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The Basics of Inventory Management (for People NOT Responsible for Inventory Management)

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  1. The Basics of Inventory Management(for People NOT Responsible for Inventory Management) Mark Tomalonis Principal WarehouseTWO, LLC

  2. Three Questions • “Why is this NOT in stock?” • “How did we end up with all of this surplus inventory?” • “What do you do for a living, inventory control person?” ✓

  3. Workshop Topics • To stock or not to stock? • Inventory management performance metrics • Basics of inventory management • Answers to the three questions ✓

  4. To Stock or Not to Stock? • Benefits & costs of stocking an item • Benefits & costs of NOT stocking an item • Finding a balance • The cost of customer satisfaction ✓

  5. Benefits & Costs of Stocking an Item • x • x • x • x • x ✓

  6. Benefits & Costs of NOT Stocking an Item • x • x • x • x • x ✓

  7. Finding a Balance • (table comparing costs goes here) ✓

  8. Inventory Management Performance Metrics • SERVICE LEVEL • how well you are meeting your customers’ expe • ON-TIME-DELIVERY • x • TURNS • x ✓

  9. The Cost of “Service Level” Combined Costs Transactions Costs Inventory Carrying Costs ✓

  10. The Basics of Inventory Management • Scope • Four parameters that determine stocking disposition • Possible item dispositions • Stocking methods • How much to stock? $ACOGS analysis • Inventory plan decision flow chart • Managing to Expectations ✓

  11. Scope of Inventory Management • x • x • x • x • x ✓

  12. Four Parameters that Determine Stocking Disposition • Unit cost • Quantity sold (in one year) • Number of times sold (in one year; “# of hits”) • Who buys it (distribution of sales by customer) ✓

  13. Four Parameters that Determine Stocking Method Examples

  14. Possible Item Dispositions (by # of Hits) # hits in one year high medium slow inactive # hits (in one year) all items, sorted by decreasing # hits (in one year) ✓

  15. Inventory Management Terms • ITEM (SKU) • USAGE (forecasted demand) • AMU (average monthly usage) • ADU (average daily usage; AMU/30) • HIT (order) • LEAD TIME (average over multiple receipts) • SAFETY STOCK (in days’ usage) ✓

  16. Inventory Management Terms • NET STOCK (NS) = on hand (physically present) - allocated (to an order, transfer, assembly) - on backorder + on open purchase order (PO) ✓

  17. Stocking Methods… …tell you WHEN to buy …tell you HOW MUCH to buy ✓

  18. Stocking Methods • Static (“minimum-maximum”) • Dynamic (“Up-To”) • Micro-Managed (high volume, high risk) • Micro-Managed (exceptional circumstances) • Non-stock (potential stock) • Non-stock (not subject to being stocked EVER) ✓

  19. Static Inventory Plan (“MIN-MAX”) • “minimum-maximum” (“MIN-MAX”) • two static control values, in quantities of the item • Intended to be used for: • infrequently sold items (e. g.: 3 to 6 “hits” per year) • typical interval between “hits” is greater than lead time ✓

  20. Static Inventory Plan (“MIN-MAX”) • WHEN to buy • net stock falls below “minimum” value (NS < MIN) • “minimum” value is a multiple of average “hit” quantity • HOW MUCH to buy • “maximum” value minus net stock (MAX – NS) • “maximum” value is a higher multiple of average “hit” quantity • Demonstration… ✓

  21. Static Inventory Plan (“MIN-MAX”) • Effect on service level and turns • “MIN” affects service level • “MAX” affects “turns” ✓

  22. Static Inventory Plan (“MIN-MAX”) PROs • easy to understand • OK for slow-moving items CONs • does not adapt to changes in consumption or lead time • easily misapplied to high usage items • easily misapplied to items with long lead times ✓

  23. Dynamic Inventory Plan (“Up-To”) • “Up-To” (“UPTO”) • control values are in days’ consumption, based on trailing average monthly usage • Intended to be used for: • frequently sold items (more than 6 “hits” per year) • items for which consumption and/or lead time changes over time ✓

  24. Dynamic Inventory Plan (“Up-To”) • WHEN to buy • net stock falls below “minimum” value (NS < MIN) • “minimum” value is a multiple of average “hit” quantity • HOW MUCH to buy • “maximum” value minus net stock (MAX – NS) • “maximum” value is a higher multiple of average “hit” quantity • Demonstration… ✓

  25. Dynamic Inventory Plan (“Up-To”) • x • x • x • Demonstration… • OP affects service level • OQ affects “turns” ✓

  26. Dynamic Inventory Plan (“Up-To”) PROs • adapts to changes in consumption and lead time • best tool to increase “turns’ CONs • difficult to understand; not intuitive • multiple control values to select (MS, SS) ✓

