• Inventory is a significant portion of working capital in most manufacturing companies
• Costs of ordering, storing, insuring, financing, and monitoring inventory can also be significant
• Reductions of on-hand inventory levels carry a direct increase in the bottom line.

• warehouse space is becoming an ever scarcer commodity for manufacturers
• often overstocked raw materials and Work-in-Progress take much-needed space away from higher-value uses such as finished goods and even production space
  

Time Costs

• larger inventories often require a much greater level of management and attention
• internal communication is less frequent and thus less reliable and purchasers are often having to react to emergency situations
• rush shipments often carry larger invoice and shipping costs
• worst-case scenarios include stockouts and late shipments to customers

5 Ways to Reduce Average Inventory Value

Frequent Deliveries - Vendor runs production schedule based on estimated forecasts and ships smaller quantities more frequently.

Item Consolidation  - Identify common uses among inventory items (especially in raw materials and packaging) and through design reduce the total number of SKUs.

Ordering Systems - Set up simple yet effective systems for the automatic monitoring and recording of inventory items; excess inventories can be trimmed, even with seasonal or volatile demand items.

Redesign - Reduce the amount of material required per finished product (an overall cost reduction). Inventory value is further diminished accordingly.

Vendor - Managed-Inventory (VMI) is part of a vendor-customer relationship in which the vendor maintains responsibility for all inventory functions, in many cases stocking items directly to storage  locations or even production points in the customer's facility.