“Best Practices” Inventory Management

2005 Grant W. Howard Company Infor, Inc (Sx screens only)

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“Best Practices” Inventory Management

Grant W. Howard13214 Wallace Road

Manchester, MI 48158(734) 428-0529

[email protected]

Taking a Closer LookTaking a Closer Look

Profits, Customer Service, LongevityProfits, Customer Service, Longevity

Maximizing Profits and Staying in Business Forever

How it Works


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Our Session Today - How it Works Company Objectives Inventory Management Objectives Inventory Management & Replenishment

– When to Replenish– What to Replenish and How Much– Other Things We Can’t Forget

Getting Better Results - Better Data, Better Use of Data, Better Tools, Better Control

Summary


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Company ObjectivesThe Big Picture

Bottom Line Profits (P&L)GM and Oper. Efficiency

Asset Management

Customer Service & RetentionMaintain the base

Profits Longevity

To be a profitable company forever.

Employee Happiness


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Inventory Management Objectives

Customer Service Availability (Fill Rates)

Proper Backorder Handling On Time DeliveryAccuracy: Item, Quantity, Price

Profitability (ROI)GM Improvement (Sales and Cost)

Freight Considerations - OC AnalysisEfficiencies & EOQ: C to C and C to PSurplus Inventory & Safety InventoryTurns/Days supply, ROI/T&E/GMROIWatch the C to P

(Purchasing/Replenishment, Receiving & Put-away, A/P)

Watch the C to C(Warehousing, Handling, Obsol. &

Shrink, Taxes, Ins, Interest)


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Inventory Management & Replenishment


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Replenishment Model

The Replenishment Model addresses the two objectives of

Customer Service and Profitability

WhenWhen to replenish? to replenish?What What needs to be replenished and needs to be replenished and How muchHow much??

What is incoming and will be late?What is incoming and will be late?What is incoming and will be early or is not needed?What is incoming and will be early or is not needed?

What is not needed?What is not needed?


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PNA/Level

EOQ

Order Cycle

Lead Time

Safety

What needs to be replenished and how much?

LP/EOQ

What is not needed? SP

When to Replenish? OP

Surplus Point

Line Point

Order Point

Out

0-30 days

Out In

0/- days

Too Late

Out

30/+ days

Too Early

What is incoming and will be early or is not needed?

What is incoming and will be late?


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When to Replenish

Order Point


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Demand/Usage Buckets

Sales/Xfer HistoryLost Sales

Exceptional SalesHuman input


Seasonal or Non-seasonal - Correct Method

Usage/Demand Window:A 2-3B 3-4C 4-5D 5-6E 6


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Product Lead Times

Time to acquire items from source Watch External vs. Internal Seasonality Considerations Normal “Worse” Case


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Safety Stock

Extra stock carried in inventory to protect against reasonable variation in usage (demand) and/or lead time.– Safety stock turns zero times. It is a fixed asset.– Carrying inappropriate amounts of safety stock is one of the biggest factor in keeping inventory costs

at unnecessarily high levels. Safety is often needlessly used for the correction of “bad” data.

With customers asking for higher and higher service levels, the cost of carrying safety stock is a big factor in total inventory cost. The cost of safety stock typically doubles when your service level increases from 90% to about 95%, again from 95% to 98%, and again from 98% to 99%. It doubles yet again in going from 99% to 99.2%. Yet most distributors apply broad generalizations and rules of thumb to

determine how much safety stock they will carry.


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Understanding Replenishment and Paths

Direct/Distributive Cross Dock

Supplier Supplier

CDCPoint of Sale

Point of Sale

Point of Sale

Central Whse

Supplier

CW

Point of Sale

• Product stored at CW• Pulled or Pushed to Br.• Demand/Usage rolled up

• Product cross docked to Br.• “Need” is rolled up (i.e. multi P/O combining)

• Product ships directly to Br.

Don’t do it because everyone else is doing it, do it because it makes sense.•Use Order Cycle Days analysis•Negotiate lower mins and more drops

Most companies should use some combination of the above.