  27. Micro-Managed Items:High Volume, High Risk • Qualifiers • item’s $ACOGS in top quartile of total $ACOGS • top customer consumes 50%+ of item’s consumption • Why it matters • most common source of future surplus • Recommended action • review these items every month • collaborate with customer (forecast) ✓

  28. Micro-Managed Items:Exceptional Circumstances • Qualifiers • stocked per salesman’s request • items consumed but not sold (Teflon tape) • Why it matters • potential for future surplus or unintended stock-out • Recommended action • isolate from computerized auto-reclassification • manually review quarterly ✓

  29. How Much to Stock? $ACOGS Analysis • x • x • x • x • Demonstration… ✓

  30. Inventory Plan Constants by ABCD • table to determine multiples of average order size (for min/max) or months’ supply and safety stock (for Up-To) ✓

  31. Possible Item Dispositions (by # of Hits) # hits in one year high medium slow inactive DYNAMIC or STATIC STATIC or NON-STOCK NON-STOCK # hits (in one year) DYNAMIC all items, sorted by decreasing # hits (in one year) ✓

  32. Quarterly Inventory Plan Method Selector (Concept) Start Recent & anticipated sales activity? Lots of hits? High $$$ mostly to one customer? YES YES YES NO NO NO Special circumstances? Static Dynamic YES Micro-Managed Nonstock NO ✓

  33. Quarterly Inventory Plan Method Selector (Example) Start last 6mo: 2+ hits? prev. 6mo: 1+ hits? future sales? last 6mo: 4+ hits? $ACOGS > $25K? > 75% sales to one customer? YES YES YES NO NO NO Stock request? New customer? Strategic item? Service item? Static Dynamic YES Micro-Managed Nonstock NO ✓

  34. Four Parameters that Determine Stocking Method Examples

  35. Inventory Control Values • Step 1: Define $ACOGS thresholds for ABCD classification • (show screenshot of ABCD tool) ✓

  36. Inventory Control Values • Step 2: Define control values for statically and dynamically managed items, by ABCD classification • (table that shows the above) ✓

  37. Managing to Expectations • Clearly define performance expectations • service level • on-time delivery • turns • Measure and review at least quarterly! • measure by ABCD classification and inventory control method • change ABCD threshold values and control values and then measure again… ✓

  38. What Could Possibly Go Wrong???? • You have assigned the responsibility of inventory management to the wrong person • Item usage is not reviewed often enough • Control values are not set correctly or reviewed • How your ERP system works is not understood • The tools in your ERP system are not used ✓

  39. Who Makes a Good Inventory Manager? • Pays attention to details • Is a good puzzle solver (crosswords, Sudoku, etc.) • Knows your ERP system and MS Excel • Is comfortable saying “no” • Is comfortable saying “no” to YOU • Does not crave glory or attention ✓

  40. Three Questions • “Why is this NOT in stock?” • “How did we end up with all of this surplus inventory?” • “What do you do for a living, inventory control person?” ✓

  41. “Why is this NOT in stock?” • No stock plan • Not enough sales history to justify a stock plan • No “speculative” stock plan request submitted • Bad stock plan • Plan is not appropriate for current consumption rate • Exceptional consumption (😃) or lead time (😠) • Purchasing error • You did not buy to stock plan ✓

  42. “How did we end up with all of this surplus inventory?” • High volume high risk item was not “micro-managed” • Bad stock plan • Plan was not reviewed often enough • Bad speculative stock request • Periodic factory inventory returns not done • Error in purchasing or order entry ✓

  43. “What do you do for a living, inventory control person?” • “Inventory control” is NOT “purchasing” • inventory control is PRO-active • purchasing is RE-active • Monthly tasks • Quarterly tasks • Annual tasks • On-demand/periodical tasks ✓

  44. MONTHLY Inventory Control Tasks • “Micro-manage” high volume, high risk items • Review recent consumption • Review forecasted consumption • Consult with sales person • Review inventory plan • Review incoming POs ✓

  45. QUARTERLY Inventory Control Tasks • Review inventory control metrics • service level (availability from stock) • on-time delivery • inventory turns ✓

  46. QUARTERLY Inventory Control Tasks • Review/reclassify all items in ERP database • (flow chart) • use automated tools (ERP tools or spreadsheet) • Identify potential surplus items • Review speculatively stocked items ✓

  47. ANNUAL Inventory Control Tasks • Review/revise $ACOGS ABCD thresholds • Review/revise MIN/MAX control values by ABCD class • Review/revise OP, OQ and SSD control values by ABCD class ✓

  48. ON-DEMAND Inventory Control Tasks • Item database maintenance • part number, list price, cost, PO cost calculation • Process new speculative stock requests • Dispose of surplus inventory • Annual inventory returns/exchanges ✓

  49. Workshop Topics • To stock or not to stock? • Inventory management performance metrics • Basics of inventory management • Answers to the three questions ✓

  50. Questions?