Cut inventory, free up cash

Looking to improve cash flow? A good place to start is by trimming the fat from your inventory holdings. Consider the case of Kraft Foods Inc., which is chronicled in the article "At Kraft, cash is king" in the Quarter 1/2010 issue of CSCMP's Supply Chain Quarterly. Editor James Cooke details the key role that inventory control and management efforts played in Kraft's efforts to improve its overall cash flow by US $1 billion.

Some tactics that the company used include:

• Rationalizing the number of stock-keeping units (SKUs) and phasing out low-revenue products with high demand volatility. Although elimination of any item means a reduction in revenue, the remaining (better-selling and more profitable) items can often increase the total cash flow.
• Switching to repetitive flexible manufacturing. Under this technique, manufacturing lines produce high-volume items at a regular frequency and in fixed quantities instead of responding daily to changing demand. Kraft's Senior Vice President of Customer Logistics Philippe Lambotte explains it this way: Suppose Kraft sells 20 cookies per month, every month. Under its traditional system, the company makes 20 cookies at once, and the cookies may sit in stock for a month before they are sold. "Repetitive flexible manufacturing allows me to produce five cookies per week, every week," he says. From an inventory standpoint, the technique is a winner because it results in less inventory sitting around unsold. From a manufacturing point of view, however, small-batch production may be not be as desirable because it is more costly than longer production runs.
• Reducing customer service levels for some product lines. By cutting back customer service goals for some products (for example from a 99-percent fill rate to a 98-percent fill rate on orders), the company can reduce inventory holdings. "When an SKU has a lower shelf velocity, it might not matter so much to provide high service, since the customer's purchase frequency is not so high," says Lambotte. "Therefore, reducing service levels of the lower-demand SKU can provide a good possibility to free cash flow."

For further details on Kraft's cash-flow initiative, check out the article, "At Kraft, cash is king" from the Quarter 1 issue.