Now is a great time to make a new year’s resolution to reduce inventory. Considering that it is February, you can say it's for the Chinese New Year, if that helps. There are a number of strategies that can help you reduce your inventory to improve overall capacity and increase company cash flow.
CMC has written extensively on cost control for factories, where we cover insights on inventory control like how to reduce inventory in a Chinese factory and how much inventory costs your Chinese manufacturer.
Why Should You Reduce Your Inventory?
Inventory is Expensive
The inventory carrying cost is generally 20% to 30% of the total inventory value, this percent is unavoidable but a high cost to your business is not. Twenty percent of one million dollars is a lot more than twenty percent of two hundred and fifty thousand dollars. Each dollar (or whatever currency used) held in inventory is a dollar that is not being used for a productive end or not improving the company’s overall bottom line.
Inventory Can Improve Productivity
Reducing inventory can actually improve productivity rather than diminish overall production capacity. Excessive inventory can be harmful by taking up space that could be used for more productive ends, it also takes more time to find the right product with excessive inventory. That is time is a non-value add and costs money that could be used in a better way.
4 Inventory Reduction Strategies For Your Factory
1. Be Honest About Your Inventory and Get Rid of What You Don't Need
The first step is to take an honest look at what is in your inventory and what you actually need to meet your production needs. It is common for our teams to find inventory in factories that is 5 to even 10 years old. While it is possible that this inventory could still be used, it is highly unlikely that there will ever be use for that material or that it is even usable.
Like the leftovers you were certain you were going to eat but have existed in the back of the refrigerator for 2 months, it is time to take the hit and throw it out. For example, we worked with a company that made bamboo products. It had literal tons of bamboo over a year old that was warped and unusable. That needed to be scrapped and its cost taken as a write off. Some materials can be recycled or sold for a discounted price.
If it can’t be used for your current or confirmed future products, then get rid of it. You might run into some pushback on this initiative since it will likely affect some managers KPIs so they would not want this seen. An external audit and strategy can help discover and remove this hidden waste.
2. Institute a "First In, First Out" System
“First in, first out” system is exactly what it sounds like: use older materials before going to newer ones. While this seems like a given, without a proper planning system, materials are easily lost, and operators will take whatever they find first even if it is not the most efficient and effective method.
3. Develop a Robust Planning System
“First in, first out” is difficult without a robust planning system. The planning system needs to be a cooperative effort between production, sales, and supply chain to be successful. Sales needs to set the delivery requirements, production plans how to meet those goals with its availability resources, and supply chain to make sure that the materials are there when needed.
Planning should be able to order materials when they are needed and only when they are needed to avoid unnecessary stock. For example, during a project in Mexico, the team created a system where sales told production what parts needed to be made each day and supply chain order the parts the night before to be delivered in the morning before production. A good planning system does not need to have this quick of a turnaround, but it is a good goal to shoot for.
Again, this is simple on paper yet in reality those high levels of coordination are difficult to achieve. It requires strong communication from all parties.
4. Coordinate With Your Suppliers to Deliver What You Need It
Many Chinese factories (though not all) like to purchase large stocks at a time. This is to ensure a “safety stock” and to take advantage of bulk pricing. For this reason, Chinese factories often have far too much inventory and struggle with cash flow.
Safety stock and bulk pricing are not, in and of themselves, bad things. However, taken to extremes, they are great examples of “penny wise, pound foolish” thinking. Saving a small amount per unit is great but if it is more stock than you need and the unused part goes to waste, than the savings is wasted. Similarly, safety stock is a great way to ensure that production never stops. That safety stock should be enough to cover a few days or weeks not months or years (this seriously occurs).
To solve this, treat your supplier like a partner. Coordinate production and delivery, understand what they need and tell them what you need. A collaborative approach is often more effective than a top-down demand-oriented approach many companies take. Yes, your suppliers need you to survive but you need them as well.
You can implement these inventory reduction strategies one at a time, but they are all interrelated. The biggest reduction in inventory cost will come from a nuanced, unified approach. Follow these strategies to reduce your inventory and meet those year of the rabbit goals.