How to Tackle Inventory Reduction

In today's world overflowing with information and goods, trends and consumer preferences are constantly changing, making demand forecasting far from easy. Therefore, it can be said that we live in an era prone to excess inventory.

How can inventory be reduced efficiently? In this third installment of our series, we focus on the theme of inventory reduction methods, explaining the periodic ordering system and introducing methods for reducing inventory. We will also discuss proposals for systems that can realize inventory reduction.

Types of Inventory Management Systems

Reducing inventory contributes to improved capital efficiency and cash flow improvement. In the previous series installment, we explained the fixed-quantity ordering system, but this time we will explain the basics of the periodic ordering system, another ordering method, including its advantages, disadvantages, and calculation formulas.

What is the Periodic Ordering System?

The periodic ordering system refers to a method of calculating and ordering quantities at predetermined ordering intervals. This ordering method calculates the order quantity each time based on the required quantity and currently held inventory. The order quantity constantly changes, with the characteristic of determining the order quantity each time according to the situation. It is possible to establish an ordering cycle that does not fall below the safety stock that should be maintained and place orders up to the maximum inventory level.

Advantages of the Periodic Ordering System

Advantages of the periodic ordering system include the ability to perform highly accurate inventory management and respond to changes in demand. Since ordering dates and receiving dates are predetermined, it is easy to establish business processes and prevent forgotten orders. Because it is possible to order specified quantities at regular intervals, it is advisable to reduce order quantities when there is excess inventory and increase order quantities when there is insufficient inventory. By minimizing excess and insufficient inventory as much as possible, this ultimately leads to inventory reduction.

Disadvantages of the Periodic Ordering System

It requires time and effort because order quantities must be calculated after confirming accurate inventory numbers and forecasting needs. Depending on the case, there is a risk of using more time and effort than expected. Additionally, there may be minimum order units established, optimal order quantities may be impossible due to delivery costs, and if the ordering cycle or procurement lead time is long, safety stock may increase.

Order Quantity Calculation Formula and Inventory Adjustment Period

In the periodic ordering system, order quantities are calculated each time based on predetermined ordering intervals. The order quantity calculation formula can be determined as follows:

◇Order Quantity = (Order Interval + Procurement Period) × Planned Usage Quantity + Safety Stock - Current Inventory - Current Outstanding Orders

Safety Stock Calculation Formula

To prevent inventory shortages due to changes in needs, it is necessary to calculate the required inventory quantity and safety stock quantity. The safety stock quantity in the periodic ordering system is determined as follows:

◇Safety Stock Quantity = Safety Factor × Standard Deviation of Demand × √(Lead Time + Order Interval)

If you want to realize inventory reduction through a smoother method without incurring labor costs beyond the above methods, it is also necessary to consider implementing the Smart Reel Rack system (described below). 

Methods for Reducing Inventory

Excess inventory has a significant impact on companies. In some cases, it can cause product value decline, cash flow reduction, decreased work efficiency, and deteriorating profitability. To solve these problems, it is necessary to reduce inventory based on the following two measures.

Shortening Procurement Lead Time (LT)

Shortening the inventory adjustment period is considered effective for inventory reduction. The inventory adjustment period refers to the period of "ordering cycle + procurement lead time." The ordering cycle is the period from placing an order to the next cycle, and procurement lead time is the period from ordering to delivery. By increasing this frequency, it is possible to reduce the purchase quantity per transaction and also reduce inventory levels. However, it becomes complicated because the frequency of inventory confirmation must also be increased.

Adopting the Double-Bin System

The double-bin system is an ordering method that manages inventory by establishing two spaces for one inventory item. It is a simplified version of the fixed-quantity ordering system, where one of the two spaces always maintains a state of replenished inventory, and inventory is issued from the other space to prevent inventory shortages.
This method has the advantage of being easy to manage, but it is necessary to establish a period longer than the usage amount as the period required to replenish one space worth of inventory. It is suitable for small items with relatively high usage, stable dispensing, minimal quality deterioration, and low unit prices.

Rather than reducing inventory through the above two methods, the Smart Reel Rack can be cited as one option when seeking methods to further improve work efficiency. By implementing this system, not only can inventory space be significantly reduced, but inventory confirmation also becomes easier. As a result, production efficiency in the assembly process can be dramatically improved.

To Achieve Efficient Inventory Reduction

Holding too much inventory is caused by excessive ordering. Excessive ordering occurs when accurate demand forecasting is not possible or when the actual number of stored inventory items is not fully understood. To solve these problems, it is necessary to implement an appropriate system.

Implement a System Suitable for Your Company

When you want to achieve inventory reduction, optimizing inventory management can be realized by utilizing an inventory management system. Implementing the Smart Reel Rack, which allows receiving and shipping regardless of reel type, enables management of various reels and contributes to reducing warehouse floor space itself. Many problems that tend to occur after excess inventory can not only be resolved by utilizing this system, but it also helps reduce costs.

Summary

The periodic ordering system is an ordering method used more frequently than the fixed-quantity ordering system!

While there are advantages to the periodic ordering system, it is important to also pay attention to its disadvantages.
Calculation errors in the periodic ordering system formulas may occur routinely depending on the person in charge. To prevent such human errors, it is necessary to consider implementing systems as mentioned above. This represents a highly contributive system design for companies that constantly seek efficiency and accuracy.

Please visit the dedicated Smart Reel Rack page here.