Proper ARP and Method


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How it All Works“When to Replenish (OP)”

Average Monthly Demand (AMD)– Demand Buckets

» Sales» Lost Sales» Exceptional Sales» Overrides/Human

– Demand Ctrl (DC)» Average/Seasonal» Number of Months» Manual

– Trending Parameters– Proper Path

Lead Time (LT)– Lead Time Buckets– Lead Control (LC)

» Number of Receipts» Not older than» Manual

Safety (SAF)– Safety Control (SC)

» Percent/Days» Manual

– Warning!


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What to Replenish & How Much

Line Point & EOQ


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Order/Review/Transfer Cycle

Concepts of OC/RC/XC:– Timing between transactions (Targets and/or C to P depts)– Creates LP which assures we replenish all products that are within the

“cycle” of hitting their Minimum or Order Point OC/RC/XC is calculated for product lines where a vendor target is the goal. It

is how long it takes us to meet the target OC/RC/XC is manually set for non-target lines and transfers, and it is the time

between transactions based on C to P Line Point is equal to Order Point plus usage during cycle

In a Service Environment, Review Cycle does NOT mean we will review the line when that time frame expires


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Economic Order Quantity (EOQ)

The EOQ formula minimizes the “Cost of Reordering or Purchasing” and the “Cost of Keeping or Carrying” which develops the lowest total hidden inventory costs - the lowest total inventory costs. The “How Much”

decision affects your bottom line and service!

24 x Avg. Monthly Usage x Cost to Purchase (“R”eorder cost)

Unit Cost x Cost to Carry (“K”eep cost)

C to C C to PCos

t Per

Uni

t Ord

ered

EOQ

Total Cost

Cost to Carry(“K”eep Cost)

Cost to Purchase(“R”eoder Cost )

Quantity Ordered 1. Not less than “x” weeks supply (1 week)2. Not more than “x” weeks supply (1 year)


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What items? How much?Purchase or Transfer

What Items: Items Below Line Point

Order Quantity: Up to Line Point Compare to SOQ/ROQ (EOQ/Class) Minimum Run Vendor/Transfer Package

* It is important to replenish items not only below OP, but also the items below the “Cycle”. These items should be replenished at least back up to

the “Cycle”. Cycle is the days left in the cycle (OC - (Today - LLB))


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How it All Works “What and How Much - LP/OQ/Pkg”

Replen./Order/Transfer Cycle DaysFreight and C to P/T Considerations:– Vendor Minimums

» Type: $, LBS, PCS, Cubes» Target

– Internal/Manual

ROQ/SOQC to C and C to P Considerations:– EOQ:

» Cost to Carry (K cost) » Cost to Purchase (R cost)» Min and Max Weeks Supply

– Class: Break Points

Vendor/Transfer Pack Minimum Runs


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Other Things We Can’t Forget


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How it All Works“Other Essential Items”

Status Freeze Usage Method Weight/Cubes/Load Factors Proper Replenishment Paths and Proper Demand Replenishment Method


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Replenishment Method EOQ (Economic Order

Quantity):– Balances cost of carrying inventory

with cost of replenishing inventory Min/Max:

– When PNA drops below Min, order up to Max

Classification:– Ranking of products used to

determine how many months’ supply to purchase

Blanket:– You set the ordering controls,

use blanket orders for purchasing

Quantity Break:– Calculates order quantity based

on best quantity break from vendor and K cost.

Human:– You set the ordering controls

Release 4.1 addresses true OP/LP/ROQ replenishment


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How it All Works“Product Stock Level/PNA”

Level/PNA = On Hand less Committed plus Incoming On-hand accuracy everyday:

– Systems &Tools, Processes & Procedures, Education & Understanding– Good Suggested/Cycle Count Program– Make the adjustments when you find them

Accurate committed and incoming everyday:– Paperfloat and Paperflow - Open Trans. Summary Report– Dates and Quantities

Watch the consignment warehouses Use “Alternate Inventory” Buckets DWIADT and DIRTFT


