White Paperhosteddocs.emediausa.com/White_Paper_7_Ways_to_Fix... · The 7 Ways to Fix Your Inventory Turnover Challenges Page 1 This%is%when%the%inventory%reduc1on%carousel%starts.%What’s%the%easiestway%to%lower%

7 Ways to Fix Your Inventory Turnover Challenges Tips for Lowering Inventory & Raising Service

White Paper:

© 2014 EazyStock, a division of Syncron www.eazystock.com

The 7 Ways to Fix Your Inventory Turnover Challenges

Page 1 www.eazystock.com

This is when the inventory reduc1on carousel starts. What’s the easiest way to lower inventory? It’s of course by reducing the stock level on the medium and fast movers. The inventory gets reduced and you achieve the five turns per year. The big ques1on is, at what price? When taking this approach your expedited purchasing costs go up and service levels goes down. Why does this happen? Because there was a focus on a single supply chain key performance indicator (KPI). In this case the inventory turn rate. This is not too uncommon in most companies and it can easily happen if a single problem rolls up to the management radar without them seeing the bigger KPI picture. Inventory reduc1ons can’t be managed in a vacuum and your inventory control can’t be done independently of the other variables and KPIs in your supply chain. There are a number of ques1ons you need to consider when crea1ng a long-‐term winning strategy for fixing your inventory turnover challenges:

•  What is your demand history and demand variability? •  What is your supply lead 5me and lead 5me variability? •  Do you have an efficient and effec5ve supply chain design? •  Do your manufacturing capabili5es and customer purchase characteris5cs align? •  Are you using the most cost effec5ve logis5cs for procurement and delivery? •  What is the right target service level for your business?

In order to achieve sustainable inventory reduc1on while maintaining or improving customer service, the variables that drive inventory must be improved. Too oJen, inventory is adjusted to meet financial goals, without understanding or improving management of the variables that drive inventory levels.

Our inventory turn rate is only three 0mes per year, our compe0tors are at five. We should be able to turn around

our inventory five 0mes, as well! Make it happen! -‐Your Boss

“ ”

Why is Your Boss Watching Inventory Levels?


Why is your boss watching inventory levels like a hawk? Because it shows up directly on the company’s financial reports in a very nega1ve way. There’s no line item on the balance sheet for tracking target service levels or forecas1ng accuracy. The boLom line is that inventory is expensive and it typically comprises 40% to 50% of a manufacturing or distribu1on organiza1on’s capital investment. The cost is a combina1on of the value of the product and the storage costs associated with holding the inventory. It is usually a big number that the execu1ve management team and shareholders see, and they don’t like it. There are a number of KPIs that need to be measured and managed simultaneously to obtain a holis1c view of your inventory performance. The top KPIs and variables are service level, development of capital 1ed up in stock, inventory turnover, back-‐order recovery and supplier performance.

The key to sustainable inventory reduc1ons is to focus on the input variables. But remember, the overarching goal of the organiza1on is to maximize long-‐term profits. Any aLempt to reduce inventory should be in harmony with this goal. In this white paper we will cover the top 7 ways distributors and manufacturers can beLer manage their inventory turnover to reduce inventory levels while increasing service. Let’s get started!


1 Inventory ABC ClassificaFon When it comes to classifying your inventory it is usually safe to follow the Pareto Principle, also known as the 80/20 rule. The Pareto Principle is the theory that most businesses see 80% of their sales come from roughly 20% of customers. ABC Classifica1on for inventory management is a very similar approach. Classifying your inventory items into A, B, C, and D (80%, 15%, 5%, 0%) based on sales volume is an industry best prac1ce when managing inventory. The most common metric to use is your Annual Sales Volume when doing ABC Classifica1on to calculate your inventory for each group. For example, if you run the calcula1on and your A items represent 50% of your inventory, you may not have enough inventory for these items to meet customer demand. Special considera1on needs to be taken for new and cri1cal items in your inventory. For new products, it’s an op1on to use yearly forecast es1mates to support demand es1mates. For cri1cal inventory items, you need special monitoring so you don’t run out of stock on the essen1al items that might result in customer turn else where.

