Cutting off the tail

 

TailRunning out of room?  Consolidating operations?  Relocating to a new location?  Need to liberate some cash?  It’s time to purge your warehouse!  When looking at all the stuff that’s accumulated in your warehouse over the years you’ll often find orphans, cripples, mistakes, bad dreams lurking in the far reaches of the racks and tucked away in the back corners.  Where to start?  You can use the white glove test – the thicker the dust on the case the more likely you can do with out it.  Or look to see how many physical inventory tags are on the box – more than two, then throw it out!

Excess and Slow Moving inventory is defined as the quantity above a specific need such as beyond a certain time period of demand or days of supply.  Excess can also be determined as inventory beyond current safety stock level plus lot size (order quantity).  Excess inventory is almost always a result of poor stock demand management.  Excess stock can result from over delivery from a supplier, but more likely bad ordering and demand management.  It’s easy to blame the buyer, but buyers rarely create the sales forecast, maintain the sales orders, set the performance metrics, or the service policies.

A common analysis is to rank sort the parts by their recent sales as shown in the graph here.  Where to attack?  Head for the Tail is a common approach.  If it’s not selling let’s dump it, goes the conventional thinking.

ABC Analysis can be misleading; some times the tail has pearls, or at least consequences if you blindly purge.

Some things you’ll find in the Tail:

  1. Lifetime Buy – part, material, component is going out of production and you need time to find substitutes.  Common these days with RoHS and electronic parts.
  2. Brand New parts – don’t have any sales yet obviously.
  3. Seasonal “Murphy” Stock – winter is coming and a key supplier is on the other side of the Rocky Mountains.
  4. Economic Order Quantity, often abused, but can be a good business decision.
  5. Supplier order volume deep Discount – a really sweet deal, see EOQ.
  6. Commodity price hedging – if you are a commodity buyer you know what I mean.  Example copper prices in 2006 and 2007: