Slow-Moving Inventory: PreventionIn 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 StealthFaster-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.StandardizationIn 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 ForecastingInaccurate 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 DuplicationLow 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 ReviewsTime 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 Alternatives1Another approach that you may want to consider is requiring Purchasing to develop and communicate a list of itemequivalents 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 ReplenishmentFor 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 IdeasThis completes our discussion of dealing effectively with slow-movers, except for the always-important question of implementation. Some action ideas ...Next...Slow-Moving Inventory: ActionWe conclude this discussion with a summary of what an action plan for managing slow-moving inventory might include. Keep in mind that you have to tackle this along two fronts reductionandprevention to succeed.How Big is the Problem (Opportunity)?Without question, your first step should be to determine the size (by location) and composition of your non-moving and slow-moving,non-criticalitem inventory and the potential reduction you might be able to achieve. Note that this step requires the identification of "critical" slow-movers since there is generally nothing much you can do about these (other than working towards reclassifying some of them as non-critical).Some organizations have their inventory under very tight and effective management. In this case, step 1 is the only step, by simply confirming the performance of their current system. In general, however, you will want to have a good feel for the reduction opportunity savings available so that you can decide whether any further action iscost-justified.Cost-justification requires at least a rough estimate of what it might cost to carry out areduction+preventionprogram. For this, you need at least an outline of an action plan and some idea of what it will cost to implement. The result will be a net savings, and probably payback, estimates.Process Design NotesYou will want to begin building a long-term management process for slow-movers from the outset as part of the initial program. Doing so will leave you with an established process after the initiating program has concluded. Here are a few thoughts on how to go about this ...Critical Item IdentificationThis tedious chore has to be done but only once, thankfully. You only have to decide oncriticality(as discussed earlier) for items with low turnover, not for your entire Item Master. For many items, criticality will be obvious. This leaves some residual number that require careful thought and discussion with users. There are some simple email-based mechanics that can be used here instead of meetings.Action Plan DevelopmentDeveloping an action plan is fairly straightforward. It will probably include items such as: Critical item identification Prioritization of the target item list Opportunity estimation Process definition Standardization potential and mechanics Pilot implementation Pilot assessment and process refinement Routine implementationEstablishing a realistic time frame and tentatively assigning resources to each action item will allow you to make a working estimate of the program cost and duration.PrioritizationIf your opportunity assessment finds that you have a substantial, cost-justified reduction potential available, then the next step is to reorder the slow-moving item list in terms of descending net reduction potential.You want to work from top to bottom of this list, selecting a small number of items from the residual list top each period. This will shorten the payback period and provide the always welcome evidence of significant early results.StandardizationAn action plan sub-task, probably carried out as part of the program activity, is to check each item for standardization potential. Can the item be grouped with equivalent or alternate items and the group subjected to a standardization analysis? If so, you will probably end up moving the group out of the main program and into a branch intended to carry out the fairly lengthy sub-process of developing standards.Vendor StockingIf an item has very low turnover one or two units a year, establish its maximum access lead time and compare that to both normal and expeditedpurchasing-as-neededpolicies. You may be able to eliminate this item entirely and rely on vendor stock, with occasional expedited delivery expense.Stock ConsolidationFor items stocked in multiple locations, you probably want to look first at possible consolidation opportunities. Access lead time, and factors such as access labor cost, enter into a relocation analysis. You may be able to consolidate items for an entire department or facility to reduce the point-of-use location count. If you get lucky, you may even be able to drop down to a single stocking location. This may require some emergency need handling procedures.Replenishment PolicyUsing PAR and reorder point for replenishing slow-moving items can be very costly, as noted earlier. Demand for slow-movers is statistically very different from normally flowing items. Unless your slow-movers are primarily low-cost items, you may want to develop a special replenishment policy for the high-cost slow-movers.Demand ForecastingPAR-driven ordering instead of forecast-driven ordering is very commonly used today. PAR-levels, unfortunately, are often poorly set, resulting in too-frequent, low unit-of-measure orders and regular stockouts. Space constraints may force PAR settings to be well below an optimal value.As just noted, PAR/reorder-point ordering can be very costly if your slow-movers are expensive, as they nearly always are in healthcare. You may want to consider ordering these from forecasts instead of PAR-based ordering.Routine Write-OffsRather than accumulate dead inventory for a large, "one-time" write-off that can visibly impact earnings, consider creating a monthly line item expense for this purpose. This is much the same as your bad debt provision. Reduced supply chain expenses from your slow-moving inventory management program may easily cover this added routine expense.http://www.anametrica.com/smi/slowmoving_inventory_action.htm