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Slash Inventory Costs in Half with This Novel Strategy

It's no secret that maintaining inventory costs money. Some industry estimates place stock carrying costs between 25 to 65 percent of the original acquisition expense. No wonder manufacturers constantly look for new and more effective ways of eliminating idle supplies.

Now a growing number of manufacturers are adopting a novel approach for cutting inventory costs borrowed from the airline industry. Rather than maintaining traditional reserves of spare parts to support repairs and maintenance of finished goods, these pioneering companies are using modern information systems to manage central pools of parts shared by multiple companies.

More Important Than Stocking
"There's a proliferation of interchangeable parts, standard equipment configurations, and SKUs, along with the need to have spare parts readily available anywhere in the world," says Stephen Slade, senior director, Oracle applications and industries marketing. "As a result, many manufacturers have realized that having access to information about spare parts can be more valuable than stocking the part itself."

Here's how the airlines have been profiting from this idea for years. Because air carriers all use the same types of planes, they can "bank" parts for a Boeing 7x7, for example, at central facilities. Multiple airline companies contribute to the pool and each shares in the acquisition and carrying costs, rather than taking on the burden individually.

As communications and data processing costs continue to drop, the airlines have ready access to inventory information to assure their maintenance operations run smoothly.

Sharing Information, Cutting Costs
Manufacturers can use modern technology to develop similar strategies that replace costly inventory with information. Local and regional third - or fourth-party logistics (3PL or 4PL) providers take on the job of managing parts pools. Inventory management systems maintain parts levels based on manufacturers' failure and performance specifications. "These 3PL/4PL parts consolidation agencies can cut inventory carrying costs in half by helping firms share common spare parts," says Slade.