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The Basics of Inventory Management (for People NOT Responsible for Inventory Management)

The Basics of Inventory Management (for People NOT Responsible for Inventory Management). Mark Tomalonis Principal WarehouseTWO, LLC. Three Questions. “Why is this NOT in stock?” “How did we end up with all of this surplus inventory?”

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The Basics of Inventory Management (for People NOT Responsible for Inventory Management)

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  1. The Basics of Inventory Management(for People NOT Responsible for Inventory Management) Mark Tomalonis Principal WarehouseTWO, LLC

  2. Three Questions • “Why is this NOT in stock?” • “How did we end up with all of this surplus inventory?” • “What do you do for a living, inventory control person?” ✓

  3. Workshop Topics • To stock or not to stock? • Inventory management performance metrics • Basics of inventory management • Answers to the three questions ✓

  4. To Stock or Not to Stock? • Benefits & costs of stocking an item • Benefits & costs of NOT stocking an item • Finding a balance • The cost of customer satisfaction ✓

  5. Benefits & Costs of Stocking an Item Benefits • Best product availability • High customer satisfaction • Low transaction cost • pick, pack& ship Costs • Warehousing/storage • Material handling staff • Reduces available cash / credit line • Bad investment? • damage/theft/shrinkage • obsolescence ✓

  6. Benefits & Costs of NOT Stocking an Item Benefits • Frees up cash/credit • Less warehousing • Avoids the purchasing of future surplus inventory Costs • Higher transaction cost • PO, receipt, invoice • loss of discount? • expedited freight fees? • Lower customer satisfaction • lose an order? • lose a customer? ✓

  7. Inventory Management Performance Metrics: Definitions SERVICE LEVEL • Percent of sales order line items available to allocate to each sales order line at the time of new sales order entry • “Was enough of this item is stock to fulfill the demand for this new sales order?” • Measures the performance of your inventory, from your customer’s perspective ✓

  8. Inventory Management Performance Metrics: Definitions ON-TIME-DELIVERY • Percent of all order line items shipped by a specified date • “Did this order line item ship prior to <date>?” • Measures the performance of your inventory, from your customer’s perspective ✓

  9. Inventory Management Performance Metrics: Definitions ON-TIME-DELIVERY • What’s the “specified” date? • original customer requested date • original promise date • original negotiated committed-to date • modified requested, promise or committed-to date ✓

  10. Inventory Management Performance Metrics: Definitions TURNS • annual (or annualized) cost-of-goods-sold ($ACOGS) divided by value of current inventory • “How much have I invested in inventory to support my company’s sales?” • Measures efficiency of your inventory, from a financial perspective ✓

  11. Inventory Management Performance Metrics SERVICE LEVEL ON-TIME-DELIVERY TURNS How does my company’s ERP system measure these metrics? ✓

  12. Maximize Service Level! Stock MORE! • Manufacturers will never “get” the importance of short lead times • Your competitors have everything in stock • Blame it on the internet: • everything and anything is available NOW! • Customers have more choices ✓

  13. Maximize Turns! Stock LESS! $Annual Sales $Cost of Goods Sold (at 27% GM) 2 turns 4 turns 6 turns 8 turns ✓

  14. The Challenge: Finding a Balance Stock MORE! Stock LESS! ✓

  15. The Cost of “Service Level” Combined Costs Transactions Costs Inventory Carrying Costs ✓

  16. The Basics of Inventory Management • Scope • Four parameters that determine stocking disposition • Possible item dispositions • Stocking methods • How much to stock? $ACOGS analysis • Inventory plan decision flow chart • Managing to Expectations ✓

  17. Scope of Inventory Management • Balance SERVICE LEVEL and TURNS • maximize customer satisfaction • maximize asset (inventory) efficiency • Do it accurately, with no errors • Do it quietly, without whining ✓

  18. Four Parameters that Determine Stocking Disposition • Unit cost • Quantity sold (in one year) • Number of times sold (in one year; “# of hits”) • Who buys it (distribution of sales by customer) ✓

  19. Four Parameters that Determine Stocking Method Examples ✓

  20. Possible Item Dispositions (by # of Hits) # hits in one year high medium slow inactive # hits (in one year) all items, sorted by decreasing # hits (in one year) ✓

  21. Inventory Management: Definitions Forecasted Demand (anticipated consumption) • This is what your company’s ERP system thinks you are going to sell • FMD (forecasted monthlydemand) • FDD (forecasted dailydemand; FMD/30) ✓

  22. Inventory Management: Definitions • HIT(order) • LEAD TIME (LT) (a calculated average) • SAFETY STOCK (SS) (in days’ of demand) ✓

  23. Inventory Management: Definitions • NET STOCK (NS) = on hand (physically present) - allocated (to an order, transfer, assembly) - on backorder + on open purchase order (PO) ✓

  24. Stocking Methods… …tell you WHEN to buy …tell you HOW MUCH to buy ✓

  25. Stocking Methods • Static (“minimum-maximum”) • Dynamic (“Up-To”) • Micro-Managed (high volume, high risk) • Micro-Managed (exceptional circumstances) • Non-stock (potential stock) • Non-stock (not subject to being stocked EVER) ✓

  26. Static Inventory Plan (“MIN-MAX”) • “minimum-maximum” (“MIN-MAX”) • two static control values, in quantities of the item • Intended to be used for: • infrequently sold items (e. g.: 3 to 6 “hits” per year) • typical interval between “hits” is greater than lead time ✓

