Most companies have two challenges: toomuch of the wrong stuff and not enoughof the right goods. Knowing where to beginmaking inventory improvements is not easy.Then, sustaining such improvements sometimes seemsimpossible. Here are 10 steps you can take to get started.

Step 1: Make sure inventory records are right. Howrecently have you done a full physical inventory? Whenyour employees go to pick stock showing in the system, arethey often unable to find it? Businesses have discoveredmillions of dollars of working capital that turned out to bebogus when a physical-to-system reconciliation was done.Before you can reduce inventory, you have to be sure ofexactly what you have.

Step 2: Find the inventory in “black holes.” As acorollary to your inventory-accuracy exercise, be sure allinventory locations are included in your accounting. Wheninventories get high, odd things happen. For example,an additional warehouse or storage facility—perhapsone

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not recognized by your order entry or ERP system—may be pressed into temporary service. Too often, this unrecorded inventory location is forgotten. Distributed,worldwide warehouses make this more possible, as doconsignments without written and carefully monitoredprocedures for tracking and limiting inventories. To findthe hidden inventory, use the collective memory of yourcolleagues. Once uncovered, make sure the inventoryis also part of the official record so it can eventually beeliminated.

Step 3: Identify and dispose of worthless inventory.Worthless inventory does not improve with age. Materialcan be defined as worthless if it has no identified demand,including consumption. Inventory can fall into this categoryfor a number of reasons: overage, out of spec, etc.If there is no identified demand, bite the bullet and getrid of it.

Step 4: Identify and make plans for nearly worthlessinventory. In addition to the obviously worthless inventorydescribed in Step 3, there is usually a large amount ofmaterial for which there may be some demand, but notenough to draw the inventory down in a timely manner.Disposing of this material is usually a bit morecomplicated than for worthless inventory because thereis usually more resistance to writing off large volumes.Developing a market for products is the most desirableway of disposing of them. Coordinate with sales to find anoutlet—even if it covers only variable cost. It’s better thanletting inventory sit idle or having to write off the entireamount.

Developmental products that never quite take off canbe the toughest inventory for sales to let go of emotionally.Hope, however, is not a sales plan. The business processshould include sales at a set minimal rate within a setmaximum time frame. If sales have not developed bythe drop-dead date, inventory does no one any good. Itshould be written off.

Step 5: Consider reasonable rebalancing of geographicregions that can then be analyzed separately. Shiftinginventory among over- and under-used warehouses is away to improve inventory turns. Shipping material backfrom Asia, if it was originally shipped to Asia from theU.S., is probably not going to be feasible in the long run.All warehouses in the eastern U.S., however, might befair game for evaluating the tradeoffs of rebalancinginventory.

Step 6: Within a rebalanced region, determine fastestmovingSKUs in dollars and days of supply. Since workingcapital is the bottom line, reducing high levels of a lowvalueitem will not be as beneficial as reducing moremoderate levels of a high-value item. Hence, identifyingthe dollar value for each SKU is a necessary first step.Simultaneously, calculate the days’ supply within eachrebalanced region based on the average forecast for thenext three months.

For the top 20% of your SKUs by dollar value, puttogether a table of SKU, total dollar value, quantity anddays’ supply. Be sure, if there is no demand for the nextthree months, you enter a large number (e.g., 999) insteadof zero as the days’ supply. Sort the table in descendingorder of days of supply. If the days’ supply for all of theseitems is higher than, say, twice their production cycle, pluslead-time to the most distant warehouse in the region,continue. If not, reduce the list to just those for which thedays’ supply is higher than the value.

Step 7: Evaluate days’ supply by individual warehousewithin the rebalancing region. With your remaining list,look now at inventory by individual warehouse. Again,recalculate dollars and days’ supply based just on demandfor that SKU at that warehouse. Is there far too much inone warehouse but far too little in another? If so, considerthe cost of relocating the inventory versus making morefor the under-stocked warehouse. If the costs are right,rebalance the stocks (at least within your working model)before continuing.

Step 8: Take a lesson from the Hippocratic Oath: First,do no harm. The easiest way to reduce excess inventory is tostop making more of it. Let sales bring the inventory down.Check your rebalanced list against production schedulesto ensure you’re not making, or planning to make, moreof already overstocked material. Alter plans and schedulesaccordingly. Then, update future inventory projections.

Step 9: Evaluate alternate ways of selling inventory,especially if you’ve rebalanced the inventory within yourwarehouses and still find excesses that cannot be broughtdown to reasonable levels within an acceptable timeperiod. For these SKUs, consider other ways to move thematerial: Can the material be converted to something thatdoes have demand? Offer a promotion. Turn an inventoryproblem into a marketing opportunity by offering yourbest customers a slightly reduced rate if they buy doubletheir normal monthly amount.

It is true that this strategy will merely move demandfrom one month to another. If, however, the need to bringdown working capital is great enough, this can be a viableoption. Can an excess SKU be repackaged economicallyinto a needed SKU (say, bags to boxes)? Better yet, cancustomers be enticed to take their second choice (i.e., theoriginal) package?

All such possibilities must, of course, be measuredfor cost-benefit tradeoffs, including the message youinadvertently send to the marketplace. Nonetheless,knowing where your excesses are provides options forwhat to do about them.

Step 10: Make the ultimate sacrifice. If, after analyzingall the possibilities above, you still have certain inventoriesvastly in excess, you may have to consider just writing themoff. “Vastly in excess” will vary by business and how criticalit is that your working capital reach a certain target by acertain time. Inventory cannot be managed in a vacuum.Writing off inventory means a hit on earnings. If it mustbe done, it is best done at the beginning of a quarter, soearnings impact will be revealed in time for the businessto do what it deems appropriate.

No one wants to scrap good inventory, so the mostimportant lesson is not to get into that position in thefirst place.

Jane Lee, vice president of supplychain solutions, oversees the ongoingdevelopment of Supply Chain Consultants’(SCC, Wilmington, Del.) expertise inall aspects of supply chain planning,independent of software. The above 10steps are part of SCC’s Zemeter InventoryPlanner, which keeps detailed recordsof inventory history. It allows customers to see developingtrends and control issues before they become problems.Contact www.supplychain.com for more information.