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“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 3 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 4 Inventory Management & Replenishment 2005 Grant W. Howard Company 5 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 6 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 7 When to Replenish Order Point 2005 Grant W. Howard Company 8 Demand/Usage Sales/Transfer History Lost Sales Exceptional Sales Human input Seasonal? Window Size? Method? Paths? Demand/Usage Buckets 2005 Grant W. Howard Company 9 Product Lead Times Time to acquire items from source Watch External vs. Internal Seasonality Considerations Normal “Worse” Case 2005 Grant W. Howard Company 10 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 11 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 12 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! 13 What to Replenish & How Much Line Point & EOQ 2005 Grant W. Howard Company 14 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 15 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! 16 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 17 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 18 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 19 Other Things We Can’t Forget 2005 Grant W. Howard Company 20 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 21 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 22 “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 23 Profitability, Asset Management, and Efficiency Better Numbers Better Tools 2005 Grant W. Howard Company 24 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 25 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 26 Demand/Usage Sales/Transfer History Lost Sales Exceptional Sales Human input Seasonal? Window Size? Method? Paths? Demand/Usage Buckets 2005 Grant W. Howard Company 27 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 28 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 29 Lost Sales/Exceptional Sale 2005 Grant W. Howard Company 30 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 31 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 32 Usage Seasonal LT Advance 90 Day Lead Time A 2005 Grant W. Howard Company M J J A S A 33 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 34 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 35 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 36 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 37 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 38 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 39 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 40 “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 41 2005 Grant W. Howard Company Quantity Ordered Data, Set up, and Generating the Numbers It All Starts Here 2005 Grant W. Howard Company 42 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 44 “Smart” Parameters Product Record Product Line Record Table Driven/Automated Vendor Record Depth Warehouse Record Balanced Company Record 2005 Grant W. Howard Company 45 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 46 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 47 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 48 Final Thoughts 2005 Grant W. Howard Company 49 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 50 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. 52