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Reasons for high inventory and ways to reduce inventory

From an accounting and financial point of view, inventory is an asset. Safety inventory is required for a certain period of time. However, excessive inventory and low inventory turnover occupies a large amount of funds, increasing storage costs and products. Picking time and a large number of labor costs, regular or irregular inventory, will also take up more time, the most serious is that high inventory will cause tremendous pressure on the company’s cash flow. CNC machining custom aluminum parts

Although many companies have reduced inventory or zero inventories to a strategic level, stocks are always repetitive, not short of material, or high inventory levels; not being undeliverable or being in stockpiling. There are many reasons for overstocking. To sum up, the common causes of excess inventory are:

Only consider direct purchase costs
If the annual demand for a component is 200 pieces, the supplier’s quotation offers three options: A program MOQ 200 pcs, unit price 90 US dollars; B program MOQ 100 pcs, unit price 95 US dollars; C program MOQ 50 pcs, unit price 100 US dollars . The annual direct procurement cost of Plan A is US$18,000, the annual direct procurement cost of Plan B is US$19,000, and the annual direct procurement cost of Plan C is US$20,000. Many companies will choose A program, take for granted that the purchased inventory as an asset, do not consider inventory management costs and capital costs, nor consider the risk of parts switching and upgrades, low-cost procurement may eventually lead to high operating costs. CNC machining custom aluminum parts

Worried about potential sales loss
The formulation of a production plan stems from the sales forecast of the sales department, and the accuracy of the sales forecast is directly related to the cost of the entire supply chain. Sales often do not sell products, but fear that there will be no products to sell when there is market demand. At the same time, sales forecasts may be overly optimistic in most situations. They also hope to have more product types and quantity to obtain more sales opportunities. . Many construction machinery companies had high expectations for the new urbanization of the country early this year. They were afraid of losing the opportunity to compete for the market. In the first quarter, a large number of complete machines and spare parts were stocked. As a result, the entire domestic industry in the second quarter was very pessimistic and stocks were also low. It is quite “spectacular”. Major companies cut production or stop production.

Customer cancels order
In the existing business environment with an imperfect credit system, despite the fact that the risk of breach of contract is decreasing year by year, it is not uncommon for customers to cancel orders, especially verbal agreements, cooperation intentions or memoranda that do not have legal effect. In addition, due to many uncontrollable factors leading to cancellation of orders, it will cause the entire supply chain link inventory backlog. CNC machining custom aluminum parts

Demand and inventory management systems are incomplete
Many companies’ demand plans are not based on objective requirements, but rather a sentimental decision: raw material prices are cheap, buy more; parts delivery is longer, buy more points; transport risks, buy more … orders do not have rolling demand forecast The support does not take non-active measures to manage inventory. It does not have a high awareness of stock turnover and old stocks. It also does not implement FIFO for products with shorter warranty periods or even for products and components. ABC classification. CNC machining custom aluminum parts

Poor supplier performance
Supplier has a long lead time, purchasers have to stock up on safety stocks to make up for supplier delivery problems in order to cope with shortage of materials; suppliers provide MOQ too high, especially for exclusive strong suppliers, purchasers have to use MOQ Quantity orders; Supplier quality, delivery instability, the purchaser had to increase inventory to assume the responsibility of the supplier. CNC machining custom aluminum parts

Product design change or abolition
Inventory includes not only finished product inventory but also semi-finished product stocks, raw material stocks, outsourced processing stocks, and dealer (agent) stocks. Many products have to produce inventory in raw materials, semi-finished products, and finished products due to functional deficiencies, policy changes, or changes in market demand that necessitate design changes, product upgrades, or product revocations. CNC machining custom aluminum parts

In addition to the above common reasons, a company’s high inventory is often not caused by a single factor. The reasons may be multi-faceted. Behind the high inventory, it is more caused by the imperfection of processes, systems, and systems. Too much inventory does not have much benefit to the company (except for speculative low-cost purchases), eliminating excess inventory is very important and necessary. So how to effectively reduce inventory.

Increase inventory management to strategic height
Establishing a sound process and system to manage inventory, from front-end sales forecasting, sales demand, to middle production, assembly, to back-end procurement, all require strict process management and control, and must be within the company from top to bottom Continuous implementation and implementation. CNC machining custom aluminum parts

Measure inventory risk for sales forecast
Sales expectations are always full, and actual sales are always not optimistic. For sales forecasts that do not land, we must first assess the extent of finished product inventory support for sales. The sales forecast is 100 machines, and the actual orders may only have 70 units. This requires measuring the ability of low inventory to support sales expectations, or adopting batch production or distributing goods to reduce risks.

Improve procurement management system and procurement strategy
Considering the comprehensive procurement cost, high-value parts can be purchased according to requirements; intermediate-value parts can establish a certain number of safety stocks according to the production plan and implement the minimum batch order; low-value parts do not occupy large amounts of funds. EOQ can be used. CNC machining custom aluminum parts

Establish the entire supply chain coordination mechanism
The sales side establishes close communication with customers, improves the accuracy of sales forecasting, realizes the rapid and accurate transmission mechanism of sales and operation plans, the operating department arranges reasonable production plans according to demand plans, and the logistics department establishes distribution and storage networks to determine the best Warehousing methods and transportation methods to improve the flexibility of the supply chain.

Compression supplier’s delivery time
The uncertainty of demand forecast always increases with time, while the supplier’s delivery cycle is too long, and the purchaser needs to establish too much inventory to reduce the risk. Especially for global procurement, long-term changes in shipping, politics, warfare, and trade routes will affect delivery times and the company’s inventory. Analyze the impact of this long-term procurement and try to minimize the supplier’s delivery time and choose a reasonable delivery method. CNC machining custom aluminum parts

Implement Lean Inventory Management Project
Promote suppliers to assist in the implementation of VMI (Vendor Management Inventory), JIT (Instant Delivery), Milk Run (Circular Pickup), etc., to stimulate supply based on actual demand, and to extend procurement and sales through PFEP (Plan For Every Part). Each material establishes a tracking system to identify and reduce unnecessary waste, which can effectively reduce inventory quantity and even achieve zero inventory. CNC machining custom aluminum parts

High product development reliability
Many companies develop new products, release the first version of the drawings without performance simulation and testing, and then continuously change the drawings, resulting in a large number of samples, raw materials and semi-finished products backlog and scrap, product development and design uncertainty, not only increase inventory , but also increased the uncertainty of the entire supply chain. CNC machining custom aluminum parts

Introduce third-party logistics support
Third-party logistics service providers have more specialized warehousing, logistics, distribution systems, and information technology platform support. The cost of self-built logistics and warehouses is high. The introduction of third-party logistics service providers or third-party supply chain management companies will be non-professional, Non-core business outsourcing can effectively reduce warehouse and logistics risks, increase inventory turnover rate and cash flow rate, and reduce operating and management expenses. CNC machining custom aluminum parts

Conclusion: Inventory turnover rate and cash flow rate are related to the company’s capital utilization efficiency, profitability, and even to the survival of the company. Reducing inventory and preventing unnecessary waste of inventory is a problem that can be mitigated but cannot be completely eliminated. Reducing inventory is not a fast-acting activity, but a long-term activity, and inventory is easily repeated, requiring continuous attention and management. CNC machining custom aluminum parts

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