“Best Practices” Inventory Management

1. Maximizing Profits and Staying in Business Forever How it Works “Best Practices” Inventory Management Taking a Closer Look Profits, Customer Service, Longevity Grant W. Howard 13214 Wallace Road Manchester, MI 48158 (734) 428-0529 ghoward685@aol.com

2. 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

3. Company ObjectivesThe Big Picture Profits Longevity Bottom Line Profits(P&L) GM and Oper. Efficiency Asset Management Customer Service & Retention Maintain the base Employee Happiness To be a profitable company forever.

4. Customer Service Availability (Fill Rates) Proper Backorder Handling On Time Delivery Accuracy: Item, Quantity, Price Profitability (ROI) GM Improvement (Sales and Cost) Freight Considerations - OC Analysis Efficiencies & EOQ: C to C and C to P Surplus Inventory & Safety Inventory Turns/Days supply, ROI/T&E/GMROI Inventory Management Objectives Watch the C to C (Warehousing, Handling, Obsol. & Shrink, Taxes, Ins, Interest) Watch the C to P (Purchasing/Replenishment, Receiving & Put-away, A/P)

5. Inventory Management & Replenishment

6. Replenishment Model The Replenishment Model addresses the two objectives of Customer Service and Profitability When to replenish? What needs to be replenished and How much? What is incoming and will be late? What is incoming and will be early or is not needed? What is not needed?

7. PNA/Level Surplus Point What is not needed? SP EOQ What needs to be replenished and how much? LP/EOQ Line Point Order Cycle When to Replenish? OP Order Point Too Late Too Early Lead Time 0/- days 0-30 days 30/+ days Out In Out Out What is incoming and will be late? What is incoming and will be early or is not needed? Safety

8. When to Replenish Order Point

9. Sales/Xfer History Lost Sales Exceptional Sales Human input Demand/Usage Buckets Seasonal or Non-seasonal - Correct Method Usage/Demand Window: A 2-3 B 3-4 C 4-5 D 5-6 E 6 Demand/Usage Buckets

10. Product Lead Times • Time to acquire items from source • Watch External vs. Internal • Seasonality Considerations • Normal “Worse” Case

11. 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.

12. Central Whse Supplier CW Point of Sale • Product stored at CW • Pulled or Pushed to Br. • Demand/Usage rolled up Understanding Replenishment and Paths Direct/Distributive Cross Dock Supplier Supplier Point of Sale Point of Sale CDC • 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 Point of Sale • Product cross docked to Br. • “Need” is rolled up (i.e. multi P/O combining)

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

14. What to Replenish & How Much Line Point & EOQ

15. 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

16. EOQ Total Cost 24 x Avg. Monthly Usage x Cost to Purchase (“R”eorder cost) Unit Cost x Cost to Carry (“K”eep cost) Cost Per Unit Ordered Cost to Carry (“K”eep Cost) C to C C to P Cost to Purchase (“R”eoder Cost ) 1. Not less than “x” weeks supply (1 week) 2. Not more than “x” weeks supply (1 year) Quantity Ordered 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!

17. 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 What items? How much? * 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))

18. Replen./Order/Transfer Cycle Days Freight and C to P/T Considerations: Vendor Minimums Type: $, LBS, PCS, Cubes Target Internal/Manual ROQ/SOQ C 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 How it All Works “What and How Much - LP/OQ/Pkg”

19. Other Things We Can’t Forget

20. How it All Works“Other Essential Items” • Status • Freeze • Usage Method • Weight/Cubes/Load Factors • Proper Replenishment Paths and Proper Demand • Replenishment Method

21. 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 Replenishment Method Release 4.1 addresses true OP/LP/ROQ replenishment

22. 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

23. Paperfloat Control - BIIS

24. Paperfloat Control - BIIS

25. Understanding Replenishment Normal Rounding, 1 decimal:Rounded up, No decimal: Rounded up, No decimal: AMD = Average Monthly Demand LT = Lead Time in Days EOQ = Economic Order Qty ADD = Average Daily Demand SSQ = Safety Stock Quantity OQ = Order Quantity SS% = SS%, SSD=SSDays SP = Surplus Point OP = Order Point ROQ = Recmmtd Order Qty OCD = Order Cycle Days SQ = Surplus Quantity LP = Line Point Order Point: Line Point and Economic Order Quantity: SSQ = (AMD/30 x LT) x Safety Percent OCD = Vendor Target / Monthly Volume x 30 SSQ = (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 + EOQ SQ = Avail - SP (only if positive)

26. Getting Better Results Collection and Use of Data Better Tools Better Control

27. 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 Getting Better Results

28. 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?

29. Hits

30. Sales/Xfer History Lost Sales Exceptional Sales Human input Demand/Usage Buckets Demand/Usage Buckets

31. Better Usage and AMU: Lost Sales/Exception Sales (Rifle approach) Usage Control Window by Rank Seasonal Trending and Advance by Lead time Transfer Usage History vs Roll up Improving Demand/Usage

32. OEET- Lost Sales/Exceptional Sale

33. Lost Sales Tracking- Usage Logging

34. Usage/Demand Window • Seasonal or Non-seasonal - Correct Method • Usage/Demand Window: A 2-3 B 3-4 C 4-5 D 5-6 E 6 • Window size can help control season start/end • Phase shift for seasonal demand

35. Three months leading into 2003 season - sold 100. Three months leading into 2004 season - sold 150. 2003 2004 J J A J J A Usage - Seasonal Trend % Seasonal Trend % = 150 = 1.5 or 150% 100

36. 90 Day Lead Time 2004 A M J J A S 2005 A Usage Seasonal LT Advance

37. 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 Usage Roll Up

38. Usage Roll up

39. 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

40. Safety Stock • Safety Control by rank: • Safety Control Method by Lead times • Percentage or Days Safety LT < 14 Percent LT>60 A 7 50 30 B 10/7 75 45/30 C 14/7 100 60/30 D 21/7 125/0 75/30 E 0 0 0 What about Direct vs CW Child/Baby? • Safety to Available Analysis

41. Safety Stock - Service and Turns Properly managed safety stock will result, over time, in this configuration of remaining stock levels at time of receiving the replenishment PO. Impossible task if done manually. Enhancement automates the monitoring. X = Actual stock available at time of receiving X X Safety Stock Level 75% X X X 50% X X X X 25% Stock out X X

42. Safety Stock Level 75% 50% X X X 25% X X X Stock out X X X X Safety Stock Analysis Service Issues X = Actual stock available at time of receiving

43. X X X X Safety Stock Level X X 75% X X X 50% X 25% Stock out Safety Stock Analysis Profit Issues X = Actual stock available at time of receiving

44. 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)

45. Average Sales Quantity (ASQ) Usage = 40 Lead-time = 7 Safety = 50% Order Point (ICAMM calc.) 15 Safety 5 0 S/O 4 Hits - ASQ = Order Point of 10 2 Hits - ASQ = Order Point of 20 This enhancement is parameter driven with exception reports

46. Five High (5-Hi) Average of Larger Sales Quantities Order Quantities during period: 100 20 100 50 10 625 100 30 100 Five Largest Sales 100 100 625 100 100 400 Total 400/4 = 100 is the 5-Hi Ordering Point This enhancement is parameter driven with exception reports

47. Order Point Adjusters(Will Highlight if Used)

48. 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 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 EOQ Total Cost Cost Per Unit Ordered “K”eep Cost “R”eoder Cost Quantity Ordered “Best Practices”

49. Review Cycle Min, Max, Exception RC Analysis -ICAR

50. Review Cycle Basis - ICAMM