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

© 2013 WarehouseTWO, LLC. All Rights Reserved..

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

Mark TomalonisPrincipalWarehouseTWO, LLC

2© 2013 WarehouseTWO, LLC. All Rights Reserved..

Three Questions

1. “Why is this NOT in stock?”

2. “How did we end up with all of this surplus inventory?”

3. “What do you do for a living, inventory control person?”

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Workshop Topics

• To stock or not to stock?• Inventory management performance metrics• Basics of inventory management• Answers to the three questions

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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

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Benefits & Costs of Stocking an Item

Benefits• Best product

availability• High customer

satisfaction• Low transaction cost

• pick, pack & ship

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Costs• Warehousing/storage• Material handling staff• Reduces available

cash / credit line• Bad investment?

• damage/theft/shrinkage• obsolescence


Benefits & Costs of NOT Stocking an Item

Benefits• Frees up cash/credit• Less warehousing• Avoids the

purchasing of future surplus inventory

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Costs• Higher transaction cost

• PO, receipt, invoice• loss of discount?• expedited freight fees?

• Lower customer satisfaction• lose an order?• lose a customer?


Inventory Management Performance Metrics: Definitions

SERVICE LEVEL• Percent of sales order line items available to

allocate to each sales order line at the time of new sales order entry

• “Was enough of this item is stock to fulfill the demand for this new sales order?”

• Measures the performance of your inventory, from your customer’s perspective

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ON-TIME-DELIVERY• Percent of all order line items shipped by a

specified date• “Did this order line item ship prior to <date>?”• Measures the performance of your inventory,

from your customer’s perspective

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ON-TIME-DELIVERY• What’s the “specified” date?

• original customer requested date

• original promise date

• original negotiated committed-to date

• modified requested, promise or committed-to date

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TURNS• annual (or annualized) cost-of-goods-sold

($ACOGS) divided by value of current inventory

• “How much have I invested in inventory to support my company’s sales?”

• Measures efficiency of your inventory, from a financial perspective

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Inventory Management Performance Metrics

SERVICE LEVELON-TIME-DELIVERYTURNS

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How does my company’s ERP system measure these metrics?


Maximize Service Level!

• Manufacturers will never “get” the importance of short lead times

• Your competitors have everything in stock• Blame it on the internet:

• everything and anything is available NOW!

• Customers have more choices

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Stock MORE!


Maximize Turns!

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your money ($)

$Annual Sales

$Cost of Goods Sold (at 27% GM)

2 turns

4 turns

6 turns

8 turns

Stock LESS!

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The Challenge: Finding a Balance

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StockMORE!

StockLESS!


The Cost of “Service Level”

0.000.010.020.030.040.050.060.070.080.090.100.110.120.130.140.150.160.170.180.190.200.210.220.230.240.250.260.270.280.290.300.310.320.330.340.350.360.370.380.390.400.410.420.430.440.450.460.470.480.490.500.510.520.530.540.550.560.570.580.590.600.610.620.630.640.650.660.670.680.690.700.710.720.730.740.750.760.770.780.790.800.810.820.830.840.850.860.870.880.890.900.910.920.930.940.950.960.970.980.991.000

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Service Level (ship from stock)

$Cos

t of S

ervi

ce L

evel

Transactions Costs

Inventory Carrying Costs

Combined Costs

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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

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Scope of Inventory Management

• Balance SERVICE LEVEL and TURNS• maximize customer satisfaction

• maximize asset (inventory) efficiency

• Do it accurately, with no errors• Do it quietly, without whining

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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)

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Four Parameters that Determine Stocking Method Examples

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One-Year Metrics I II III IVUnit Cost $5 $5,000 $100 $500Quantity Sold 2000 2 100 100$ACOGS $10,000 $10,000 $10,000 $50,000# of Hits 100 1 3 50% Sold to Top Customer 17% 100% 33% 90%


Possible Item Dispositions (by # of Hits)

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all items, sorted by decreasing # hits (in one year)

# hi

ts (i

n on

e ye

ar)

high medium slow inactive


Inventory Management: Definitions

Forecasted Demand (anticipated consumption)• This is what your company’s ERP system

thinks you are going to sell• FMD (forecasted monthly demand)• FDD (forecasted daily demand; FMD/30)

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• HIT (order)• LEAD TIME (LT) (a calculated average)• SAFETY STOCK (SS) (in days’ of demand)

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• NET STOCK (NS)

= on hand (physically present)

- allocated (to an order, transfer, assembly)

- on backorder

+ on open purchase order (PO)

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Stocking Methods…

…tell you WHEN to buy

…tell you HOW MUCH to buy

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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)

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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

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• 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…

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• Effect on service level and turns• “MIN” affects service level

• “MAX” affects “turns”

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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

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How does my company’s ERP system control a static inventory plan?


