White Paper: 5 Cost Savings Achieved when Lowering Inventory Levels EazyStock, a division of Syncron.

Transcription

1 White Paper: 5 Cost Savings Achieved when Lowering Inventory Levels 2014 EazyStock, a division of Syncron

2 Cost-Cutting Challenges of Distributors & Manufacturers Companies that buy or make items to stock often identify the lowering of inventory levels (and their associated costs) as their largest potential source of cost reductions that can generate permanent improvements to operating margins and overall profitability. The challenge that many small and midsized businesses face is balancing the desire to lower inventory stock levels with that of maintaining the growth of the company s top line revenue via higher customer service, and order fill rates. Cutting inventory levels too aggressively will negatively affect sales, stifle growth and lower customer service rates. Conversely, pursuing high service levels often results in paying the price of overstocking inventory. For wholesale distributors and manufacturers that stock a small number of SKUs in one location, efficient inventory planning that meets both top and bottom-line needs can be completed by closely monitoring each inventory item s demand history. The reality is, however, that many such companies particularly those that manage aftermarket parts, accessories and supplies stock thousands (if not tens of thousands) of SKUs across multiple locations. Planning inventory effectively, much less optimally, in such complex environments is often difficult, if not impossible without an automated approach. 30/30/30 Rule of Inventory Optimisation is a simple means by which wholesale distributors, manufacturers, and other businesses that manage large numbers of stocked items can estimate the benefits of optimising inventory. Page 1

3 What is Inventory Optimisation? Inventory optimisation is the process of significantly lower inventory levels while raising customer service rates by automating demand forecasting and planning for each and every active SKU across all stocking locations. More specifically, inventory optimisation involves leveraging a business existing ERP system data to define individual settings related to inventory policies (what and what not to stock) and, for stocked items, inventory parameters (safety stock, reorder point and order quantity levels). This is accomplished by applying advanced algorithms and planning tools to improve the forecasting and planning of items down to the SKU level. By removing the supply chain inefficiencies caused by inexact inventory planning, companies can greatly lower inventory levels while, at the same time, raising customer service, or order fill rates, often with surprising results. 30/30/30 Rule of Inventory Optimisation is a simple means by which wholesale distributors, manufacturers, and other businesses that manage large numbers of stocked items can estimate the benefits of optimising inventory. While individual results vary, it is typically the case that optimising inventory planning leads to the following benefits: 30% Lower Inventory Levels - A business that stocks 10 million in inventory can lower that to 7 million. 30% Higher Service Levels - A company with a 70% service level can increase that metric to 91%. 30% More Efficient Processes - A business that invests 10 man days per month in forecasting and planning can reduce that to 7 days. While all three components of the 30/30/30 Rule of Inventory Optimisation drive improved profitability, it is the reduction of inventory levels that holds the key to the most substantial and predictable cost reductions. Page 2

4 The Direct Impact of Lowering Inventory Levels on Costs The following five cost components should be considered the core drivers of any initiative to lower inventory levels. While additional cost savings may be linked to lowering storage and personnel overhead costs, these five are virtually guaranteed savings that apply to every Pound of inventory value a business can remove from stock Capital Costs (or Inventory Financing Costs) - Easily the largest component of the inventory optimisation cost savings equation, the elimination of financing costs via the reduction of working capital requirements can often be calculated as 8% to 10% of each Pound of inventory level reduction. Obsolescence Loss - Dynamically planning inventory to reduce the risk of overstocking items nearing the end of their product lifecycle minimizes losses due to product markdowns and obsolescence. Typical savings via optimisation are 6% to 10% of inventory level reductions. Shrinkage Costs - Less inventory on hand means fewer write-offs due to damage, pilferage and other loss of stock. Industry averages peg this number at 3% to 6% of inventory stock levels, with higher numbers typically found in consumer goods distribution and retail environments. Variable Storage and Service Expenses - Depending on a company s business model, a number of cost components of inventory storage and service expenses may be truly variable. This is particularly the case with businesses that use 3PL services and those that staff storage locations with variable/hourly labour. Conservatively, these expenses translate to 2% to 4% of the value of inventory on hand. Insurance Expenses - Lowering net inventory levels also directly impacts the cost of insuring such assets. The typical company will find savings of 1% to 2% over the monetary value of inventory level reductions. Page 3

5 Let s Take a Look at the Numbers Let s take a quick look at the net benefits that result from inventory level reductions and apply the 30/30/30 Rule of Inventory Optimisation. The average cost savings of inventory level reductions the typical wholesale distributor or manufacturer that optimizes inventory can achieve is equal to 6% to over 11% of existing (pre optimisation) inventory levels. For example, let s assume that a company with 10 million of inventory on hand, could reduce that stock level by 30% or 3 million via optimisation. Annual cost savings would be as follows: Type Savings per 1 Reduced Direct Cost Savings per Year Capital Costs 8% to 10% 240K to 300K Obsolescence Loss 6% to 10% 180K to 300K Shrinkage Costs 3% to 6% 90K to 180K Storage & Service 2% to 4% 60K to 120K Insurance Expense 1% to 2% 30K to 60K TOTAL 20% to 32% 600K to 960K To be clear, this estimate is based solely on the variable cost savings of that are triggered with every Pound reduction of inventory levels, and doesn t include additional benefits of inventory optimisation like lower inventory operations overhead, higher customer service, lower stock out costs, order cost reduction, and the like. Page 4

6 Determining Real Cost Savings With Your Own Inventory Data Modern, cloud-based inventory optimisation solutions include the predictive analytics that enable companies to visualize benefits easily prior to system implementation, using their own company data. Evolving Stock Health - even prior to implementing inventory optimisation, a business should be able to envision current and target inventory levels based on a simple analysis of their own supply chain data. Companies that seek the cost savings that are the direct result of inventory level reductions often seek to visualize benefits in a proof of concept format prior to committing to such an initiative. True cloud-based solutions like EazyStock enable this analysis via trial editions, in which existing inventory data (demand history and item master data) is uploaded for optimisation using simple spreadsheets. Such an analysis can typically be accomplished with minimal effort, and can provide the interested distributor or manufacturer with a fast, reliable proof of concept prior to implementation or investment. Distributors and manufacturers that use EazyStock s proven approach typically benefit from the 30/30/30 Rule of Inventory Optimisation and achieve 30 percent improvements in stocking efficiency, service rates and planning productivity. Page 5

7 About EazyStock EazyStock provides inventory optimisation software for small and midsized businesses that seek to lower inventory levels and raise service rates while making demand forecasting and inventory planning easy. EazyStock s preconfigured, cloud-based approach to optimisation allows a company to leverage the data generated by existing ERP systems to achieve optimisation without the need for costly or complex implementations or integration projects. EazyStock is a division of Syncron, a privately-held company headquartered in Stockholm, Sweden with operations and partners world-wide. Schedule a live 20 minute demo of EazyStock: Page 6