A Major, Big$ Problem
We have been getting a surprisingly large number of page visits for our field notes on slow- and non-moving inventory in healthcare. This suggested that visitors might be interested in a more general treatment of this increasingly important topic.
Slow-moving inventory1 can turn out to be a very significant problem in some cases ...
One organization we studied recently had more than 85% of its very substantial inventory investment tied up in slow-moving items. About 50% of this was non-moving. It consumed a large amount of scarce storage space as well as a fair amount of materials handling labor.
A simple inventory turnover report made this previously unnoticed problem — and opportunity — readily apparent.
Many organizations in which inventory is a necessary but peripheral aspect of what they do pay relatively little attention to inventory management, and particularly to slow-movers. They tend to have little or no awareness of either its size or the substantial costs generated by it.
Herein lies a major opportunity: Eliminating just half of this inventory could, in the example above, free up several million dollars in much-needed working capital. And that is assuming success also in preventing such inventory from simply building right back up again, which it tends to do. In addition, it can free up valuable storage space and eliminate significant materials handling expense.
1 In these notes, we will refer to both slow- and non-moving inventory simply as "slow-moving inventory".
Easy to Create
Some slow-moving inventory is essential. A critical spare part or a long-lead medical item has to be on hand when needed to avoid the potentially huge costs of not having it. We are not addressing such critical inventory here but only the slow-moving inventory that is not "critically needed".
Non-critical slow-moving inventory usually builds slowly and almost imperceptibly. While it has many causes, among the most popular are:
- No (or an ineffective) standardization process
- Inaccurate forecasts of end-use demand
- Too much inventory duplication
- Lack of buying coordination
We will take a closer look at each of these shortly.
Hard to Reduce
At some point, the capital tied up in slow-moving inventory becomes very noticeable. This often occurs after the problem has reached a magnitude at which reduction has become very hard and painful. Commonly encountered obstacles to inventory reduction include:
- Too much investment to write off
- We might need it someday
- Customers rely on us to have hard-to-find items
- Nobody wants to standardize
- Too many items to tackle for our limited time
Most of these are not easily overcome. They are real and usually well-justified. Progress is often frustratingly slow.
Success = Reduction + Prevention
A successful solution in most cases will require a sustained effort on two major fronts — reduction and prevention. Slow-moving stock has a nasty habit of quietly rebuilding itself after the reduction effort has concluded. A preventive component to the management process is thus essential.
Let's look first at slow-moving inventory reduction ... Next ...
The Hidden Costs
Slow-moving inventory typically shows up as a part of working capital. What is not as readily apparent are storage and handling costs.
Slow-movers often consume a great deal of scarce storage space, crowding out fast-movers and generating costly stockouts and frequent, inefficient ordering patterns.
Slow-movers can also incur substantial handling costs for counting, relocation, rotation, expiry date checking, and the like. These hidden costs can add up to a serious operating expense burden.
Out of Sight, Out of Mind
Slow-moving inventory takes many forms, some of which are both unexpected and virtually impossible to remedy. An example ...
One specialty retailer we studied had a distribution center with a large section in the back dedicated to "parts". These, it turned out, were mainly damaged items that could not be repaired, marked down, and sold. They were carried at full cost on the books and represented a substantial capital item.
Nowhere, however, were they identified as "dead". These items simply stayed in a jumble on the racks, moved occasionally to make room for the newly dead. When we brought this situation up with the CFO, he stated that write-offs were out of the question because of bank loan requirements. A nasty problem with no easy fixes.
Opportunity Estimation
Does your business have a serious slow-moving inventory problem? Do you know roughly how much working capital you could free up and how much expense you could eliminate by tackling your slow-movers?
Estimating this opportunity requires knowledge of what your essential slow-moving stock levels should be as well as the cost of a program to achieve them.
In our concluding page on action ideas, we discuss the mechanics of estimating the slow-mover opportunity and elements of a slow-mover reduction + prevention program.