Up to 30% stock reduction potential

VDI study “Inventory management & delivery readiness”

by Dr. Götz-Andreas Kemmner

The lower the inventories, the more market-synchronized and competitive companies are. Would you like to know how high your inventory reduction potential is? If so, then be sure to take part in our “Inventory Management & Delivery Readiness” study, which we are conducting in collaboration with VDI-Nachrichten. Your cooperation is also required!

If we look at the balance sheets of German companies, we see that on average 16% of assets are tied up in stocks. High inventories are a drag on the race for competitiveness because, firstly, every euro more in inventories means one euro less in liquidity. Secondly, most known studies assume that a company has to bear between 19 ct and 30 ct in annual inventory costs per one euro of inventory. These inventory costs are not only incurred for interest on capital, as is often assumed, but also for ageing and wear, loss and breakage, storage, warehouse management, depreciation, handling and insurance of inventories. With a quasi-interest burden of 19 to 30%, inventories are probably the most expensive loan that companies can afford.

Thirdly, inventories not only cost money, they also act as an organizational lubricant and cover up other weak points in the value chain, which in turn cause considerable costs for companies. Based on numerous projects, we estimate the inventory reduction potential in an average company in series and variant production at over 20%. According to the Pareto principle, in 20% of companies the figure is even over 30%. 20% reduction in inventories in statistical average companies enables an increase in cash and cash equivalents of 55% and a reduction in liabilities to banks of 27%.

TOP 10 Overstocks
TOP 10 Overstocks

But what is causing the excessive stocks?

Numerous factors are involved in high inventory levels, ranging from inept planning processes to incorrectly measured delivery readiness levels, from faulty forecasting methods to incorrect scheduling parameters and from incorrect product assortment to unfavorable production processes. 20% reduction in inventories in statistical average companies enables an increase in cash and cash equivalents of 55% and a reduction in liabilities to banks of 27%. However, if you produce what the market doesn’t need, you don’t have the resources to supply what is needed. This increases inventories, reduces delivery readiness and increases the annual inventory write-downs required.

Contrary to the hope held by many companies, inventories do not improve market orientation and delivery readiness. Experience and analyses show: The leaner the warehouse, the more synchronized with the market and the more competitive companies are, while at the same time reducing unit costs. We want to know how high the inventory reduction potential really is for an average German company. The results of this study will be published in VDI-Nachrichten in the fall of 2006, and each participating company will receive a clear statement on its own inventory reduction potential and recommendations for action.

Picture of Prof. Dr. Andreas Kemmner

Prof. Dr. Andreas Kemmner

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