Welcome back to another installment of Whitepaper Wednesday here on the Purchasing Certification Blog. Today, I’ll be reviewing a whitepaper entitled “Inventory Reduction: Getting Traction for Fast Track Results” from R. Michael Donovan & Co.
The whitepaper begins by stressing today’s executives’ interest in reducing inventory levels, saying that “the old ways [of keeping large inventories] caused erratic and long lead times, high costs and unnecessary cash consumption.” Though the whitepaper uses the term “the old ways,” many organizations are still plagued with too much inventory as the whitepaper attests that many organization’s past efforts to reduce inventory were “ill-fated” and ended up bringing about unintended consequences such as “decreased customer service; lower productivity; lost sales; lower profits; and, ironically, more cash unnecessarily consumed.”
So, how does one go about decreasing inventory?
According to the whitepaper, not by using traditional inventory metrics such as inventory turnover or days of inventory. Instead, the whitepaper recommends a methodology called IQR. Maybe I read through the whitepaper too quickly, but it wasn’t clear to me what IQR stood for.
The IQR process involves identifying, for each part number, an optimum inventory value. Then, it requires you to classify inventory into four categories: Active (where the optimum inventory value matches the amount of inventory you actually have for that part number), Excess, Slow Moving, and No Moving.
Here is where my problem with the whitepaper’s methodology starts. Does “Active” mean exactly the right value? Is there an acceptable range? Is +/- 10% sufficient?
Moreover, the whitepaper offers no criteria for what consistutes the difference between Excess, Slow Moving, and No Moving. While this doesn’t appear to matter at first due to the whitepaper’s calculation of IQR (sum of Active values divided by total inventory value), it does later.
You see, a case study near the end of this whitepaper attempts to demonstrate how IQR is used to prioritize inventory reduction opportunities. But, more confusion ensues when the case study ends up listing seven categories – Active 1, Active 2, Excess 1, Excess 2, Excess 3, Slow Moving, and No Moving – then said that “the biggest inventory reduction opportunity is clearly in the Excess 2 category with $26,879,000. or 49% of the $54,965,000. total inventory.”
It would have been helpful to know the criteria used to determine the common characteristics among all of the items included in “Excess 2,” but there were none to be found. Instead, the reader is left to guess. The case study closes with quantified inventory reductions, but doesn’t mention any specific techniques that were used to achieve the results.
Then, a second case study is presented with no mention of the use of IQR but a mention of an inventory reduction technique: “a pull system for inventory replenishment was designed to replace MRP push methods.” With a 65% reduction in inventory, it leads you to believe that this company didn’t bother with prioritizing certain items, they just tried to reduce inventory across the board, which would be in conflict with a tenet from the whitepaper which states “Separate the vital few from the trivial many. Do not attempt to tackle every suggested ‘defer’ action.”
So, as you might imagine, I was a little disappointed with this whitepaper. Maybe if you’re smarter than I am, you can draw helpful conclusions for yourself by reading it firsthand. If you have that type of appetite, then go ahead and get your own copy at R. Michael Donovan & Co.’s website (registration required).
To Your Career,
Charles Dominick, SPSM
President & Chief Procurement Officer
Next Level Purchasing, Inc.
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