like items together. For example, his warehouse stores both tents and their parts, as well as fragile items, like glasses and china

Hau L. Lee and Corey Billington/ Supply chain management reducing cost /Journal of Strategic Financing/ October 1, 1993

This article explains about how supply chain is a network of facilities that performs the functions of procurement of material, transformation of material to intermediate and finished products, and distribution of finished products to customers. Often, organizational barriers between these facilities exist, and information flows can be restricted such that complete centralized control of material flows in a supply chain may not be feasible or desirable. Consequently, most companies use decentralized control in managing the different facilities at a supply chain. In this paper, we describe what manufacturing managers at Hewlett-Packard Company (HP) see as the needs for model support in managing material flows in their supply chains. These needs motivate our initial development of such a model for supply chains that are not under complete centralized control. We report on our experiences of applying such a model in a new product development project of the DeskJet printer supply chain at HP. Finally, we discuss avenues to develop better models, as well as to fully exploit the power of such models in application.

Thomas, H., Sanvido, V., and Sanders, S / material management in cost savings/Journal of Contemporary Research In Business/ 1989

This article explains about research has indicated that formal material management programs have the potential to yield significant construction cost savings, yet small‐ and medium‐sized commercial contractors may not feel that an integrated material management program is cost effective. The objective of this paper is to quantify the adverse impacts of ineffective material management practices. Data collected as part of an ongoing construction productivity study is used to analyze and compare the effects of material management practices on two steel erection projects. Rules of credit were applied to calculate the daily output. Adverse conditions caused by the lack of an effective material management program are identified, and the days on which the conditions occurred are noted. For these days, the actual daily productivity is compared with the expected productivity to determine the number of work‐hours lost. The cost impact is compared to the cost of effective material management. The results show a benefits/cost ratio of 5.7, favoring greater attention to material management.

Akintola Akintoyea / Inventory represents cost to procure/ CPA Practice Management Forum / 1995

The article show cases how materials constitute a huge proportion of the cost of construction. Materials are sometimes ordered weeks or even months ahead of requirement leading to uneconomical inventory on construction sites or contractors' warehouses. Building material inventory represents cost to procure, cost to store and insure, cost to guard against theft and cost incurred when inventory becomes obsolete. This paper presents an overview of the Just-in-Time (JIT) production system and discusses application and implementation issues for the control of material inventory in building construction. JIT ensures that suppliers deliver directly to the production floor to achieve either a reduction in inventory or zero inventory and consequently a reduction in production costs. Implementation of JIT building material management in construction has the potential to realize the same far reaching benefits experienced in manufacturing. Relevant factors to consider in JIT implementation for material inventory management in construction are implications for construction output and quantities, production planning, design planning, construction contractor and suppliers' relationships, material sourcing, and education and training.

Lee, Y Bogardi and Stansbury, J./ Decision support using material management /International Journal Of Finance And Technology / Sep 2013

A decision support system based on a modified fuzzy‐composite programming method is developed to assist decision makers in solving multiple‐objective decision problems under uncertainty. The method is applied to a dredged material management problem involving disposal of polluted dredged material at multiple disposal sites, where there are conflicting objectives such as environmental risk and cost, and the information regarding the impacts of dredged material disposal on each site is uncertain. Using the modified fuzzy‐composite programming method, values of the risk and cost are transformed into fuzzy numbers (i.e., fuzzy risk and fuzzy cost) to incorporate uncertainties associated with the risk and cost into the risk‐versus‐cost trade‐off analysis.

Venkatapparao Mummalanenia, Khalid M. Dubas and Chiang-nan Chaoc/ Business Wire [New York] /01 Mar 2006: 1/

Purchasing managers need to periodically evaluate supplier performance in order to retain those suppliers who meet their requirements in terms of several performance criteria. Six attributes frequently used as performance criteria are identified and used in this study. These attributes are: on-time delivery, quality, price/cost targets, professionalism, responsiveness to customer needs, and long-term relationships with the purchasing company. Purchasing managers use all six attributes jointly in evaluating supplier performance. Further, in making their choices the purchasing managers must necessarily make trade-offs among different levels of these attributes. Conjoint analysis is the appropriate method for measuring preferences where several attributes are used jointly in an overall evaluation. This article reports the results of an exploratory study examining the trade-offs made by Chinese purchasing managers among the six attributes identified earlier. The priorities of Chinese managers as well as the trade-offs they make are finally discussed in terms of their implications for Western marketers