Inventory Reduction vs Inventory Optimization 

Both are valid initiatives, one should be an ongoing effort that needs to be systemized and supported, while the other is likely going to be more event based. 

Inventory reduction can be done for a whole host of reasons. Some of you may have found your way here from the post about how to leverage the results of an inventory reduction initiative. Those scenarios are generally more optimistic and don’t necessarily account for the sometimes-necessary inventory reductions needed to account for a significant event that requires immediate action. See 2007-2008, see Covid-19. Or maybe you’ve been brought into a dysfunctional organization to turn it around. I don’t believe I have ever joined an organization that has said you know what? Our inventory is in a perfect place. After all you are being brought in as a leader to fill in a gap in their organization one way or another. Inventory reduction can be a quick win and demonstrate the competence implied with your hiring. 

So very simply inventory reductions should see an overall reduction generally across the totality of the business. Number of inventory turns(COGS/Average value of inventory) annually should increase as a result of reducing the denominator. For more on inventory turns, feel free to look that up online, you won’t really find us going too deep on that. Its trend is an indicator that your sales strategy is in step with your inventory strategy. I have my doubts on how effective it is as an organizational management tool though. While effective goal setting and good hiring won’t have as straight forward measurements, active management in this area will yield better results for the organization holistically and likely improve the inventory turn ratio anyways. Don’t over complicate the measurement. Watch the overall number, let the supply chain team break down and monitor the specific product categories and create reduction plans from there. It will be very helpful to gain buy in from the sales team and let them give input on the product categories that are better targets for reduction. They tend to get nervous that there won’t be product at the time needed for a sale. It is a justified concern and an easy solve. Just ask the question.

There is of course a word for this business exchange and intersection, but not every company is ready or willing to engage in a formal Sales and Operations Planning. SOP, SIOP, whatever else you want to call it, if we are feeling really pugnacious, we could say IBP is basically the same thing because it’s just an evolution of SOP which most companies already struggle to do remotely competently, and IBP adds even more egos and cooks to that kitchen. I’m obviously being a reductionist, but call it whatever you want, it’s hard to do well. You might call it something and not get engagement from the various functions either. Meaning you might want it to be IBP but it is really just a supply chain meeting. Further, I would argue it is not necessary to have a set structure in place to execute every inventory reduction. 

For inventory optimization however, an SOP process of some sort is critical. The effort needs the consistent structure and support, and this is arguably the core function of SOP. That explicitly being creating a consistent process of communication that makes sure the organization is getting the maximum amount of profit from their inventory investment. Forecasting, planning and inventory management and control are all components of this when informed appropriately by sales and product management functions. The other function is to have strategic discussions around significant events to understand what gaps need to be filled to make those events happen as successfully as possible. Here we are focusing on specifically the optimization which I would argue is the purest form of business for a manufacturer because you are focusing specifically on the most efficient way to take product that you make, buy, assemble or package and turn that into profit through sales.

What I don’t want to sell here is that after successful engagement of inventory optimization is that there will be a lot of extra room for a significant inventory reduction. Look back at the post “What are you going to do with all that extra cash” for why you night be more interested in leveraging a sporadic inventory reduction strategy. Add onto that, administratively, inventory optimization will carry a larger ongoing cost. So in times of high volatility, it may not make sense for an organization to employ more people, hell, it would be irresponsible financially and morally to hire people and then not be able to support them long term. Here at nuanceornothing.com, we are all for responsibly managing your workforce. Additionally, my take is a lot of conversation around these disciplines focus on an aspirational vision of what a process or structure could look like with a large enterprise mindset. There is a lot of space to engage with some techniques, but not all. The idea of what the supply chain discipline can be at a small organization versus larger scale enterprise is something we will explore further in the future. It is likely that the incentives are just more favorable to focus on the larger organizations and that is why the content ends up being more generalized and less actionable for main street. It’s going to take someone letting their supply chain freak flag fly to really break that lose…I’m your huckleberry.

Until next time,

Blake