Transcript Lorem Ipsum

“Best
Inventory Management
Management
“Best Practices”
Practices” Inventory
Maximizing Profits and Staying in Business Forever
How it Works
Taking a Closer Look
 2005 Grant W. Howard Company
Grant W. Howard
13214 Wallace Road
Manchester, MI 48158
(734) 428-0529
[email protected]
1
Today
Day 1 - 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
•Generating the Numbers
•Summary
Taking a Closer Look
2
 2005 Grant W. Howard Company
2
Company Objectives
The Big Picture
Profitability
Growth
Bottom Line Profits (P&L)
GM and Oper. Efficiency
Asset Management
Longevity
Customer Service & Retention
Maintain the base
Employee
Happiness
 2005 Grant W. Howard Company
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Inventory Management Objectives
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
Efficiency & Asset Mgt: CtoC and CtoP
Surplus Inventory & Safety Inventory
Turns/Days supply, ROI/T&E/GMROI
Watch the C to C
Watch the C to P
(Warehousing, Handling, Obsol. &
(Purchasing/Replenishment, Receiving &
Shrink, Taxes, Ins, Interest)
Put-away, A/P)
 2005 Grant W. Howard Company
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Inventory Management
& Replenishment
 2005 Grant W. Howard Company
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The Replenishment Model
A Good Replenishment Model
addresses the two objectives of
Customer Service and Profitability
When to Replenish?
What to Replenish and How much?
What is not needed?
 2005 Grant W. Howard Company
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The Basics - Make Sure
What is
not
Needed?
Surplus Point
EOQ
Line Point or Max/EOQ
When to
Replenish?
Order
Cycle
PNA/Level
What to
Replenish and
How Much?
Order Point or Min
Lead
Time
Safety
When, What, How Much?
What is not Needed?
 2005 Grant W. Howard Company
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When to Replenish
Order Point
 2005 Grant W. Howard Company
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Demand/Usage
Sales/Transfer History
Lost Sales
Exceptional Sales
Human input
Seasonal?
Window Size?
Method?
Paths?
Demand/Usage Buckets
 2005 Grant W. Howard Company
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Product Lead Times
Time to acquire items from source
 Watch External vs. Internal
 Seasonality Considerations
 Normal “Worse” Case

 2005 Grant W. Howard Company
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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.
 2005 Grant W. Howard Company
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Understanding Replenishment
and Paths
Direct/Distributive
Supplier
Point of
Sale
Point of
Sale
Central Whse
Cross Dock
Supplier
Supplier
CW
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.
Point of
Sale
Point of
Sale
• Product stored at CW
• Product cross docked to Br.
• Pulled or Pushed to Br.
• “Need” is rolled up (i.e. multi
P/O combining)
• Demand/Usage rolled up
Proper ARP and Method
 2005 Grant W. Howard Company
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How it All Works
“When to Replenish (OP)”

Average Monthly
Usage (AMU):