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

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• WHEN to buy• net stock falls below “Order Point” (OP)

• OP = FDU (LT + RC + SS)

• Example:• FDU = 5 units (= FMU of 150, divided by 30 days)• LT = 30 days• RC = 14 days (two weeks)• SS = 20 days• OP = 5 x (30 + 14 + 20) = 320

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• HOW MUCH to buy• “Order Quantity” (OQ)

• OQ = FMU x MS (MS = # of months’ supply) - NS• Example:

• FMU = 150 units per month• MS = 2 months’ supply• NS = 100 units• OQ = (150 x 2) – 100 = 200

• Demonstration…

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• Effect on service level and turns• SS (safety stock, in days) affects service level

• MS (months’ supply) affects “turns”

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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, RC, SS)

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How does my company’s ERP system control a dynamic inventory plan?

How does my company’s ERP system calculate Forecasted Demand?

If the company that provides my ERP system can predict the future, why doesn’t it make software to help me win in the stock market????


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)

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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

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How Much to Stock? $ACOGS Analysis

• x• x• x• x• Demonstration…

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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)

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Possible Item Dispositions (by # of Hits)

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all items, sorted by decreasing # hits (in one year)

# hi

ts (i

n on

e ye

ar)

high medium slow inactive

NON-STOCKSTATICor

NON-STOCK

DYNAMICor

STATICDYN

AM

IC


Quarterly Inventory Plan Method Selector (Concept)

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Start

Recent &anticipated sales

activity?

Nonstock

Static Dynamic

Micro-Managed

Lots of hits?High $$$

mostly to onecustomer?

Specialcircumstances?

YES YES

YES

NO NO NO

NO

YES


Quarterly Inventory Plan Method Selector (Example)

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Start

last 6mo: 2+ hits?prev. 6mo: 1+ hits?future sales?

Nonstock

Static Dynamic

Micro-Managed

last 6mo: 4+ hits?$ACOGS > $25K?> 75% sales to one customer?

Stock request?New customer?Strategic item?Service item?

YES YES

YES

NO NO NO

NO

YES


Four Parameters that Determine Stocking Method Examples

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One-Year Metrics I II III IVUnit Cost $5 $5,000 $100 $500Quantity Sold 2000 2 100 100$ACOGS $10,000 $10,000 $10,000 $50,000# of Hits 100 1 3 50% Sold to Top Customer 17% 100% 33% 90%Disposition dynamic non-stock static micro-

managed


Inventory Control Values

• Step 1: Define $ACOGS thresholds for ABCD classification

• (show screenshot of ABCD tool)

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Inventory Control Values

• Step 2: Define control values for statically and dynamically managed items, by ABCD classification

• (table that shows the above)

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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…

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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

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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

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Three Questions

1. “Why is this NOT in stock?”

2. “How did we end up with all of this surplus inventory?”

3. “What do you do for a living, inventory control person?”

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“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

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“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

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“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

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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

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QUARTERLY Inventory Control Tasks

• Review inventory control metrics• service level (availability from stock)

• on-time delivery

• inventory turns

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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

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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

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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

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Workshop Topics

• To stock or not to stock?• Inventory management performance metrics• Basics of inventory management• Answers to the three questions

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Questions?

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Learn how “inventory-sharing” with over 250 other Eaton distributors can help you improve product availability for your customers, while reducing your own surplus Eaton inventory.

Visit us at Booth #7 in the Exhibitor Area.Register an account at www.warehousetwo.com.

http://www.warehousetwo.com/


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• This is our standard bulleted PowerPoint slide• For more information on how to place text,

images, graphs and charts on this slide template, please visit the Eaton Brand Center (via the Applications & Tools dropdown on JOE) and download our PowerPoint Style Guide under Templates

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Date post:	19-Mar-2016
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The Basics of Inventory Management (for People NOT Responsible for Inventory Management)

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