Slow moving inventory is often seen as an easy target for people undertaking an inventory review. Rather than undertake a structured review process (such as the Inventory Cash Release process) many people will target slow moving inventory as if it is some kind of silver bullet for inventory optimization. This is usually based on a belief that the characteristic of being slow moving is proof that the items aren’t really needed. In my view this is mistaken because the items could well be needed, albeit infrequently, but supply issues might mean that they need to be held in stock.
The mistaken view can usually be traced back to the definition that is used for slow moving inventory. Many companies describe slow moving as being inventory where they have more than, say, 12 months stock on hand but this definition describes the inventory in terms of the quantity held rather than the frequency of movement. Under this definition an item could have demand every week but be classified as slow moving because for some reason they have more than 12 months stock on hand. While inventory with this profile might very well be a problem (depending upon other factors such as supply limitations), it certainly isn’t ‘slow moving’.
A better approach, in my view, is to define ‘slow moving’ based on the frequency of demand. Depending upon the way your other inventory is classified this could be as much as a single demand in a few months or it might be having no demand for 12 months. The actual frequency for the definition really does depend upon your circumstance. But the key is to define slow moving in a way that reflects frequency of demand not the quantity on hand.
The other problem with slow moving inventory is that wrong approach is often used for calculating the holding requirements. By definition there will most likely be very few data points for a calculation and so it is inappropriate to use a Gaussian (or normal) function for calculating the Reorder Point (ROP). Yet people do this because they rely on their inventory management software for the calculation and this software often doesn’t differentiate inventory types. (I find this hard to believe but, yes, it is actually true.)
A better approach is to use a Poisson function for slow moving inventory. This approach helps you determine the probability of a stock out, over the period of restocking, depending upon the number that you hold at the ROP. This is conceptually different to the Gaussian function and is far more reliable for slow moving inventory.
Here are a few things that you can do if you are concerned about slow moving inventory:
- Check your company’s definition of slow moving. Does it reflect quantity or frequency? Is the time frame suitable for your situation?
- Check how the calculation for the ROP is calculated.
- Reassess your holdings based on the new definition and approach.
- Institute new system flags to identify items that have had no movement for a period of time so that you can determine if they are slow moving or have become obsolete.
These actions will help you to better manage your slow moving inventory but don’t expect a slow moving inventory review to solve your inventory problems – it won’t. It is just one tool in a complete approach and needs to be applied as part of a structured process.
See also the video tutorial on Slow Moving Inventory.