Author: Steven Walter, Sr. Manager, Consulting at enVista
A company’s product is the heartbeat of its business. While every SKU is launched into the marketplace with the goal of lifting the bottom line, all SKU assortments are filled with slow-moving products. In fact, 80 percent of many manufacturers’ and distributors’ sales come from only 20 percent of their SKUs. The problem with this is not that the slow-moving SKUs don’t have high revenue, but that they require a significant amount of time and energy to manage while contributing hugely to inventory and operations waste. We often find that the bottom 10 percent of SKUs represent more than 40 percent of a company’s inventory investment. As an organization’s largest capital investment, it is not sustainable to have this much of a drain on inventory without a high enough return on investment.
While this may seem to advocate for harsher SKU rationalization, the truth is that certain business requirements, such as complimentary products, warranty/OEM parts agreements, complete assortment and good/better/best variety, can require some companies to keep slow-moving products in their assortment.
Efficiently Managing Slow-Moving SKUs
So, if we can’t just rid our assortments of all slow-moving SKUs, what is the solution? Below are seven supply chain planning strategies that will help you manage these products efficiently and give your bottom line a boost.
- Min/Max Inventory Method – A safety stock and cycle time-based inventory strategy is typically used to govern steady/high-moving products. However, for slow-moving and intermittent products, a controlled, min/max strategy is more effective. Min/max gives the planner more control over peak inventory levels and limits replenishment to only after inventory levels have reached a predetermined minimum value. More control means a lower risk of overstock.
- Deploy-to-Order/Centralization – While a hub and spoke model is commonly used to manage slow-moving product, it can often lead to inventory duplication. Inventory centralization is an effective method to pool risks, reduce variability and combat high minimum order quantity (MOQ)/lead times, but it must be deployed strategically to reduce cumulative inventory and minimize waste. A deploy-to-order strategy keeps nearly all low-volume product inventory at the central hub, with minimal to no inventory at customer-facing distribution centers (DCs).
For this strategy, you will need to evaluate the average order quantity on a SKU, keeping a minimal amount of it at the customer-facing DC and the rest at the central hub. This will pool risks to one level of your network and avoid the common risk of overextending/duplicating inventory on hub and spoke implementations. - Deliberate Stock vs. Non-Stock Determination – Similar to centralization, the key to minimizing waste exposure is to reduce the active stocking locations. Ask yourself if a slow-moving product really needs to be kept at the majority of customer-facing DCs. If orders are sporadic enough, they could be kept only at central or regional centers and then shipped direct to customers when they are ordered. Every SKU will have different requirements. Evaluate tradeoffs to stocking a product at each location to ensure you only keep inventory where you absolutely need it to make a sale.
- Reduce Target Service Levels – Slow-moving products typically have more variable demand than their higher volume counterparts. This means they require more days on hand (DOH) to achieve the same service levels. Consider aiming higher for steady products and lowering expectations for low-volume, variable products to balance overall service levels and maximize the value of your inventory investment.
- Demand Classification– Typical ABC/XYZ style SKU segmentation is a useful tool but is often insufficient to drive your planning strategies, particularly for low-volume products. Evaluating demand intermittency and margin in addition to revenue and variability will help you discern between slow and steady, erratic and intermittent demand profiles. This will allow you to apply the most effective forecasting, inventory, operational and replenishment strategy to each demand profile.
- Choose the Right Forecasting Method – For many slow-moving products, particularly products with intermittent demand (25 percent or more of measured periods without sales), the traditional exponential smoothing-based time series models will not be sufficient. Utilizing forecasting models specifically designed for slow-moving and intermittent products will help you minimize risk and better plan for intermittent demand.
- Documented, Automated Lifecycle Triggers – If you are waiting for a human to find and act on a dead or dying SKU, it is already too late. This will either leave you with large sums of inventory that need to be scrapped, or with products still in your assortment well after its useful life. To avoid this, analyze your historical product lifecycles to identify leading indicators and firm thresholds to indicate when a product’s lifecycle phase is changing. These automatic triggers will provide you with the flag to evaluate products and give you an opportunity to shift inventory and replenishment strategies to allow for a more graceful journey from maturity to obsolescence.
The Bottom Line: Proactive Inventory Management
At the end of the day, inventory is required to enable sales, but it can also be used to buffer against supply chain unpredictability. Any of these actions, if implemented incorrectly, could lead to lost sales, angry customers and negative sales outcomes for your faster-moving products. Don’t wait until you are staring at a pile of dead inventory before acting. Instead, be proactive by bringing in a third-party expert to provide data-based, unbiased input into your inventory and deployment strategy and support implementing the new strategy in a rapid but measured manner.
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