Transcript SUN MANAGING STOCK 15/05/08

Sage User Network
Managing your stock for profit
Steve Tattum
Product Manager Sage (UK) Ltd
Managing your stock for profit
• Are stockouts affecting your
delivery service levels?
• Do you keep running out of the
same items?
• Why are there never any A4
pads in the stationery
cupboard?
Profile your stock for better service levels
and improve your cash flow forecasting.
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Horror stories …
We pay for 3rd party secure warehouse storage for some
promotional packaging materials and labels. The stock is
never issued and increases each year - currently valued at
£1.5m
Our sales staff will not confirm despatch until they have
walked across the site and seen the stock for themselves.
Production has stopped for lack of a critical part. We have
‘ring fenced spares stock’ which cannot be released.
“I’ve triple checked the stock count – which number would
you like?”
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Alphabet soup
How many of these do you know?
ATO
MTO
CTO
2-BIN
KANBAN
ATS
MTS
ETO
JT(F)L
JIT
ROL
FIXED PERIOD DAYS
ROI
MRP
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DRP
EOQ
FIRM PLANNED
Same problem – different perspectives
Sales – all items, all variants, in-stock, all the time
Production – ‘you should have planned / forecasted earlier’, ‘why
can’t you sell what we have in stock?’
Finance – ‘pay me now’, ‘pay you much later’, order the bare
minimum but buy cheap
Product support – we need all the parts for products we have
sold in the last 5 years, on the shelf
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Inventories / Stock
• All organisations have stocks
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–
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Raw materials
Bought in or made-in-house components
Work in progress - partly finished goods
Finished goods in warehouse
Inventory in transit
Goods for sale and on display
Spare parts for machinery
Reasons for Having Inventories
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•
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Goods made / packed / delivered in batches
Demand is seasonal, supply is constant and / or limited
Demand cannot be predicted exactly
So that work centres do not have to wait for components / work from
previous centres
• To supply materials quickly (e.g. from a warehouse)
• To take advantage of favourable prices (discounts)
• To protect against price rises or shortages
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Stock Level
Stock Profile over Time
ROL
MIN
Lead time
Place Order Now
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Time
Reorder Level Decision
• Decision rule:
– when the stock level reaches a certain point - the re-order level (ROL) order some more. What should the ROL be?
ROL
Stock-out
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Maintaining inventory levels
• Task - order a number of ‘parts’ which are in regular use
– e.g. dog food, photocopier paper, product labels
• Two problems
– When to order?, how much to order?
• Issues
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Cost of holding inventory
Cost of placing orders
Uncertainty of demand, time to replenish stock
Obsolescence
Space, money constraints
Economic Order (Batch) Quantity
EOQ / EBQ
• Key Assumptions
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Demand is constant and known
Replenishment is instantaneous (zero lead time) or at least fixed
Cost of holding stock is known
Cost of placing an order for an item known and independent of order
size and other orders (often called the setup cost)
– No limitations on space, cash
– No discounts (price is fixed)
Orders are placed immediately for a fixed quantity
• Is this the real world ?
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EOQ model
Total
costs
Costs
Stock-holding
costs
Ordering
costs
EOQ
The optimum solution is given by
Order quantity
2DS
EOQ 
H
(D=demand 1000 p.a. S= setup/order cost £15 H= holding cost /unit p.a. £3 )
EOQ = 100
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ROQ and ROL Method
• ROL is determined to give a 95% (or other) service level.
– 5% of stock cycles will lead to a stock out
• ROQ = EOQ.
• Example of simple rule:
– when the stock level falls below 50 (ROL) or 200 (ROQ) order
more.
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Keeping the information up to date
• Re-order levels are constantly reviewed as our product
lines evolve and sales patterns change
• Supplier lead times are continuously monitored and
updated
• Life is full of good intentions !
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So how many of you use this ?
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Creating the update formulae
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Testing the formulae
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Setting the inventory policy
Q
A
M
R
D
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Inventory policy
Q
A
M
R
D
Exact quantity
Minimum of EOQ
Multiples of EOQ
Minimum of EOQ + multiples of ROI
Discrete batches of EOQ (works orders only)
Demand = 23
Q
A
M
R
D
19
23
23
30
25
2 x 15
EOQ = 15 ROI = 10
And changing the numbers ….
Demand = 27
Q
A
M
R
D
20
27
27
50
30
2 x 25
EOQ = 25 ROI = 10
Problems with the EOQ Model
• Demand may not be (approximately) constant
– seasonal, fashion goods
– rapidly changing ‘technology’ products
• The stock holding costs may be a simple linear model
– small increase in stock may need new warehouse
• Setup / ordering costs are very difficult to identify
– are labour costs fixed or variable?
– depend on other items being ordered
• EOQ forces us into a way of thinking
– let’s do things differently
• We need to be agile, innovative and still employ simple systems
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It could be as easy as ABC ….
• ABC analysis provides a mechanism for identifying
items which will have a significant impact on overall
inventory cost whilst also providing a mechanism for
identifying different categories of stock that will require
different management and controls
Wikipedia
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Pareto Curve for ABC Classifications

Based on usage value = Usage(items/year) x Cost(£/year)
Cumulative %
of total value
100
80
Class A
items
0
23
20
Class B
items
Class C
items
50
100
% of total
number
of items
ABC Analysis
• Typically
– A: 20% of items (fast moving, valuable) account for 80% of the stock turnover
– C: 50% of items (slow moving, low value) account for 10% of the stock
turnover
– B: the middle 30% of items (middle value or turnover) account for the
remaining 10%
• Policies:
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–
–
–
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Develop class A suppliers more – premium service
Give tighter physical control of A items
Forecast A items more carefully – buy on demand
Schedule deliveries of B items – call-off against best price contracts
Simple re-order and EOQ rules for C items
Managing exceptions
• Managing the risk
• How much is this worth ?
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New items
New suppliers
Problematic quality
Single source of supply
• Promoting to Class A
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Putting it all together
• So using ABC to profile our stock we can:– Reduce the number of orders to achieve better focus
– Count the important items more frequently.
• EOQ helps us to manage stable, low cost, high usage
items (C class) more effectively.
• We can automatically review and update EOQs
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Setting up ABC categories
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Using the tools
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Using the tools
y, n, or i
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More Reams of Paper …
• “Our MRP report is 500 pages long”
• “And it makes stupid suggestions …”
– Reduce the quantity of labels from 10,000 by 9 to 9,991
– Re-schedule the order as it will arrive 1 day too early
• “We placed orders for suppliers from A to S then the next
report arrived ….so we started at the beginning …..”
• “MRP recommended the purchase orders too late … and
no works orders at all !”
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How many wheels on your car ?
Data integrity
We make lawnmowers …. It’s late March and we have run
out of wheels which are on a 12 week delivery !
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99% BOM Accuracy
Realistic lead times
Realistic average batch sizes
Overdue orders - reprioritised
Close orders delivered ‘short’
Priorities
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Red flags
“the MD’s best friend”
Marketing’s next big order
Shop floor bonus & piece work
MRP only knows about due dates
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Filters
• An electronic ‘RED PEN’
• Put your buyers’ practical knowledge into the system
• Manage by exception
• Remove the trivial and irritating recommendations
• Focus on the important items
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Summary
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Use Re-Order reports or KANBAN to manage ‘C’ items.
Set up your inventory policy and keep it under review.
Use MRP to recommend orders for Make or Buy.
Order what you need, plan deliveries for when it is needed.
Set ‘fixed period days’ - group demands for the stock item.
Maintain your data accuracy – responsibility &
accountability.
Count the cash ….
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