Excess inventory: What is the real cost of not reviewing your inventory management processes?
That’s right I said the cost of NOT reviewing your inventory.
Usually when people (me included) raise the topic of the cost of inventory we talk about the financing and management costs of holding inventory.
However, with spare parts many people consider these costs to be either conceptual or ‘sunk’ (that is, a cost that cannot be recovered).
It is this view of spare parts inventory costs that prevents many companies from taking action to review their inventory and particularly review their spare parts inventory management processes. The attitude is: if it is hard to define or ‘sunk’, then why bother?
But there is another inventory cost that is often overlooked.
This is the cost incurred today of expenditure on items that you don’t really need to stock or in quantities that you don’t really need to hold.
The ongoing expenditure on these items is a waste of funds and a very real cost of not reviewing your inventory.
One of the problems with spare parts management is that there is typically a long time lag between purchase and recognition of excess or obsolete holdings.
This time lag means that inventory problems are treated as if they are all behind us, in the past. But the costs of stocking decisions aren’t just in the past, they are borne by companies with every purchase that they make today, tomorrow, next week, next month, and so on.
It is the stocking and purchasing policies and guidelines that a company adopts today that drives those decisions and the wasted expense. After all how did all that excess get into the storeroom – someone had to decide to purchase it!
Applying the wrong tools, techniques, policies, or guidelines today results in the systemic purchasing of items that will only be recognized as being in excess when a review is conducted at some time in the future. By which time it will be way too late, the money has been spent.
Surely it is better do something about this now, before that cold, hard cash is committed.
My experience in this field tells me three things:
- Most excess inventory is built up slowly over time – indicating that the excess is produced by many small decisions, not a few big ones
- Despite the fact that most companies remove or revalue some inventory on a regular basis, they can, at almost any point in time, identify typically between 20-40% of inventory that is in excess of actual needs and can be safely removed – meaning that managing only technical obsolescence and revaluations does not adequately address the issue
- This excess inventory isn’t all old or slow, some is so recently purchased that it can be returned to the vendor while some even has a high turnover.
What this means is that some of the money spent on inventory items today will, almost certainly, be wasted. So, next time anyone says ‘we don’t need to review our spare parts inventory management’, just remember that this inaction has a real ongoing cost to the company.
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Posted by: Phillip Slater