Managing Inventory – Dealing With Slow Movers
What do you do with slow movers? You can identify and focus on a few inventory items – the A items. But another side must be considered: what to do with the slow movers? Read on and I will help identify different strategies to effectively deal with slow movers by first identifying the problems slow movers create.
The slow movers are those items or SKUs for which sporadic or very little demand exists. Typically, these items fall into the “C” category of the ABC analysis and constitute about 50 percent of the part numbers but only about 5 percent of the total value (where total value is based on total revenue and demand usage).
But a single C-class item, while generating less demand per unit, consumes about the same amount of overhead resources used to store the item (physical space, stockeeping personnel, obsolesence costs, and the time and effort to enter the data and to maintain it in the computer system) and to maintain the demand for the products that use these items. These resources are also used to maintain the demand and the products that use these items. Fir the first, the demand, there is marketing and the need for a marketing/sales person to call people and to forecast demand. For the second, the products that use these items, consider the time and effort needed for an engineer to design, revise, and maintain the demands. At some point, you have to consider that the costs for many C-class items often exceed the benefits.
But if this is the case, why aren’t more managers aware of the imbalance between costs and benefits? First, few managers or systems even collect all those costs incurred in supporting a given component or SKU. These costs, if not recorded, are assigned to overheads. Once assigned to overheads, they lose their managerial usefulness and are now a part of a large cost component for which no one is responsible. If these costs are not recorded, they cannot be measured. And you can’t manage what you don’t measure.
Another reason is fear of not having inventory or components in stock. Every marketing manager or salesperson seems to fear the effects of dropping a product from the catalog or reducing inventory levels. They worry they might lose one or more critical customers by doing so.
The third reason involves the measurement system. Put bluntly, most production systems do not reward activities that reduce the number of SKUs. (They do so indirectly through cost). As a result, the measurement system focuses attention elsewhere in the process, not on the total number of parts in stock.
One way to gain control over the C-class items is to turn the logic of ABC analysis around. ABC focuses on the critical or vital few – the 15 percent of the SKUs that generate or account for aboout 80 percent of sales. Instead of focusing attention on the top 15 percent, focus both on the top 15 percent and the bottom 5 percent.
The items for which there is very little demand (but potential costs) comprise the bottom 5 percent. If these 5 percent can be eliminated, you can expect potential improvement in the overall performance of the system.
By re-examining the bottom 5 percent on a regular basis (e.g. once every quarter), you can hope to eliminate the potential problems – these products with no demand but high costs. But before you can eliminate them, you must follow a process. The first step is to identify the bottom 5 percent using ABC analysis. The second is to examine them using a cross-functional team which will evaluate every slow mover and justify the continued presence of a slow-moving component.
One strategy for managing slow movers is to drop the SKU entirely. With this approach, you declare the part obsolete. This makes sense if there are no other parent assemblies that use the specific part; if there are no outstanding demands for that specific service part; and if top management is willing to accept the costs of writing off obsolete inventory. A major reason why more firms don’t do this is because of concerns over who will bear the resulting costs.
Transferring the responsibility for slow movers from production and inventory control to a supplier or to marketing is another tactic. When you transfer to a supplier, the supplier assumes responsibility to provide sufficient availability. In this sense, the item has now become a vendor managed inventory (VMI) item. When the item is transferred out, the costs are converted from overhead to variable, and the demand for internal space generated by that item is eliminated. If marketing or some other group insists on stocking a slow mover, an option is to make that group responsible for stocking and managing the component.
Another tactic for slow movers is to redesign another component so it can be easily adapted to provide the same production functionality of the component you seek to eliminate. This strategy has long been used in the white appliance industry (firms that manufacture dishwashers, washing machines, ovens, etc.).
Red-tagging, anotyher strategy, is commonly associated with the ”5 S” program frequently found in Kaizen events in which all unnecessary items are identified and labelled with a red tag. The goal is to flag items so they can be easily and quickly moved out, which puts you in a better position to organize the remaining necessary items. Tagged items are moved to a separate area. A red tag – which contains information such as part number, location, and time last used – is left in the items’ place in the main stockroom.
Typically, if the part is needed, the red tag is pulled and given to someone in inventory control, who retrieves the part from the secondary location. This demand provides evidence the part is still needed and shouldn’t be disposed. But if after some predetermined period of time, the part has generated no demand, yoou can eliminate the physical stocks. However, keep the drawings, item master information, and any other necessary data on the item so the part can be built again should the need arise.
The final tactic is the default strategy – keeping the part in stock and accepting the inherent benefits (and costs).
These various strategies provide a more structured and comprehensive process for dealing with the slowest movers. Ideally, by eliminating slow movers, you potentially can reduce the number of parts you must control, which translates to lower costs, fewer resource needs, and simpler systems – a true win-win situation.