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Inventory Reduction

Warehouse consolidation can significantly enhance profitability by reducing inventory levels and associated carrying costs. It helps in managing demand variability and lead times, leading to lower average inventory and increased inventory turns. Companies have reported up to a 30% reduction in inventory levels and over a 40% increase in inventory turns through such consolidation efforts.

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Saurabh Mehrotra
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16 views2 pages

Inventory Reduction

Warehouse consolidation can significantly enhance profitability by reducing inventory levels and associated carrying costs. It helps in managing demand variability and lead times, leading to lower average inventory and increased inventory turns. Companies have reported up to a 30% reduction in inventory levels and over a 40% increase in inventory turns through such consolidation efforts.

Uploaded by

Saurabh Mehrotra
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
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Warehouse consolidation leading

to increased profitability
Companies carry inventory to support the business cycles.
Inventories help manage variability of customer demand,
variability of lead times and also forecasting inaccuracies.

The level of inventory being carried is linked to the desired Service


Level of the company, which in turn is balances the companies
cost of under-stocking to that of over-stocking.

The inventory carrying cost represents a major cost head for any
organisation. The opportunity cost of value of the average
inventory being carried by the organisation is one of the major
components of the inventory carrying cost. Organisations look at
higher returns through higher inventory turns, through reduction
in the average inventory value.

Average Inventory = (Q* / 2) + Safety Stock Warehouse consolidation results in demand and lead time
variability (of individual warehouses) averaging out, resulting in a
lower standard deviation of demand σdem (and a lower Coefficient
IAvg = (μ + Z σdem) + (Z σdem)
of Variance). As can be seen average inventory level which is
directly proportional to σdem, comes down.
Where
Warehouse consolidation thus facilitates significant reduction in
Iavg = Average Inventory the opportunity cost of inventory, by facilitating reduction in
μ = Average Demand overall inventory levels being carried by the organisation.
σdem = Standard Deviation of Demand Warehouse consolidation projects have been seen to bring about
Z = Z value corresponding to the desired Service Level upto 30% reduction in inventory levels leading to over 40%
increase in inventory turns.
= Average Lead Time
Service Level
Warehouse cosolidation
leading to increased
profitability
Companies carry inventory to support the business cycles.
Over stocking Inventories help manage variability of customer demand,
variability of lead times and also forecasting inaccuracies.

Under stocking The level of inventory being carried is linked to the


desired Service Level of the company, which in turn is
balances the companies cost of under-stocking to that of
over-stocking.

The inventory carrying cost represents a major cost head


for any organisation. The opportunity cost of value of the
average inventory being carried by the organisation is one
of the major components of the inventory carrying cost.
Organisations look at higher returns through higher
inventory turns, through reduction in the average
inventory value.
Average Inventory = (Q* / 2) + Safety Stock Warehouse consolidation results in demand and lead
time variability (of individual warehouses) averaging out,
resulting in a lower standard deviation of demand σdem
IAvg = (μ + Z σdem) + (Z σdem) (and a lower Coefficient of Variance). As can be seen
average inventory level which is directly proportional to
σdem, comes down.
Where
Warehouse consolidation thus facilitates significant
reduction in the opportunity cost of inventory, by
Iavg = Average Inventory facilitating reduction in overall inventory levels being
μ = Average Demand carried by the organisation.
σdem = Standard Deviation of Demand
Warehouse consolidation projects have been seen to
Z = Z value corresponding to the desired Service Level bring about upto 30% reduction in inventory levels
leading to over 40% increase in inventory turns.
= Average Lead Time

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