A B C

Annu

al Sales Volum

e

% of Total Number of Items

80%

100%

D

2 Revised Purchase Order Cycles and QuanFFes Another effec1ve strategy for beLer managing inventory turnover is to purchase smaller and more frequent order quan11es to reduce the overall inventory you carry. Can your warehouse and staff manage more frequent purchase cycles? Can capacity loss be offset by running lower demand parts less frequently? Will there be any loss of transporta1on efficiencies by moving to smaller batches? Determining order frequencies is one of the key variables of your supply chain. One way can be to stay at the same number of annual orders but reallocated between the A, B and C and at the same 1me evaluate the demand frequency to more intelligently manage your order cycles and order quan11es. This strategy gives inventory managers more flexibility to align purchasing paLerns with actual customer demand.



3 Improved Inventory ForecasFng and Forecast Accuracy

Forecas1ng is not always the most popular subject to inventory planners and managers, but there is no escaping the conversa1on as forecas1ng is done by every make-‐to-‐stock or purchase-‐to-‐stock company. The one and only thing we know to be true with inventory forecas1ng is that it will rarely be accurate. It is possible to improve your forecas1ng but most companies make the mistake of star1ng with mathema1cal forecas1ng methods which should be the last step in the process. Inventory forecas1ng best prac1ces should begin with ensuring your data accuracy first. For example, sales and marke1ng may have been influencing your demand through pricing and promo1on ac1vity. First, you must understand and collect the inputs that drive the core of your demand. Separate out seasonality and trends. Have the outliers filtered away and separate your base demand from campaign driven demand. Use the demand that is as close to real customer demand as possible, preferably point of sales data. If you forecast off of shipments, and the shipments don’t reflect true customer order quan1ty and dates (based on unavailability and back orders), the data is tainted and will skew your forecas1ng. When you have the right inputs and the data is clean, THEN it’s 1me to review the forecas1ng methods. Ensure that you keep all data up to date as the products moves through their product lifecycles. It is important to understand that forecas1ng accuracy will require ongoing analysis and calcula1on. By calcula1ng your forecast accuracy on a regular basis you enable your organiza1on with a tool to ensure the right forecasts are being made based on the right demand paLerns.

Trends

Base Forecast

Market Knowledge

Seasonality Factors


4 Eliminate Excess and Obsolete Stock Levels

Do you know how much obsolete stock is being kept on hand in your facili1es? Is it being kept because the company can’t “afford” an expense hit this quarter to write-‐off the obsolete stock? Once your inventory reaches the obsolete stage of its life-‐cycle, it’s typically too late to take ac1ons that will result a profitable return on that investment. With good inventory policies in place, a beLer understanding of real customer demand and product life-‐cycle trends, companies can avoid this type of situa1on. But be warned that if you don’t address obsolete stock today, it will just con1nue to grow. Don’t let accoun1ng drive poor opera1ng rules. Get obsolete inventory off the books, and u1lize that open warehouse space for produc1ve and profitable inventory turns. If you iden1fy excess stock, which is stock you have too much of on hand compared to your forecasted demand, try to accelerate sales with the help of your marke1ng and sales teams before it becomes obsolete.

5 Understand Your Customers’ Service Level Needs

What kind of service, in terms of lead 1me and availability, do your customers require? It is no use to provide a higher service than required as it costs your company money. Understand how your customers are using your products and what they expect in availability and delivery 1me. If a 7 day lead 1me is good enough for your customer, then you might be able to lower your inventory levels and rely heavier on smaller expedited orders to save on inventory storage costs. However, in today’s compe11ve environment, you cannot forget that the customer is king. If you fail to deliver sales orders in a 1mely manner, your customers will not hesitate to jump to one of your compe1tors. You just might find that you have to shorten lead 1mes and increase availability of your inventory just to keep up with your compe1tors. Whatever the case, understanding your customers’ needs is cri1cal to your success.


6 Reduce the Variability of Your Demand Does your organiza1on struggle with reducing or elimina1ng large end-‐of-‐period buys (that were only to meet quotas)? This is an extremely difficult habit to break and requires support all the way up to the top of your organiza1on if there is to be las1ng, sustainable change. One of the ways to steady out demand variability is to analyze and study the largest spikes in your historical demand. What caused them and did they have a nega1ve impact on your sales and service delivery? If you can iden1fy the different demand paLerns and alter these paLerns in the future, your vola1lity will be much more predictable. In turn, your forecas1ng, planning and replenishment prac1ces will become more controlled and manageable.

