Operating departments face increasing pressure from management to reduce inventories. It is often the case that inventories can be trimmed, realizing significant cost benefits. However, we also know that excessive inventory reductions actually cost the company more money than is saved. Moreover, deciding which locations should sustain inventory reductions is critical to customer service.
While the enterprise resource planning (ERP) system can tell you how much inventory you have, it can't easily tell you why you have it. It is also difficult to tie cost increases in manufacturing and lost sales directly to an inventory level that is too low. In this article, we will show you how to identify the contributions to overall inventory, discuss which components lend themselves to control, and highlight how inventory reductions can be directly related to manufacturing costs and customer service.