– Lead Time Buckets
– Lead Control (LC)
– Usage Buckets
»
»
»
»
Sales/Transfers
Lost Sales
Exceptional Sales
Overrides/Human
– Usage Ctrl (UC)
» Average/Seasonal
» Number of Months
» Manual
– Trending Parameters
– Proper Path
 2005 Grant W. Howard Company
Lead Time (LT):
» 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
 2005 Grant W. Howard Company
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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
 2005 Grant W. Howard Company
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Economic Order Quantity (EOQ)
EOQ
Total Cost
Cost to Carry
(“K”eep Cost)
Cost to Purchase
(“R”eoder Cost )
Quantity Ordered
C to C
C to P
1. Not less than “x” weeks supply (1 week)
2. Not more than “x” weeks supply (1 year)
24 x Avg. Monthly Usage x Cost to Purchase (“R”eorder cost)
Unit Cost x Cost to Carry (“K”eep cost)
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!
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 2005 Grant W. Howard Company
EOQ
Usage Rate
Item Cost
Cost to Carry
Cost to Purchase
EOQ
1
$100.00
24%
$4.00
2
Usage Rate
Item Cost
Cost to Carry
Cost to Purchase
EOQ
100
$1.00
24%
$4.00
200
$100 Month Usage, 2 Month Supply $100 Month Usage, 2 Month Supply
$Mth Usage
.01
.10
1
10
100
1,000
10,000
100,000
1,000,000
Mth’s Supply
200 (16.67 years)
63 (5.25 years)
20 (1.67 years)
6.3 (189 days)
2 (60 days)
.63 (19 days)
.2 (6 days)
.063 (1.9 days)
.02 (.6 day)
$Inv
2.00
6.30
20
63
200
630
2000
6,300
20,000
$CtoC
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
$CtoP
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
4.00
M’s Sup (2.00CtoP)
141 (11.75 years)
45 (3.75 years)
14.1 (1.18 years)
4.5 (135 days)
1.41 (42 days)
.45 (13.5 days)
.141 (4.2 days)
.045 (1.35 days)
.014 (.42 day)
$CtoC = $Inv x Month’s Supply x 1/2 x 2%
(1/2 for Average Inventory, 2% Monthly CtoC)
What about freight percentage and RC days?
 2005 Grant W. Howard Company
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What Items and How Much?

“What” to Replenishment/Line Point:
– Replenishment Options:
» Line Buy (Make Target/Review Cycle)
» Fill In Transfer/Emergency Buy
» Do Nothing
– Replenish all items that will go BOP before the
next replenishment cycle (Balance the Line)

Surplus Point
EOQ
Line Point or Max/EOQ
Order Cycle
“How Much” to Replenish/Order
Quantity:
– Up to Line Point/Remaining Cycle (Cycle
Coverage - Freight/C to P)
– Compare to Suggested Order Quantity
(EOQ/Class - CtoC and CtoP)
– Minimum Run
– Vendor/Transfer Package Rounding
 2005 Grant W. Howard Company
PNA/Level
Order Point or Min
Lead Time
Safety
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How it All Works
“What and How Much - LP/OQ/Pkg”

Review/Order/Transfer
Cycle Days:

Cost to Carry and Cost to Purchase
Considerations:
» EOQ:
Freight and Cost to Purchase/Transfer
Considerations:
» Vendor Minimums
• Cost to Carry (K cost)
• Cost to Purchase (R cost)
• Min and Max Weeks Supply
• Type: $, LBS, PCS, Cubes
• Target
» Class: Break Points
» Internal/Manual - C to P


 2005 Grant W. Howard Company
Order Quantity:
Minimum Runs
Vendor/Transfer Pack
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Other Things We
Can’t Forget
 2005 Grant W. Howard Company
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How it All Works
“Other Essential Items”
Status
 Freeze
 Usage Method
 Weight/Cubes/Load Factors
 Proper Replenishment Paths
 Replenishment Method

 2005 Grant W. Howard Company
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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
 2005 Grant W. Howard Company
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“When, What and How Much”

“When” to Replenish
–
–

Surplus Point
EOQ
“What” to Replenish
–
–
–
–

Fixed Interval - Timeframe or Target - Profits only (Watch
for nothing BOP)
Flexible Interval - Trigger Point (Order Point) - Service and
Profits
Line Point or Max/EOQ
Replenishment Cycle (Line Point)
Controls the frequency of P/O’s and Transfers
This is the speed control (Frequency)
Target and/or C to P driven
“How Much” to Replenish
–
–
–
–
PNA/Level
Order Point or Min
Lead Time
Order Quantity
Controls the quantity of items on P/O’s and Transfers
This is the workload/spread (Amplitude)
C to C, C to P and Freight driven
 2005 Grant W. Howard Company
Order Cycle
Safety
What’s the Difference
RC = 0; RC = 1 week
OQ = 1 week; OQ=4 weeks
RC = 1 week & OQ=1 week; RC = 1 week & OQ = 4 weeks
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Profitability, Asset
Management, and
Efficiency
Better Numbers
Better Tools
 2005 Grant W. Howard Company
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Getting Better Results