  27. Static Inventory Plan (“MIN-MAX”) • WHEN to buy • net stock falls below “minimum” value (NS < MIN) • “minimum” value is a multiple of average “hit” quantity • HOW MUCH to buy • “maximum” value minus net stock (MAX – NS) • “maximum” value is a higher multiple of average “hit” quantity • Demonstration… ✓

  28. Static Inventory Plan (“MIN-MAX”) • Effect on service level and turns • “MIN” affects service level • “MAX” affects “turns” ✓

  29. Static Inventory Plan (“MIN-MAX”) PROs • easy to understand • OK for slow-moving items CONs • does not adapt to changes in consumption or lead time • easily misapplied to high usage items • easily misapplied to items with long lead times ✓

  30. Static Inventory Plan (“MIN-MAX”) How does my company’s ERP system control a static inventory plan? ✓

  31. Dynamic Inventory Plan (“Up-To”) • “Up-To” (“UPTO”) • control values are in days’ consumption, based on trailing average monthly usage • Intended to be used for: • frequently sold items (more than 6 “hits” per year) • items for which consumption and/or lead time changes over time ✓

  32. Dynamic Inventory Plan (“Up-To”) • WHEN to buy • net stock falls below “Order Point” (OP) • OP = FDU (LT+ RC + SS) • Example: • FDU= 5 units (= FMUof 150, divided by 30 days) • LT = 30 days • RC = 14 days (two weeks) • SS = 20 days • OP = 5 x (30 + 14 + 20) = 320 ✓

  33. Dynamic Inventory Plan (“Up-To”) • HOW MUCH to buy • “Order Quantity” (OQ) • OQ = FMUx MS (MS = # of months’ supply) - NS • Example: • FMU= 150 units per month • MS = 2 months’ supply • NS = 100 units • OQ = (150 x 2) – 100 = 200 • Demonstration… ✓

  34. Dynamic Inventory Plan (“Up-To”) • Effect on service level and turns • SS (safety stock, in days) affects service level • MS (months’ supply) affects “turns” ✓

  35. Dynamic Inventory Plan (“Up-To”) PROs • adapts to changes in consumption and lead time • best tool to increase “turns’ CONs • difficult to understand; not intuitive • multiple control values to select (MS, RC, SS) ✓

  36. Dynamic Inventory Plan (“Up-To”) How does my company’s ERP system control a dynamic inventory plan? How does my company’s ERP system calculate Forecasted Demand? If the company that provides my ERP system can predict the future, why doesn’t it make software to help me win in the stock market???? ✓

  37. Micro-Managed Items:High Volume, High Risk • Qualifiers • item’s $ACOGS in top quartile of total $ACOGS • top customer consumes 50%+ of item’s consumption • Why it matters • most common source of future surplus • Recommended action • review these items every month • collaborate with customer (forecast) ✓

  38. Micro-Managed Items:Exceptional Circumstances • Qualifiers • stocked per salesman’s request • items consumed but not sold (Teflon tape) • Why it matters • potential for future surplus or unintended stock-out • Recommended action • isolate from computerized auto-reclassification • manually review quarterly ✓

  39. How Much to Stock? $ACOGS Analysis • x • x • x • x • Demonstration… ✓

  40. Inventory Plan Constants by ABCD • table to determine multiples of average order size (for min/max) or months’ supply and safety stock (for Up-To) ✓

  41. Possible Item Dispositions (by # of Hits) # hits in one year high medium slow inactive DYNAMIC or STATIC STATIC or NON-STOCK NON-STOCK # hits (in one year) DYNAMIC all items, sorted by decreasing # hits (in one year) ✓

  42. Quarterly Inventory Plan Method Selector (Concept) Start Recent & anticipated sales activity? Lots of hits? High $$$ mostly to one customer? YES YES YES NO NO NO Special circumstances? Static Dynamic YES Micro-Managed Nonstock NO ✓

  43. Quarterly Inventory Plan Method Selector (Example) Start last 6mo: 2+ hits? prev. 6mo: 1+ hits? future sales? last 6mo: 4+ hits? $ACOGS > $25K? > 75% sales to one customer? YES YES YES NO NO NO Stock request? New customer? Strategic item? Service item? Static Dynamic YES Micro-Managed Nonstock NO ✓

  44. Four Parameters that Determine Stocking Method Examples ✓

  45. Inventory Control Values • Step 1: Define $ACOGS thresholds for ABCD classification • (show screenshot of ABCD tool) ✓

  46. Inventory Control Values • Step 2: Define control values for statically and dynamically managed items, by ABCD classification • (table that shows the above) ✓

  47. Managing to Expectations • Clearly define performance expectations • service level • on-time delivery • turns • Measure and review at least quarterly! • measure by ABCD classification and inventory control method • change ABCD threshold values and control values and then measure again… ✓

  48. What Could Possibly Go Wrong???? • You have assigned the responsibility of inventory management to the wrong person • Item usage is not reviewed often enough • Control values are not set correctly or reviewed • How your ERP system works is not understood • The tools in your ERP system are not used ✓

  49. Who Makes a Good Inventory Manager? • Pays attention to details • Is a good puzzle solver (crosswords, Sudoku, etc.) • Knows your ERP system and MS Excel • Is comfortable saying “no” • Is comfortable saying “no” to YOU • Does not crave glory or attention ✓

  50. Three Questions • “Why is this NOT in stock?” • “How did we end up with all of this surplus inventory?” • “What do you do for a living, inventory control person?” ✓

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