Slow-Moving Inventory: Prevention: Growth by Stealth

Slow-Moving Inventory: Prevention
In 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 slowmoving 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 Stealth
Faster-moving inventory typically dominates our attention. Inventory buildup 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.
Standardization
In 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 Forecasting

Inaccurate 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 Duplication

Low 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 Reviews
Time 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 Alternatives1

Another 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 endusers 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 Replenishment
For 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 Ideas
This completes our discussion of dealing effectively with slow-movers, except
for the always-important question of implementation. Some action
ideas ... Next ...
Slow-Moving Inventory: Action
We 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 reduction and prevention 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, noncritical item inventory and the potential reduction you might be able to
achieve. Note that this step requires the identification of "critical" slowmovers 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 is cost-justified.
Cost-justification requires at least a rough estimate of what it might cost to
carry out a reduction+prevention program. 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 Notes

You will want to begin building a long-term management process for slowmovers 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 Identification
This tedious chore has to be done but only once, thankfully. You only have to
decide on criticality (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 Development

Developing 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 implementation
Establishing 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.
Prioritization
If your opportunity assessment finds that you have a substantial, costjustified 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.
Standardization
An 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 Stocking
If 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
expedited purchasing-as-needed policies. You may be able to eliminate this
item entirely and rely on vendor stock, with occasional expedited delivery
expense.
Stock Consolidation
For 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-ofuse 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 Policy
Using 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 highcost slow-movers.
Demand Forecasting
PAR-driven ordering instead of forecast-driven ordering is very commonly
used today. PAR-levels, unfortunately, are often poorly set, resulting in toofrequent, 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 slowmovers 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-Offs
Rather 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

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Slow-Moving Inventory: Prevention

In many organizations, a simple inventory turnover report shows the

Improved Demand Forecasting

Reduced Inventory Duplication

always leads eventually to a build up of slow-movers that cannot be resolved

Equivalents and Alternatives1

Slow-Moving Inventory: Action

We conclude this discussion with a summary of what an action plan for

How Big is the Problem (Opportunity)?

Process Design Notes

Action Plan Development

Critical item identification

Prioritization of the target item list

Standardization potential and mechanics

Pilot assessment and process refinement

Establishing a realistic time frame and tentatively assigning resources to

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