Strategies Every Procurement Professional Should Know to Reduce Inventory Levels and Cost

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Spend Matters welcomes this guest post from Ana Sofia Gómez, a manager at GEP.

In an organization, the challenge for optimizing costs goes beyond getting the best prices in the market through the procurement function. The challenge also involves implementing strategies, or acquiring added values and services that allow the organization to improve their process administration and get benefits from those improvements. With manufacturing companies, one area of opportunity is inventory management. For the maintenance, repair and operating supplies (MRO) procurement areas, you can support inventory maintenance and management areas to develop suppliers who can offer value-added services that help reduce the cost of inventories and ensure their supply.

The concept of consignment has been around a long time and is a good opportunity in inventory management. Consignment inventory is the consignment of goods to a customer location without receiving payment until after the goods are used or sold. This provisioning of inventories allows customers to transfer the cost of inventories to suppliers so that their inventory costs are lower and inventory isn’t paid for until it’s used. However, it may still be the responsibility of the client to carry some inventory management even if it’s not part of the client's costs.

This concept has evolved to another option in the market, known as vendor-managed inventory (VMI), which refers to a planning and administration system, and is not directly tied to inventory ownership. Under this concept, instead of being pending in the monitoring of what is required in the warehouse and having to worry about requesting orders, the supplier assumes the responsibility of this activity by having a connection to the customer database.

The advantages of this concept are:

  1. Improved customer service. By receiving information directly, suppliers can respond more effectively to inventory needs.
  2. Reduced uncertainty in demand. By monitoring inventory information and demand flows, unexpected or unplanned purchases can be forecast and decreased.
  3. Reduced inventory requirements. By knowing the customer's inventory volumes, the supplier can better plan its stock and contribute to customers not having unnecessary stock in their inventories.
  4. Contributes to reduced costs by efficiently buying and managing inventory processes.

Although both concepts are not new, the challenge of implementing these methods is that many organizations do not have good control of their inventories. Those who are responsible for their administration find it difficult to determine which items, and under what volumes, to negotiate such agreements, and assume the risks in case of not covering the volumes committed in the negotiated period. They are strategies that can present opportunities for the organization, but a good analysis and negotiation with the supplier to define the items, volumes and responsibilities of the client and the supplier are critical for successful implementation of these types of initiatives.

Every day is more pressing for organizations to reduce the values and levels of inventory because they represent one of the largest financial investments that the company has. Reducing inventory levels not only helps optimize costs but also enables companies to lower their asset turnover rate while improving the ROI, thereby improving the value of the business. Implementing strategies as a consignment or VMI can be an alternative that contributes to this goal.

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