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Best Practices Inventory Management
Maximizing Profits and Staying in Business
Forever How it Works
Taking a Closer Look
Grant W. Howard 13214 Wallace Road Manchester, MI
48158 [phone] ghoward685_at_aol.com
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• 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 Cant Forget
• Getting Better Results
• Generating the Numbers
• Summary

Taking a Closer Look
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Company ObjectivesThe Big Picture
Profitability
Longevity
Growth
Bottom Line Profits (PL) GM and Oper.
Efficiency Asset Management
Customer Service Retention Maintain the base
Employee Happiness
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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/TE/GMROI

Watch the C to P (Purchasing/Replenishment,
Receiving Put-away, A/P)
Watch the C to C (Warehousing, Handling, Obsol.
Shrink, Taxes, Ins, Interest)
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• Inventory Management Replenishment

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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?
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The Basics - Make Sure
What is not Needed?
What to Replenish and How Much?
When to Replenish?
When, What, How Much? What is not Needed?
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When to Replenish Order Point
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Demand/Usage

• Sales/Transfer History
• Lost Sales
• Exceptional Sales
• Human input
• Demand/Usage Buckets

Seasonal? Method?
Window Size? Paths?
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Product Lead Times

• Time to acquire items from source
• Watch External vs. Internal
• Seasonality Considerations
• Normal Worse Case

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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.

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Understanding Replenishment and Paths
Direct/Distributive
Cross Dock
Supplier
Supplier
CDC
Point of Sale
Point of Sale

• Product ships directly to Br.

• Dont 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)

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How it All WorksWhen to Replenish (OP)

• Average Monthly Usage (AMU)
• Usage Buckets
• Sales/Transfers
• Lost Sales
• Exceptional Sales
• Overrides/Human
• Usage Ctrl (UC)
• 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!

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What to Replenish How Much Line Point EOQ
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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

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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!
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EOQ

• Usage Rate 1
• Item Cost 100.00
• Cost to Carry 24
• Cost to Purchase 4.00
• EOQ 2
• 100 Month Usage, 2 Month Supply

• Usage Rate 100
• Item Cost 1.00
• Cost to Carry 24
• Cost to Purchase 4.00
• EOQ 200
• 100 Month Usage, 2 Month Supply

Mth Usage Mths Supply Inv CtoC CtoP Ms Sup
(2.00CtoP) .01 200 (16.67 years) 2.00 4.00 4.00
141 (11.75 years) .10 63 (5.25
years) 6.30 4.00 4.00 45 (3.75 years) 1 20
(1.67 years) 20 4.00 4.00 14.1 (1.18
years) 10 6.3 (189 days) 63 4.00 4.00 4.5 (135
days) 100 2 (60 days) 200 4.00 4.00 1.41 (42
days) 1,000 .63 (19 days) 630 4.00 4.00 .45
(13.5 days) 10,000 .2 (6 days) 2000 4.00 4.00 .14
1 (4.2 days) 100,000 .063 (1.9
days) 6,300 4.00 4.00 .045 (1.35
days) 1,000,000 .02 (.6 day) 20,000 4.00 4.00 .01
4 (.42 day) CtoC Inv x Months Supply x 1/2 x
2 (1/2 for Average Inventory, 2 Monthly
CtoC) What about freight percentage and RC days?
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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)
• 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

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How it All Works What and How Much - LP/OQ/Pkg

• Review/Order/Transfer Cycle Days
• Freight and Cost to Purchase/Transfer
  Considerations
• Vendor Minimums
• Type , LBS, PCS, Cubes
• Target
• Internal/Manual - C to P

• Order Quantity
• Cost to Carry and Cost to Purchase
  Considerations
• EOQ
• Cost to Carry (K cost)
• Cost to Purchase (R cost)
• Min and Max Weeks Supply
• Class Break Points
• Minimum Runs
• Vendor/Transfer Pack

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Other Things We Cant Forget
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How it All WorksOther Essential Items

• Status
• Freeze
• Usage Method
• Weight/Cubes/Load Factors
• Proper Replenishment Paths
• Replenishment Method

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How it All WorksProduct 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

