When I attended Purchasing 101, the instructor emphasized that successful buyers must master three key things: cost reduction, cost reduction and cost reduction. Over the years, however, I’ve actually found another opportunity for purchasing professionals to shine: inventory reduction.
Money spent on inventory, raw materials, work-in-progress and finished goods represents inaccessible capital. But there are four straightforward ways to free up those dollars for more constructive purposes:
1. Improve supply chain communications. The more information you share with other members of your supply chain, the less inventory you need to carry. Purchasing can help establish electronic data interchange with suppliers to communicate forecasts, releases, shipping information and invoices.
2. Reduce safety stock by improving supplier performance. Safety stock is carried to make up for problems such as poor quality or an incomplete delivery. But suppliers should be measured by their on-time, accurate, high-quality and cost-effective delivery. Purchasing must work with suppliers to correct problems instead of investing money to mitigate them. The goal should always be a perfect order.
I’ve had many suppliers who quoted good prices, but only if I purchased large quantities. This obviously doesn’t support the goal of reducing inventory levels. Find suppliers who agree to lower prices and small quantities, as needed. Likewise, if a supplier is giving you a very long lead time, ask them to detail what makes up their quoted lead times. Often, a majority of lead time is spent on waiting or transportation. Choosing a supplier that’s closer to your location may solve this problem.
3. Let suppliers manage inventory. Consider negotiating with suppliers so that they are the ones managing your inventory. This arrangement works particularly well when the supplier stations their personnel at your business. The in-house supplier representative helps with scheduling, making sure quality and delivery are perfect, and ensuring excellent communication between your company and the supplier. I’ve worked with several in-house suppliers, and issues were always resolved very quickly. Most importantly, the partnership helped us reduce inventory.
4. Eliminate surplus and obsolete inventory. In my experience, about 10% of inventory will never be used again. Yet you’re still spending money to store, maintain, count and pay taxes on it. Identify this inventory segment at your company, and get details on which product or parts are worth the most in extended value. Then, establish a cross-functional team — including buyers — to sell parts at a discount, sell items back to suppliers or rework products into something useful. The last resort should be to scrap what you can’t get rid of elsewhere.
Purchasing can play an important role in reducing your company’s inventory levels. To encourage focus on this vital function, set goals so purchasing professionals have incentive to reduce inventory, not just costs; improve communication in the supply chain; and reduce safety stock by picking suppliers who deliver on time, deliver perfect orders, ship in small quantities and have short lead times. Then, negotiate with suppliers to manage your inventory and collaborate with the team to reduce surplus inventory. Lastly, always give credit for efforts to decrease inventory levels.
Learn more about the ASCM Supply Chain Procurement Certificate! The foundational program provides an overview of procurement fundamentals, sourcing strategies, supplier relationship management, negotiations, evaluation metrics and more.