The costs of excess inventory can be huge. In this article, I want to just show the savings that can occur from a focus just on the inbound side, and give supply chain practitioners a little simple math to allow them to calculate their potential savings.
As manufacturers have embraced Lean concepts, many have built KanBan (just-in-time, just-in-sequence) warehouses close to their factories. The inbound warehouse receives inventory from core suppliers, sequences those strategic materials to support the next few hours production schedule, and uses trucks making milk runs to deliver those materials just-in-time to support the next wave of production (two hour delivery windows are not uncommon).
If for any reason, the strategic materials – raw materials, components, and subassemblies used in manufacturing – cannot be delivered, downtime can cost manufacturers millions of dollars. In the automotive industry, fines can be as much as $4,000 per minute for trading partners whose delivery failures cause production downtime.
As a result, the inbound warehouses often seek to have several weeks of inventory on hand. Companies that run very lean in manufacturing, if not careful, end up pushing much of the inventory that used to be in the factory upstream.
Let’s look at a concrete example of a heavy machinery manufacturer. In order to ensure production uptime, it would not be unusual for that company to have four weeks of inventory coverage in their factory warehouses. Further, in heavy machinery, many of the components are expensive. Four weeks of inventory could easily be valued at $100 million.
By moving from four weeks of inventory coverage to three, the savings associated with inventory carrying cost savings in one year would be $65 million. Many companies, when seeking to implement a new solution to solve a problem, look for at least a two year payback period. In this example, the total two year payback period from inventory savings would be $130 million. The savings associated with leaning out upstream inventory can be huge, far outstripping the costs of new technologies, implementation, and training people in new processes.

With these kinds of savings, companies whose inbound inventory is worth substantially less than in this machinery industry example above could easily justify a visibility project to reduce strategic materials inventory.
Inventory Savings Table
The math here is pretty simple. The one number an operations executive will need to check with the finance department is the inventory carrying cost. The inventory carrying cost is different industry to industry and company to company.  Inventory caring cost savings come in different forms: savings from freeing up cash and not having to pay interest on that cash; the ability to pay less insurance and lower taxes on inventory; labor savings associated with less material handling; the ability to rent a smaller warehouse; and other areas as well. These are true savings, not just financial sleight of hand.
A 20 percent inventory carrying cost has, historically, been a decent cross industry estimate. Companies that have taken the trouble to do an in-depth study of their inventory carrying costs usually find they have significantly underestimated this cost driver. They may also discover that using the same carrying cost across different product lines may not make sense.
There  are two key software solutions for right sizing the inventory in the inbound supply chain: inventory optimization (IO) and a robust visibility solution. The IO solution needs to be complemented with a good track and trace solution for two reasons. First of all, inputs from a visibility solution provide key parameters for the IO solution. Secondly, the visibility solution uncovers opportunities to reduce lead times, which makes the IO engine much more effective.
While in this article I’ve focused on savings associated with reducing inventory on the inbound side, it is worth mentioning that if a company’s inbound and outbound supply chains are well integrated, improvement on the inbound side can lead to service improvements for customers receiving outbound orders. Improved customer satisfaction, built on service level improvements, clearly helps to grow revenues. 
This is not easy. In addition to implementing new technologies, there are also significant cultural and process issues that will need to be addressed to insure a successful project. But with these kinds of savings opportunities, a successful project creates new corporate heroes.