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Paperfloat Control - BIIS


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Paperfloat Control - BIIS


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Normal Rounding, 1 decimal: Rounded up, No decimal: Rounded up, No decimal:AMD = Average Monthly Demand LT = Lead Time in Days EOQ = Economic Order QtyADD = Average Daily Demand SSQ = Safety Stock Quantity OQ = Order Quantity

SS% = SS%, SSD=SSDays SP = Surplus PointOP = Order Point ROQ = Recmmtd Order QtyOCD = Order Cycle Days SQ = Surplus QuantityLP = Line Point

Order Point: Line Point and Economic Order Quantity:SSQ = (AMD/30 x LT) x Safety Percent OCD = Vendor Target / Monthly Volume x 30SSQ = (AMD/30) x SSD LP = OP + (AMD/30 x OCD)OP = (AMD/30 x LT) + SSQ EOQ= SQ((24 x AMD x R) / (Unit Cost x K))Available and Level: Order Quantity and Surplus Quantity:Avail = On-hand - Committed OQ = 1. OQ = LP - Level (only if positive)Level = On-hand - Committed + Incoming 2. If EOQ>OQ, OQ=EOQ 3. Round OQ to Package Quantity

SP = LP + EOQSQ = Avail - SP (only if positive)

Understanding Replenishment


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Getting Better ResultsCollection and Use of Data

Better Tools Better Control


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Getting Better Results Fixed some things Improved some things Added some things

70 - 80% SKU Coverage to 80-92/93%

15-25,000 SKU/Buyer to 40,000-100,000

Hits and Ranking Usage Lead Time Safety Stock Order Point Adjusters Review Cycle Control Order Qty Control


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Ranking and Hits

Good Product Ranking is Critical for:– Parameter setting – Good exception reporting– Good analysis/priority reporting

Using Line Hits:– Hits: Sales, Transfers, Lost Sales, No Exc– Percentage and Set hits– New Items?– Frozen, OAN, DNR?


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Hits


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Sales/Xfer HistoryLost Sales

Exceptional SalesHuman input



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Improving Demand/Usage

Better Usage and AMU:

Lost Sales/Exception Sales (Rifle approach)Usage Control Window by RankSeasonal Trending and Advance by Lead timeTransfer Usage History vs Roll up


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OEET- Lost Sales/Exceptional Sale


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Lost Sales Tracking- Usage Logging


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Usage/Demand Window Seasonal or Non-seasonal - Correct Method Usage/Demand Window:

A 2-3B 3-4C 4-5D 5-6E 6

Window size can help control season start/end Phase shift for seasonal demand


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Usage - Seasonal Trend %

J J A J J A

20042003

Three months leadinginto 2003 season - sold100. Three months leading

into 2004 season - sold150.

Seasonal Trend % = 150 = 1.5 or 150% 100


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Usage Seasonal LT Advance

A20052004 A M J J A S

90 Day Lead Time


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Usage Roll Up

Transfer Usage History Concerns» Path exception (P/O or Transfer)» Usage exception overrides on “Child”» Changing Paths and rebuilds» Follows each warehouse’s Usage Control

Central Whse

Supplier

CW

Point of Sale

• Product stored at CW• Pulled or Pushed to Br.• Demand/Usage rolled up


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Usage Roll up


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Product Lead Times

External vs. Internal Lead Times Min and Max Lead Times Number of Receipts & Age Ignore Lead Time Lead Time Exceptions Lead Time Maintenance


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Safety Stock Safety Control by rank: Safety Control Method by Lead times Percentage or Days Safety

LT < 14 Percent LT>60A 7 50 30B 10/7 75 45/30C 14/7 100 60/30D 21/7 125/0 75/30E 0 0 0

What about Direct vs CW Child/Baby?

Safety to Available Analysis


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Safety Stock - Service and Turns

Safety Stock Level

X

X

XX

X

X

X

X

X

X

X = Actual stock available at time of receiving

Stock out

X

Properly managed safety stock will result, over time, in this configuration of remaining stock levels at time of receivingthe replenishment PO. Impossible task if done manually.

75%

25%

50%

Enhancement automates the monitoring.


