Where it Began

A medium-sized company found itself frequently out of stock of their finished goods and yet they had $6 million tied up in inventory. They asked me to analyze their inventory to see what was going on. Cash flow was getting tight and therefore paying suppliers was becoming difficult.

The Analysis

As both a seller of finished goods and a manufacturer of those goods, the number of items involved in their inventory management was in the hundreds. After looking at both their inventory surpluses and the root cause of their out-of-stock (OOS) items, I reported to the owner that, despite having a lot of inventory, it was the wrong inventory. There were large amounts of components which would take years to use up based on the sell-through rate of the finished goods produced from those components. Additionally, he was out of stock of components needed to keep his most popular items in stock. As a final blow, I discovered many obsolete (orphaned) parts sitting in inventory. An orphaned part means that the company will never need that part because it’s no longer used in any finished good.

The Action

Action 1: Surplus items

For surplus finished goods inventory, it’s a game of patience. Sometimes, you just have to wait for it to sell through. In these cases, no new requests were sent into production to produce more of these finished goods until the available supply became less than 10 weeks (production’s lead time). For some products, a production request hasn’t been sent in for over a year.

Because these products degrade after several years, the company made these items available on their web site and heavily marketed them. These efforts helped speed up the process of selling through excess inventory.

For surplus components of finished goods, it was a waiting game. There really isn’t a way to speed up the usage of surplus components if the demand for the finished goods that require them isn’t there.

Action 2: Out-of-stock items

Remembering that cash flow was tight because of excess inventory, purchases of components needed to be prioritized. We ranked every finished good according to its historical sales levels and made the top sellers a priority.

As months passed, and excess inventory was slowly used up (per Part 1 of the inventory transition plan), the amount of cash tied up in inventory dropped from $6 million to $4 million.

action 3: Orphaned parts and obsolete inventory

When we began the inventory transition plan, almost 25% of the in-house inventory was orphaned parts and obsolete finished goods. A sub-project began to evaluate which components could be used as substitute parts in actively produced finished goods. For example, one product had a 35 mm black cap. One of the obsolete parts was a 35 mm white cap. Could the white cap be used in place of the black cap temporarily to exhaust the supply of 35 mm white caps? While that sounds simple, these types of decisions must be made with the input of marketing experts (who determine whether they think customers would accept that visual change) and production experts (who can determine if the two caps will function in an equivalent manner).

Summary

If you are having the same challenges in your own company, dive into the details of all of your items to see if your inventory is out of balance. If it is, set a plan to change that balance. It can take a long time to correct the balance, especially when you need to wind down excess inventory items and find a home for orphaned parts, but it can be done.