Fast Positive Trend New

Slow

Lumpy Negative Trend Dying

Obsolete Erratic

The 9 Demand PaTerns of Inventory

Variability is highly correlated with lead 1me thus, shorter lead 1mes generally have less variability. Iden1fying your demand vola1lity and discovering the cause will help you beLer plan to reduce that variability, which in turn will help you lower inventory levels and costs.


7 Align Your Company KPI Measurements

Does it always seem like leadership, finance, opera1ons and sales are on different pages of the same book? Many organiza1ons have departmental breakdowns when it comes to defining opera1onal success.

Let’s look at an example:

1.  The inventory planning manager is compensated based on having low quan11es of finished

goods in inventory. He likes low inventory in the warehouses, because management is happy with the reduc1on in capital costs. Lower inventory levels, good for the organiza1on, right?

2.  On the other hand we have the sales manager that wants everything in the warehouse so when that big new sales order comes in, everything is available, because she is compensated on selling more product. Increased sales, good for the organiza1on, right?

3.  Then we have the produc0on manager who gets a bonus based on opera1onal efficiency. The produc1on manager likes long stable produc1on runs resul1ng in lowering the unit cost by increasing the overall equipment efficiency and man power u1liza1on. Good for the organiza1on, right?

Do you see the conflict?

The compe1ng performance measurements result in the produc1on manager disregarding short produc1on cycles to produces excess stock to get his u1liza1on up. The inventory manager won’t accept the goods at the warehouse because he doesn’t want finished goods inventory going up and infla1ng his carrying costs. Inventory gets stored at the plant or in trailers off site as a result. The sales manager inks a big deal but the stock is not available at the warehouse, so it gets expedited from another plant or an off-‐site loca1on risking the loss of the sale. The boLom line is everyone gets his or her bonus but the supply chain is anything but efficient.

Create a Holistic View


In conclusion, inventory is the measuring s1ck of your en1re supply chain. It reflects the agility and profitability of your supply chain. The only sustainable way to reduce inventory is to improve your supply chain processes. To do this, your organiza1on needs an end-‐to-‐end view of the en1re chain and the walls between departments need to be torn down. Distributors and manufacturers that keep a close eye on the following KPI’s will effec1vely reduce inventory levels and improve inventory turns:

•  Target service levels •  Capital 1ed up in stock •  Back order recovery •  Supplier performance

There are different types of systems that support planners and purchases with their day to day work. The most common system u1lized by the distributor and manufacturing industries are Enterprise Resource Planning (ERP) systems. The issue is that ERP systems do not help op1mize inventory management. ERP systems were developed for transac1on processing, data collec1on and data repor1ng. Inventory planning and op1miza1on solu1ons establish the op1mal mix between inventory investment and service levels for each inventory item at each loca1on. Review your ERP-‐system func1onality and evaluate poten1al add-‐on solu1ons that can help you beLer manage the inventory challenges we addressed in this white paper. There is huge poten1al savings that can be achieved with the right type of solu1on. Inventory planning solu1ons keep all your planning parameters up to date and ensure that each item is planned and replenished in the best possible way. In addi1on you get all of your KPIs calculated and updated automa1cally so you can follow service level, development of your capital 1ed up in the stock, backorders, etc. alongside with the inventory turnover rate which was the one KPI metric that got all of this started in the first place.

Systematize Your Forecasting, Planning and Replenishment Processes

About EazyStock


EazyStock provides inventory op1miza1on soJware for small and midsized businesses that seek to lower inventory levels and raise service rates while making demand forecas1ng and inventory planning easy. EazyStock’s preconfigured, cloud-‐based approach to op1miza1on allows a company to leverage the data generated by exis1ng ERP systems to achieve op1miza1on without the need for costly or complex implementa1ons or integra1on projects. EazyStock is a division of Syncron, a privately-‐held company with opera1ons and partners world-‐wide.

This white paper is a knowledge ar1cle produced by EazyStock, a cloud-‐based inventory op1miza1on soJware. Click below to sign up for a free 30 day trial to test drive the solu1on. www.eazystock.com/free-‐trial

Documents

White Paperhosteddocs.emediausa.com/White_Paper_7_Ways_to_Fix... · The 7 Ways to Fix Your Inventory Turnover Challenges Page 1 This%is%when%the%inventory%reduc1on%carousel%starts.%What’s%the%easiestway%to%lower%