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When, What and How Much

• When to Replenish
• Fixed Interval - Timeframe or Target - Profits
  only (Watch for nothing BOP)
• Flexible Interval - Trigger Point (Order Point) -
  Service and Profits
• What to Replenish
• Replenishment Cycle (Line Point)
• Controls the frequency of P/Os and Transfers
• This is the speed control (Frequency)
• Target and/or C to P driven
• How Much to Replenish
• Order Quantity
• Controls the quantity of items on P/Os and
  Transfers
• This is the workload/spread (Amplitude)
• C to C, C to P and Freight driven

Whats the Difference RC 0 RC 1 week OQ 1
week OQ4 weeks RC 1 week OQ1 week RC 1
week OQ 4 weeks
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Profitability, Asset Management, and
Efficiency Better Numbers Better Tools
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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

• 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?

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Demand/Usage

• Sales/Transfer History
• Lost Sales
• Exceptional Sales
• Human input
• Demand/Usage Buckets

Seasonal? Method?
Window Size? Paths?
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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

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Lost Sales Exceptional SalesKey for Good Demand

• Lost Sales Qty Less Ship and B/O
• Exceptional Sales is flagged by a X in the Tax
  Field

Exceptional Sale
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Lost Sales/Exceptional Sale
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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

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Usage - Seasonal Trend
Seasonal Trend 150 1.5 or 150
100
Previous 3 months usage 150
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Usage Seasonal LT Advance
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Usage Roll Up

• Transfer Usage Concerns
• Path exception (P/O or Transfer)
• Usage exception overrides on Child
• Changing Paths and rebuilds
• Follows each warehouses Usage Control

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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

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Safety Stock

• Safety Control by rank
• Safety Control Method by Lead times
• Percentage or Days Safety
• LT lt 14 Percent LTgt60
• 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

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Safety Stock - Service and Turns
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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)

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Average Sales Quantity (ASQ)
Usage 40 Lead-time 7 Safety 50
Order Point (ICAMM calc.)
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Safety
5
S/O
0
4 Hits - ASQ Order Point of 10 2 Hits - ASQ
Order Point of 20
Cost and Hits Considerations
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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
Costs and Hits Considerations
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Best PracticesBetter 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

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Data, Set up, and Generating the Numbers It All
Starts Here
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What is not needed?
What needs to be replenished and how much?
When to Replenish?
The Numbers
The Tools
What is incoming and will be early or is not
needed?
What is incoming and will be late?
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Parameters and Set-up

• Smart Parameters Maintenance
• Warehouse Maintenance
• Product Line Maintenance
• Product Maintenance
• At start up and as needed

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Smart Parameters
Table Driven/Automated Depth Balanced
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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

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Generating the NumbersThe Forecast

• Rank (Rank and Class)
• Review/Order/Xfer Cycle
• Usage, Safety, OP, LP, OQ
• Exception Reporting
• Monthly and as needed
• Discussed With Maintenance Section

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The Results
What is not Needed?
What to Replenish and How Much?
When to Replenish?
When, What, How Much? What is not Needed?
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Final Thoughts
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Measurement Fill Rate, BOs Turns, Excess,
Mix TE, GMROI
Data to Info
The Tools
Data Usage - OE/WT Lead Time - PO/WT Level/PNA
Info - OH Paperfloat Purch Hist
Replenishment Buyers Ctrl Center Items
BOP/Priority
The Numbers Hits/Ranking Order Cycle Ave Usage,
Safety, OP, LP, Order Quantity
Timeline Analysis Too Late Too Early
Set-up Smart Set-up Co. and Whse. Product
Pline Product Master Product Whse.
Surplus Inventory External/Lng. Term Internal/St.
Term
Maintenance One Stop Inq/Maint Proofs/Mass
Update Exc Control Center
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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.

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GWHCO

• www.gwhco.org
• Grant Howard
• ghoward_at_gwhco.org
• 734-428-0529 Phone
• 734-428-0593 Fax
• John Cason
• jcason_at_gwhco.org
• 256-830-0676 Phone
• 256-830-0481 Fax

• 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 self-maintaining
  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.