BEST PRACTICES IN INVENTORY MANAGEMENT

INTM Supply Chain Management

By Rafel Mayol

Introduction

Definition:
Activity

that organizes the availability of goods to the customers, from sales items to consumables and spare parts.

A balancing act :
Operations:

long runs for better efficiency. Sales: high inventory ready to sell. Purchasing: large orders for better prices. Finance: working capital and cash flow concerns.

Objectives

To optimize:
Customer

service (availability, delivery, etc.) Inventory costs (tied cash, space, etc.) Operating costs (linked to logistics)
Improve three objectives simultaneously, not one at a time.

High stock levels are the result of poor control and low availability

Customer Service

Availability polices:
Separate
Core1:

products by

increase portfolio of these products. Non-core (and seasonal): lower its inventory levels and establish product life cycle management2.

Estimating delivery times accurately: high impact on customer satisfaction.

1Core:

things you dont want to run out. 2Product life cycle management: inventory levels function of actual cycle time.

Manage Inventory

Use ABC Analysis:

Policy Method Stock Target 1 to 4 weeks Class A Tight control Frequent monitoring 10% of JIT Advanced forecasting inventory approach Service-level policy 65% of turnover Class B Lean stock 20% of policy inventory 25% of turnover Sophisticated method Computerized management Exception reporting

2 to 8 weeks

Class C Minimum Infrequent ordering 3 to 20 70% of supervision Automatic system weeks inventory Large Class O or Xof for non-movers. 10% turnover orders Include Class Z for non-stock items considered in ABC Analysis

Manage Inventory

1First

Supplier delivery quantities are very important. Little and often for A class. Apply just in time in A class items. FIFO1 approach in warehouse movements. Periodically identify and remove obsolete items. Manage excess items (O class).
In, First Out

Just In Time management

JIT is the aim of best practice inventory control. JIT is the result of successful management of:
High-quality

supply Inventory control Process planning & plant design Workforce motivation Logistics MRP Continuous improvement

Just In Time management

JIT ideal environment:

Narrow

product portfolio with stable demand. High volume manufacturer in stable market. Local, reliable and dependent suppliers. Fast-cycle processes.

Key concepts:
Only

buy when needed. Make and buy small quantities. Balance flow throughout supply chain. High reliability for supply, products and processes.

Organization

Inventory management as a senior management activity Set objectives

Customer service
Stock availability and delivery on time Satisfaction surveys

Inventory
Value Stock cover ratio

Operating costs
Warehousing and inventory operations Cost per transaction, movement and purchase.

Work closely with less suppliers

Safety stock

Collect data Analyze demand in variability. Demand for slow movers is a Poisson distribution. Safety stock depends on
Company

policy Variability of demand Reliability of supply Dependability of transport

Ordering size

EOD1 doesnt work in reality; too high stock level. Order size considerations
Min

1Economic

order value: place order for phased delivery. Negotiate on annual volume. Min shipment size: coordinate orders mix. Change shipping method. Min order quantity per line: order for phased delivery. Schedule payment once stock is used. Min delivery quantity per line: share items with others. Renegotiate or look for alternative supply.
Order Quantity

Reduce cumulative lead times

Benefits of reducing lead times:

Shorter

lead times with smaller lot sizes. Demand forecast becomes less important. Customer service levels improve. Safety stocks reduced.

Reduce cumulative lead times

Make to order business:

Purchase

raw materials before finalization of engineering process. Publish and measure lead time for every business unit activity. Use a Project Manager for big proposals. Consider outsourcing on bottleneck activities. Use real time procedures.

Reduce cumulative lead times

Make to stock business:

Smaller

lot sizes reduce lead time. Analyze material planning MRP system and its lead times in the procurement process. Reduce purchasing cycle lead time with suppliers. Vendor managed inventory. Improve forecast accuracy. Analyze inbound and outbound warehousing and distribution lead times. Consider outsourcing. Use real time procedures.

Forecasting

Good forecasting results in low costs Predicting for a group is more accurate than for each item. Use right forecasting technique for each product

Market research Market demand models Historical techniques Minimum stock levels Demand patterns

Consider product life cycle: introductory, supply and obsolescence. Sales and demand are different things Inclusion of offers & campaigns after forecasts are made.

Key Point Indicators for Inventory

At least

Accuracy +95% (both deviation and frequency). Inventory and Bill Of Materials accuracy. Inventory turnover.
Perfect order rate. top-line and bottom-line growth. maintained gross margin. initial customer order fill rate. final fill rate/returns/cancellations. gross margin return on investment (GMROI). cost of backorders. age of inventory. measures of overstock. write-downs as a percentage of costs.

Additionally

Finally

Improve whole supply chain rather than one step (see the big picture). Minimize logistic costs while exceeding customer expectations. Decide best locations and quantities to hold stock. Use inventory pooling if possible. Use of automated systems to allow managers to focus on value added activities. Involve in vendor-managed inventory programs.

Finally

Sales, Inventory and Operations Planning. Develop processes to address their particular own interests. Supply chain oriented product development to take advantage of its capabilities. Identify deteriorated stock early in the chain and take action Make purchasing and inventory people work together Use lean principles Move from ABC to multi-echelon optimization

QUESTIONS?
Rafel Mayol