SYSPRO Inventory Workshop PNG - Lae International Hotel

1. SYSPROInventory WorkshopPNG - Lae International Hotel Anand Subramaniam Manager Service Delivery – Asia Pacific Glen Skelton Principal Consultant – Asia Pacific

2. Agenda • Inventory Management Overview • Inventory Classification • Inventory Measures (KPI) • Inventory Cost • Inventory Models • Economic Ordering Quantity • Economic Ordering Quantity using Discounts • Minimum Quantity Calculation

3. Agenda • Safety Stock • Economic Production Quantity • Inventory Controls • ABC Classification • Inventory Counting • Additional Approaches to Inventory Management • Inventory Management Initiatives • Landed Cost Tracking

4. Inventory Management

5. Overall Objective To achieve satisfactory levels of customer service whilst keeping inventory costs within reasonable bounds.

6. Relationship between Inventory and Customer Service Level Relationship Safety Stock Service Level %

7. What is Inventory? • Items that can be worked on to add value • Supplies typically consumed during operations • Raw materials and purchased parts • Partially completed goods, work-in-process • Finished goods inventories (manufacturing firms) or merchandise (retail stores) • Replacement parts, tools and supplies

8. What is an Inventory System? • Policies, procedures and controls for monitoring inventory levels and determines • What levels, should be maintained? • When stock, should be replenished? • How large, should orders be?

9. Functions of Inventory • Smooth seasonal production requirements • Protect against stockouts • Hedge against price increases • To provide a stock of goods that will provide a “selection” for customers • To take advantage of quantity discounts • Flexibility in scheduling • Supply (lead-time) variability • Independence of operations • Variation in demand

10. Inventory Terms • Lead time: time interval between ordering and receiving the order • Holding (carrying) costs: cost to carry an item in inventory for a length of time, usually a year • Ordering costs: costs of ordering and receiving inventory

11. Inventory Terms • Shortage costs: costs when demand exceeds supply • Independent demand - demand for item is independent of demand for any other item • Dependent demand - demand for item is dependent upon the demand for some other item

12. Inventory Scenarios in a Firm The Importance of Inventory in other Functional Areas • Marketing uses inventory to provide strong customer service. • Manufacturing uses inventory to schedule longer production runs. • Finance wants inventory turnover ratios to be kept high so that risk of inventory loss is reduced and rate of return on assets kept competitively high.

13. Inventory Management Objectives • Maximise inventory turnover • Minimise damage and waste while in inventory • Minimise handling and storage • Minimise out of stock situations (stockouts) • Minimise the after “best before date” cases • Minimise engineering/design/customer changes • Minimise time from request to shipping • Minimise ordering costs from producer to stock • Minimise ‘interest’ costs of holding materials

14. Current Trends / Managerial Issues • Inventory is no longer viewed as an asset • Product life cycles are becoming shorter increasing the likelihood of product obsolescence. • The high costs of inventory storage. • Firms are focusing on reducing setup and order costs, resulting in smaller EOQ (Economic Order Quantities). • Firms are working more closely with vendors to reduce product throughput times and lead times. • Recent emphasis is on increasing customer service and reducing inventory investment

15. 10 Ways to Reduce Inventory • Classify inventory into ABC categories • Reduce lead time • Reduce order quantity • Improve forecasting • Eliminate obsolete stock • Centralize inventory • Reduce number of SKUs • Reduce variation –match supply and demand • Vendor managed inventory (VMI) • Align performance metrics (KPI)

16. Inventory Classification

17. Inventory . Process stage Number & Value Demand Type Other Raw Material WIP Finished Goods Maintenance Repair Overhaul A Items B Items C Items Independent Dependent Inventory Classification (Prod Class)

18. Pull Respond quickly Independent Demand Reactive Customer Demand Push Orderly Dependent Demand Proactive Inventory Replenishment Pull Vs. Push for Managing Inventory

19. Inventory Measures

20. Service Level / Inventory measures • Customer service Level Measures: • Percentage of orders shipped on schedule • Percentage of line items shipped on schedule • Percentage of dollar volume shipped on schedule • Idle time due to material and component shortages • Warehouse Productivity Measures: • Productivity ratio = Units handled per day divided by labor hours per day • Throughput = amount of material moved through the system in a given time period • Inventory Minimisation Measures: • Inventory turnover • Inventory Management Efficiency

21. Inventory Turnover Product 1 Product 2 Cost of merchandise sold $15,620,127,000 $ 737,188,000 Inventories: Beginning of year $1,115,529,000 $478,467,000 End of year 1,067,837,000 571,669,000 Total $2,183,366,000 $1,050,136,000 Average $1,091,683,000 $525,068,000 Inventory turnover 14.3 times 1.4 times Inventory Turnover Measures the relationship between the volume of goods sold and the amount of inventory carried during the period.

