Cutting inventory by RMB 100 million,
not by cutting purchasing

The usual way to cut inventory is to buy less. The result is a fall this month, shortages the next, then restocking — and higher inventory than before. This project did the opposite: spread the inventory out, look at it clearly, then decide which part to reduce and which part to increase.

The problem

• A target without a path. The company had set "release RMB 77.8m, DIH from 71 to 50", but could not say which categories held the stock, how much, or why.
• Inventory treated as one lump. Finished goods, WIP and raw materials were looked at together; segmentation was by value only (ABC), with no view of demand variability, so cuts were made across the board.
• Little transparency. Physical stock, storage locations and consumption frequency did not reconcile; nobody dared to act.
• Reducing inventory and protecting kitting pulled against each other. Purchasing feared shortages, planning feared line stoppages, finance looked only at value — three different definitions.

What we looked at first

We did not cut first. Step one was to spread the whole inventory out by category, value and consumption frequency, and confirm that the data was right and the books were real. With inaccurate data, every later action is wasted.

Step two was segmentation: value (ABC) × demand stability (XYZ). Crossed, that gives nine boxes, each with a different problem and a different treatment.

What we did

• 1 · Set the target and analyse the actual. Check actual inventory levels, make sure the data is right, and improve visibility of stock and storage.
• 2 · ABC/XYZ analysis. Classify by consumption value (ABC) and consumption frequency (XYZ) to provide the data for optimisation.
• 3 · Analyse each segment. Calculate KPIs for each segment and identify its inventory drivers (fishbone, 5 Whys).
• 4 · Define the strategy. Compare with the original target, quantify the adjustment potential, change the inventory mix and set management measures for each segment.
• 5 · Implement and control. Put the measures in place, monitor the reduction against target, track representative items and correct when it drifts.

Results

Who this is for

• Automotive components and discrete manufacturers with large inventory value and slow turnover, where the boss asks every day where the cash is tied up.
• Companies that have cut inventory before in bursts: push it down, run short, restock.
• Purchasing, planning and finance using different definitions of inventory, with everyone managing it and nobody owning it.
• Not for: trading companies whose inventory is already low, or whose problem sits mainly on the demand side.