Strategy for Deriving Maximum Profits by Inventory Minimization
Inventory has been a hotly debated topic in many organizations. Since inventory is directly visible in company financials,there is a high degree of sensitivity to excessive inventory levels in the management ranks. Many organizations carefully track inventory turn ratios and benchmark themselves against key competitors. For some organizations a focus on “lean supply chains” with their high inventory turns have proven to be of substantial strategic value. Whenever the topic of inventory reduction surfaces,a discussion around the following tradeoff is bound to erupt: inventory reduction versus potential negative service level implications. This paper provides a fundamental and systematic approach for inventory optimization bringing these seemingly contradictory forces into unison. We will show a framework that can be applied,discuss two fundamental strategies to be used sequentially to reduce inventory and demonstrate the application of the principles in a case study. Reliance on IT solutions is also discussed. We briefly address the need of cash generation through inventory sell-offs even if doing so jeopardizes profitability. For many managers this seems like foolish executive action,but we will shed some light on the rational and demonstrate that in fact this action may represent sound business activity.