22. Number of Days’ Sales in Inventory Product 1 Product 2 Average daily cost of merchandise sold: $15,620,127,000/365 $42,794,868 $737,188,000/365 $2,019,693 Ending inventory $1,067,837,000 $571,669,000 Average selling period 25 days 283 days Inventory Management Efficiency Average Selling Period = Ending Inventory / Average cost of merchandise sold

23. Inv. Comp. Inventory Days Rationale In Transit 5,000 18 Transit delay Obsolescence/ 10,000 36 Obsolete and Damage damaged goods Speculative 5,000 18 Forward buy for discount Safety stock 10,000 36 To meet service requests. “Peeling the Inventory Onion” # of working days / year = 278

24. Inventory Measures Example • XYZ Company has annual Cost Of Goods Sold of $10,000,000. • The average inventory value at any point in time is $384,615. • Calculate inventory turnover and weeks/days of supply • XYZ operates 260 working days in a year

25. COGS = $10,000,000. AVG Inventory = $384,615.Working Days = 260 Inventory Measures Example • InventoryTurnover: 10,000,000= 26 Inv turns 384,615 • Weeks Supply: 384,615 = 2 weeks 10,000,000/52 • Days of Supply 384,615 = 10 days 10,000,000/260

26. SYSPRO Seminar Inventory Turns & Average Selling Period

27. Warehouse Productivity Metrics • Pounds or units per day • Employees per units / pound moved • Units / Pounds unloaded per hour • Units / Pounds picked per hour • Units / Pounds loaded per hour • Percentage of orders correctly filled • Productivity ratio = Units handled/day divided by labor hours/day • Throughput = amount of material moved through the system in a given time period

28. Key Performance Indicators (KPI)

29. Inventory Cost

30. Inventory Costs What costs do we experience ….. due to inventory?

31. Inventory Costs Costs associated with inventory: • Cost of Shrinkage • Cost of the products • Cost of ordering • Cost of hanging onto it • Cost of having too much / disposal • Cost of not having enough (shortage)

32. Shrinkage Costs • How much is stolen? • Do you know at your workplace ? • Where does the missing stuff go? • Employees: ?? % • Shoplifters: ?? % • Administrative / paperwork error: ?? % • Vendor fraud: ?? % • Etc. Etc.

33. Inventory Costs

34. Holding or Carrying Cost • Obsolescence • Insurance • Extra staffing • Financial Charges / Interest Element • Pilferage • Damage • Warehousing

35. More units must be stored if more are ordered Purchase Order Description Qty. Microwave 1000 Order quantity Why Holding Cost Increases ? Purchase Order Description Qty. Microwave 1 Order quantity

36. Category Housing costs (building rent, depreciation, operating cost, taxes, insurance) Material handling costs (equipment, lease or depreciation, power, operating cost) Labor cost from extra handling Investment costs (borrowing costs, taxes, and insurance on inventory) Pilferage, scrap, and obsolescence Overall Holding / Carrying cost Cost as a % of Inventory Value 6% (3 - 10%) 3% (1 - 3.5%) 3% (3 - 5%) 11% (6 - 24%) 3% (2 - 5%) 26% Inventory Holding Costs - Example

37. Inventory Holding Costs Factor • Annual Costs • = holding cost factor % • Average Value of Stockholding e.g. 26% or AUD 0.26 cents in $ per month of stock The holding costs can be as high as 40% of the value of the inventory and not below 15%

38. SYSPRO Seminar Holding (Carrying) Cost

39. Order Cost • Supplies • Forms • Order processing • Clerical support

40. Cost is spread over more units Example: You need 1000 microwave ovens 1 Order (Postage $ 0.33) 1000 Orders (Postage $330) Purchase Order PurchaseOrder Purchase Order Purchase Order Description Qty. Purchase Order Description Qty. Description Qty. Description Qty. Microwave 1 Description Qty. Microwave 1000 Microwave 1 Microwave 1 Microwave 1 Order quantity Why Ordering Cost Decreases ?

41. Setup Cost • Clean-up costs • Re-tooling costs • Adjustment costs

42. SYSPRO Seminar Ordering Cost

43. Inventory Models

44. Inventory Models answers… Some main Inventory Questions: • How much to buy? • When is it time to buy? Also: • Which products to buy? • From whom (supplier)?

45. Inventory Models Help answer the inventory planning questions! • Fixed Order Quantity Models • Economic order quantity • Production order quantity • Quantity discount • Probabilistic Models • Order Point / Periodic Review Model • Fixed Order Period Models • Minimum Quantity • Min / Max Models • Safety Stock

46. FOQ Vs. FTP System

47. FOQ Vs. FTP System (Contd.) • Fixed Order Quantity Model • Event triggered (Example: running out of stock) • Fixed Time Period Model • Time triggered (Example: monthly sales call by sales representative)

48. Determining Order Quantities

49. Average Inventory Elements influencing Average Inventory • Average = OQ/2 + SS + IT • Where: • Average = average inventory level • OQ = average replenishment order quantity • SS = average safety stock level • IT = average in-transit inventory

50. Re-Order Point and Safety Stock When to Order • ROP = LT * DD + SS • Where: • ROP = reorder point • LT = replenishment lead time • DD = average daily demand • SS = safety stock