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Safety Stock Level

X

X

X

X

XX

X X Stock outX

75%

25%

50%X

Safety Stock Analysis


Service Issues


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Safety Stock Level

XX

X

X

XX

XX

X

Stock out

X

75%

25%

50%

Safety Stock Analysis


Profit Issues


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Order Point Adjusters

Threshold– Manually set minimum order point

Average Sales Quantity (ASQ)– Total usage for a defined period divided by the

hits for that period 5 - Hi

– Average of 5 largest sales over a defined period (throw out the largest sale)


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Average Sales Quantity (ASQ)

Usage = 40Lead-time = 7Safety = 50% Safety

Order Point (ICAMM calc.)

S/O5

15

0

4 Hits - ASQ = Order Point of 10

2 Hits - ASQ = Order Point of 20

This enhancement is parameter driven with exception reports


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Five High (5-Hi)

Order Quantities during period:100 20

100 5010

625 10030

100

Five Largest Sales100100625100100400Total

400/4 = 100 is the 5-Hi Ordering Point

Average of Larger Sales Quantities

This enhancement is parameter driven with exception reports


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Order Point Adjusters(Will Highlight if Used)


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Properly combines the three replenishment models, i.e. proper products and proper quantities:

– Order Point Buying - Customer Service Considerations

– Line Buying - Target (Freight) and C to P Considerations

– EOQ Buying - Cost to Carry and Cost to Purchase Considerations

Transfer Replenishment– Assures up to LP– True EOQ (no RC, Pkg, etc– EOQ On/Off– EOQ Set Supply– Manual EOQ Override– Proper Rounding– WT Cycle

“Best Practices” Proper OC/RC/XC controls Proper EOQ controls EOQ/Class Method:

– Replenishes items BELOW LP– Order Quantity:

» Up to Line Point» Assures SOQ/ROQ» Rounds to Pkg Qty

Cos

t Per

Uni

t Ord

ered

EOQ

Total Cost

“K”eep Cost

“R”eoder Cost

Quantity Ordered


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Review Cycle Min, Max, Exception RC Analysis -ICAR


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Review Cycle Basis - ICAMM


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Review Cycle Basis - ICAR


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Review Cycle Basis - ICSL


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Review Cycle WT - ICSD


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Review Cycle WT - ICSL


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OQ Control - ICSD


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OQ Control - ICSL


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OQ Control - ICSW


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Some Final Thoughts

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BCC with Priority, Target & 1-Stop

“Too Late”

“Too Early”

Surplus

Monitoring and Measurement

Data

Parameters & Controls

Proactive Fixing

Generate the Numbers

The NumbersThe Numbers The ToolsThe Tools

PNA/Level

Surplus Point

Line Point or Max/EOQ

Order Point or Min

EOQ

Order Cycle

Lead Time

Safety

When to Replenish?

What is not

needed?

What is incoming and will be early or is not needed?

What is incoming and will be late?

OP, LP, EOQ Rank,AMU, Saf, RC, SP

What needs to be replenished

and how much?

Out

0-30 days

Out In

0/- days

Too Late

Out

30/+ days

Too Early


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“Branch Participation” is Essential! Sell Service the customer Controlled Replenishment (PO’s and Transfers) Good Data and Information (Rifle vs Shotgun)

– Lost and Exceptional Sales– On-hand Integrity and Paperfloat Control

Proper Backorder Handling Surplus Prevention & Disposition

– Controlled Replenishment– Help utilize the Surplus

“Smart” selling and transferring Eyes and Ears

Train the MassesTeach Them Benefits

Give Them the Tools


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Back to BasicsMost distributors DON’T: Set the system up properly Feed the system good data Understand or Use the system properly Clean up bad processes and procedures Educate their people on the system or processes Help departments work together Help work towards common goalsYet they think it will all just magically work


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Profits Service

Education

Technology

Processes

Management


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Normal service is commonplace. They can get that anywhere…

A Chinese strategist wrote thousands of years ago: “Use the normal to engage; the extraordinary to win.”


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REMEMBER!

When to ReplenishOrder Point

Service

What to Replenish and How Much

Line Point and SOQ

Profitability

Documents

“Best Practices” Inventory Management