REDUCING COSTS – LOWER PRICES VERSUS LOWER INVENTORY
When faced with a need to reduce costs, the first thought of many purchasing staff is to target the prices paid to suppliers. Whilst this might have some short term benefits in times of a buyer’s market, the balance of power can move to a seller’s market when raw materials and commodities are short in supply.
A longer term and sustainable strategy for reducing costs is to target the company’s inventory of bought-in materials and spare parts, whether for production / operations or for maintenance.
Money tied up in materials stock-holdings is lying idle until the items are put into use – and perhaps, that money could have a better earning power for the company if used for other purposes. So there must be sound reasons why items are held in the materials inventory.
Inventory reduction can be achieved by avoiding the need to hold items in stock in the first place. And where there is a clear commercially based benefit for holding selected items in stock, then the quantities to be held need to be decided on economic and risk-based decision-making.
Develop the skills to know how to approach an inventory reduction – join my training group in London from 3 – 7 September 2012, or in Aberdeen 8 – 10 October 2012. http://www.cp-training-consortium.co.uk/how-to-reduce-inventory-levels-some-practical-solutions-course-477
Posted By:
Brian Cook, Senior Training Associate, February 2012.
This course is proving very beneficial to delegates that have attended in recent years. Feedback indicates that genuine improvements CAN be made using some of the learning points covered by the course.
Traditionally many companies have a large inventory of materials and spare parts – but without any defined business reasons for having the items or the quantities that are present in the comp[any’s warehouse.
The course aims to focus attention of the costs of buying & holding items in stock versus the consequences to the company of not having the items when required. There are many factors to be considered – not least overcoming traditional attitudes within organisations, such as “we’ve always had plenty in stock”.
The following statement is from a delegate from a Middle Eastern oil company, outlining how his own initiative to reduce inventory levels is progressing. He is putting into practice some of the key learning points acquired during the course – and we at CP continue to support his efforts with emailed comments and suggestions as-and-when requested.
A delegate’s feedabck, 3 months after attending the course in London, November 2010
Still I did not finish the proposal for a Stock Holding Policy but I got my manager’s support, which is very good. There is resistance from end-users to reduce the quantity on hand. Also, end-users are not happy to reduce the quantity on hand or to not have the item on stock. However, most of end-users understand the cost of having over-stock and the risk of not having stock.
I am collecting live inventory data from my company to show the management how things are bad (you know managers like numbers). Then, I will propose the solution and the right practice. In addition, I will try to provide some cost analysis.