The RightStock™ model also distinguishes between value added inventory (VAI) and excess, non-value added inventory (NVAI). Value added inventory is the sum of safety stock, lot size, and pipeline inventory. Those three types of inventory are theoretically adding value by mitigating risk in demand and supply variability, producing economies of scale in production and/or procurement, and floating fiscally and/or physically for an optimal time period before becoming on-hand inventory.
VAI = SSI + LSI + PI
Inventory not adding value in those three buckets is non-value added inventory (NVAI) – the difference between the total inventory level (TIL) and the value added inventory (VAI).
NVAI = TIL – VAI
Another key deliverable in our RightStock™ diagnostic is a comparative illustration of how a client’s inventory should be allocated to those three buckets and the excess that remains. An example non-value added inventory diagnostic for a sample SKU from a heavy industry client is illustrated below. The analysis reveals non-value added inventory in units, dollars and days. In this particular case there are 393 units, $2,357.41, and 26.20 days of excess inventory. 22% of the inventory investment is excessive. Unfortunately, this is not an atypical finding in RightStock™ assessments. Particularly disturbing is the $2,399.40 on order for an SKU that already has 22% too much inventory.
For this particular client we found that the large majority of SKUs were in a similarly over-invested state. They had large on-order quantities for even the most over-invested SKUs. Simply stopping and/or slowing down inbound orders for over-invested SKUs saved the company more than $14,000,000.
A similar analysis is illustrated below. The figure is from a recent client in the aerospace industry and shows for each supplier the number of part numbers and the specific part numbers with excess inventory and the amount of the excess. We use this profile to work collaboratively and consistently with suppliers to identify root causes for the excess and to eliminate/minimize those excesses. In this particular case, we eliminated more than $12 million of excess inventory and maintained or improved service levels across the SKU and customer base.