Fix some things
Improve some things
Add some things






70 - 80% SKU
Coverage to 80-95+%
15-25,000 SKU/Buyer
to 40,000-100,000+
 2005 Grant W. Howard Company



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?
 2005 Grant W. Howard Company
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Demand/Usage
Sales/Transfer History
Lost Sales
Exceptional Sales
Human input
Seasonal?
Window Size?
Method?
Paths?
Demand/Usage Buckets
 2005 Grant W. Howard Company
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Improving Demand/Usage
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
 2005 Grant W. Howard Company
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Lost Sales & Exceptional Sales
Key for Good Demand
•Lost Sales = Qty Less Ship and B/O
•Exceptional Sales is flagged by a “X” in the Tax Field
Exceptional Sale
 2005 Grant W. Howard Company
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Lost Sales/Exceptional Sale
 2005 Grant W. Howard Company
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Usage/Demand Window
Seasonal or Non-seasonal - Correct Method
 Usage/Demand Window:

A
B
C
D
E

2-3
3-4
4-5
5-6
6
Window size can help control season start/end
 2005 Grant W. Howard Company
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Usage - Seasonal Trend %
Seasonal Trend % = 150 = 1.5 or 150%
100
J
J
A
Same Period one year ago usage 100
 2005 Grant W. Howard Company
J
J
A
Previous 3 months usage 150
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Usage Seasonal LT Advance
90 Day
Lead
Time
A
 2005 Grant W. Howard Company
M
J
J
A
S
A
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Usage Roll Up
Central Whse
Transfer Usage Concerns:
Path exception (P/O or Transfer)
Usage exception overrides on “Child”
Changing Paths and rebuilds
Follows each warehouse’s Usage Control
Supplier
CW
Point of
Sale
AMU=26
Dep=12
Total=36
AMU=12
• Product stored at CW
• Pulled or Pushed to Br.
• Demand/Usage rolled up
 2005 Grant W. Howard Company
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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

 2005 Grant W. Howard Company
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Safety Stock



Safety Control by rank:
Safety Control Method by Lead times
Percentage or Days Safety
A
B
C
D
E
LT < 14
7
10/7
14/7
21/7
0
Percent
50
75
100
125/0
0
LT>60
30
45/30
60/30
75/30
0
What about Direct vs CW Child/Baby?

Safety to Available Analysis
 2005 Grant W. Howard Company
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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
X
Safety Stock Level
75%
X
X
50%
X
X
X
X
 2005 Grant W. Howard Company
X
X
25%
Stock out
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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)
 2005 Grant W. Howard Company
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Average Sales Quantity (ASQ)
Usage = 40
Lead-time = 7
Safety = 50%
15
5
0
Order Point (ICAMM calc.)
Safety
S/O
4 Hits - ASQ = Order Point of 10
2 Hits - ASQ = Order Point of 20
Cost and Hits Considerations
 2005 Grant W. Howard Company
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Five High (5-Hi)
Average of Larger Sales Quantities
Order Quantities during period:
Five Largest Sales
100
100
20
100
100
625
50
100
10
100
625
Total
400
100
30
400/4 = 100 is the 5-Hi Ordering Point
100
Costs and Hits Considerations
 2005 Grant W. Howard Company
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“Best Practices”
Better Numbers - Line Point and OQ

Review/Order Cycle Improvements:
– Based on Purchasing History or
Extended AMU
– Min, Max and Exception
– Transfer Cycle Days
– OC/RC Analysis

Order Quantity (EOQ) Improvements:
– Co, Whse, Pline, Product level
– Vendor and Transfer (Path)
– Min and Max Supply
– Calculate but do not use (SP)


