Slow-Moving Inventory: Prevention

In many organizations, a simple inventory turnover report shows the problem starkly: Substantial portions of inventory investment and storage space are typically consumed by slow- and non-moving items. Dealing effectively with this problem, however, can often be very difficult. You must not only eliminate as much of this inventory as possible but also act to prevent it from building right back up again.

Here are some thought and ideas on how to prevent the build-up of slow-moving inventory. You will notice some overlap with the reduction effort but we thought it would be best to treat each action front separately.

Growth By Stealth

Faster-moving inventory typically dominates our attention. Inventory build-up among slow-moving items occurs stealthily, item by item, hardly noticeable. Only for firms where inventory costs are a major cost component are slow-movers subjected to routine and intense attention.

Slow-moving inventory usually begins to receive serious attention after it has become a significant and visible burden. By then, the reduction options are fewer and more painful. Worse yet, attention is focused on slow-mover stock reduction and not so much on causes and prevention.

The lesson here seems to be that if you ignore it, it will grow. Routine attention is vital.

Standardization

In many cases, end-users requisition different but functionally equivalent items. This is often done unintentionally because they are unaware of approved and stocked alternatives. Requisitions are processed by Purchasing without any effort being made to suggest substitutions where they may be available.

Standardization around one or two alternatives is great in theory but often hard to implement in practice. Everyone wants to standardize on their preferred item. Many can articulate a persuasive case for why their preference item is vitally needed or is the best choice for the standard.

Nevertheless, a standardization process should be part of every inventory management practice set. Success requires steadily pressure over an extended period of time, picking off a few items at a time. We know of no magic formula.

One trick, however, is to get agreement on a standard but with the freedom to purchase preferred alternatives under special circumstances. Then, you make sure that the standard is always in stock and that the alternatives, assuming that they are non-critical, are stocked at a lower a lower service level. Dealing with stockouts is normally a hassle so that usage will drift toward the available product.

Improved Demand Forecasting

Inaccurate forecasting is one of the greatest sources of excess inventory for many businesses. Because end-use demand for many items is very difficult to forecast accurately, we must pay the price of forecast error in the form of excess inventory costs, including eventual write-downs and write-offs.

Rarely are forecast error costs compared to the costs of improved forecasting. This is a costly mistake, since forecast error reduction can often be achieved at modest expense.

To estimate your forecast error costs, you need to tally up the costs of excess inventory for each item — carrying costs, storage costs, handling costs, and write-offs — and deduct the costs that would be incurred under a range of forecast error reductions. This will allow you to decide how much you can afford to spend on forecast error reduction.

Reduced Inventory Duplication

Low turnover can result from stocking an item in too many locations. Turnover reports are normally done by location and item, so that even where total demand is substantial, having many stocking locations can make turnover-by-location low.

This suggests that your routine reviews of low turnover items should include a check on the number of stocking locations for each item. We have seen cases where an item was stocked in more than a dozen locations, each with a quantity on hand of 1. Most locations showed zero turnover.

If you find items with a large number of stocking locations, you may want to explore the possibility of consolidation of some or even all of these. Reducing the number of locations allows you to reduce safety and cycle stock as well as reducing the cost of counting and replenishing all of the current locations.

Routine Reviews

Time and attention constraints can make it very hard to devote much attention to slow-moving inventory. Critical and fast-movers often consume the bulk of available inventory management effort. This situation nearly always leads eventually to a build up of slow-movers that cannot be resolved without major pain.

You have to make slow-moving inventory culling part of your routine chores, perhaps assisted by adding an expense budget line item to absorb small but regular inventory write-downs and write-offs.

Equivalents and Alternatives¹

Another approach that you may want to consider is requiring Purchasing to develop and communicate a list of item equivalents and alternatives, beginning with slow-moving items. Many slow-movers are slow because end-users are requisitioning many different items for the same purpose. Total end-use demand for these may well be substantial.

Standardization is typically built upon sets of equivalents and alternates. For example, Purchasing may be authorized to order an equivalent without requisitioner authorization but required to obtain authorization before ordering an alternative. Developing such substitution lists and rules governing their use is usually a substantial task that must be handled over an extended period of time.

Delayed Replenishment

For costly, slow-moving items, standard replenishment strategies can be extremely expensive. Keeping a single unit on hand for a $5,000 device that is rarely used or sold and replacing it as soon as removed is built into nearly all inventory management systems.

A much less costly alternative is to delay replenishment based on usage statistics — average time between uses or sales. This typically must be done outside of the routine replenishment mechanics but it can cut inventory costs by 50% or more.

For items with some degree of criticality (but which have been classified by users as non-critical), you may want to locate a backup, expedited sourcing. This takes care of infrequent cases where demand is clustered.

Action Ideas

This completes our discussion of dealing effectively with slow-movers, except for the always-important question of implementation. Some action ideas ... Next ...

 

¹ We define "equivalents" as functional equivalents, normally being exact substitutes for one another in terms of critical metrics of use and effectiveness. "Alternates" are defined as less than exact substitutes where some degree of trade-off is necessary.

 

The Cost of Bad Forecasts

Slow-moving inventory often results from bad forecasts of end-use demand. The costs of such inventory — capital costs, storage costs, routine handling costs, write-offs, and disposals — are actually costs generated in part or fully by forecast inaccuracy.

Do you know what your forecast inaccuracy costs are today? You should. There are quite a few ways to improve forecast accuracy. If the cost of implementing these is less than the cost of inaccuracy, then you should start a forecast improvement project.

Build a Process

Slow-moving inventory rarely grows by intention. Instead, it grows by lack of attention.

To ensure that it gets regular attention, you need to generate routinely a slow-moving stock report and add a review agenda item to your inventory management process. This should be done monthly, even if only a few items are addressed each time.

Such consistent, routine effort will pay off. Occasional efforts rarely do.