Use of Hits and “Smart” Item Ranking
“Smart” Parameters and Controls
Surplus Point
EOQ
Line Point or Max/EOQ
Order
Cycle
PNA/Level
Order Point or Min
Lead Time
Safety
EOQ
Total Cost
“K”eep Cost
“R”eoder Cost
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 2005 Grant W. Howard Company
Quantity Ordered
Data, Set up, and
Generating the
Numbers
It All Starts Here
 2005 Grant W. Howard Company
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Proactive Fixing
BCC with
Priority,
Target &
1-Stop
Data
What is
not
needed?
Surplus Point
EOQ
Parameters &
Controls
What needs to
be replenished
and how much?
Line Point or Max/EOQ
When to
Replenish?
Order
Cycle
PNA/Level
Order Point or Min
Lead
Time
The Numbers
“Too Late”
The Tools
Safety
Too Late
Generate the
Numbers
Too Early
0/- days
Out
0-30 days
In
What is incoming
and will be late?
30/+ days
Out
What is incoming
and will be early
or is not needed?
Surplus
OP, LP, EOQ
Rank,AMU,
Saf, RC, SP
“Too Early”
Out
Monitoring and Measurement
Parameters and Set-up
“Smart” Parameters Maintenance
 Warehouse Maintenance
 Product Line Maintenance
 Product Maintenance
At start up and as needed

 2005 Grant W. Howard Company
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“Smart” Parameters
Product Record
Product Line
Record
Table Driven/Automated
Vendor Record
Depth
Warehouse
Record
Balanced
Company
Record
 2005 Grant W. Howard Company
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Data




Usage buckets: Sales, Transfers, Lost Sales,
Exceptional Sales, Manual/Automated overrides
Lead Time buckets: P/Os, Transfers, Manual
overrides
Purchasing History: Review Cycle Calculation
Option
Purchasing Net Available: On-hand and open docs
– Orders, Transfers, P/Os, Workorders
 2005 Grant W. Howard Company
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Generating the Numbers
The Forecast
Rank (Rank and Class)
 Review/Order/Xfer Cycle
 Usage, Safety, OP, LP, OQ
 Exception Reporting*
Monthly and as needed

* Discussed With Maintenance Section
 2005 Grant W. Howard Company
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The Results
What is
not
Needed?
Surplus Point
EOQ
Line Point or Max/EOQ
When to
Replenish?
Order
Cycle
PNA/Level
What to
Replenish and
How Much?
Order Point or Min
Lead
Time
Safety
When, What, How Much?
What is not Needed?
 2005 Grant W. Howard Company
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Final Thoughts
 2005 Grant W. Howard Company
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Measurement
Data to Info
Data
Usage - OE/WT
Fill Rate, BO’s
Turns, Excess, Mix
T&E, GMROI
The Numbers
Level/PNA Info OH & Paperfloat
Hits/Ranking
Purch Hist
Order Cycle
“Smart” Set-up
Ave Usage,
Safety, OP, LP,
Order Quantity
Product Master
Product Whse.
Items BOP/Priority
Timeline Analysis
Too Late
Too Early
Surplus Inventory
Co. and Whse.
Product Pline
Replenishment
Buyer’s Ctrl Center
Lead Time PO/WT
Set-up
The Tools
Maintenance
One Stop Inq/Maint
External/Lng. Term
Internal/St. Term
Proofs/Mass Update
Exc Control Center
 2005 Grant W. Howard Company
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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.”
 2005 Grant W. Howard Company
51
GWHCO
www.gwhco.org
Grant Howard:
[email protected]
734-428-0529 Phone
734-428-0593 Fax
John Cason:
[email protected]
256-830-0676 Phone
256-830-0481 Fax
 2005 Grant W. Howard Company
Our approach involves tailoring the
best practices in distribution to the
specific needs of our clients. Our
working philosophy revolves
around building a strong and selfmaintaining infrastructure by
developing a working plan based
on processes and procedures,
education and understanding,
implementation of tools and
technology; and through
communication, organizational
structure and team environments.
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