Best Practices for Inventory Reduction

Best Practices for Inventory Reduction

Gary GossardIQR International

© 1992-2005 IQR International, Inc.

Presentation OutlinePresentation OutlineBest PracticesTop Ten Inventory Reduction PracticesInventory Quality RatioReduction Strategies and Case Studies

Identify and Reduce the ExcessRevise Material Ordering GuidelinesUse Continuous Improvement

Summary & Conclusions


Definition 1Definition 1A “Best Practice” is a process or technique … that has a proven record of success in providing significant improvement in cost, schedule, quality, performance, safety, environment or other measurable factors which impact the health of an organization.

The Best Manufacturing Practices Center of Excellence


Definition 2Definition 2A “Best Practice” is a group of tasks that optimizes the efficiency or effectiveness of the business discipline or process to which it contributes. It must be implementable, replicable, transferable and adaptable across industries.

The Gartner Group


Inventory Reduction Inventory Reduction Best Practices SurveyBest Practices Survey

Inventory Management Report“Improving Logistics & Supply Chain Management”

Survey of inventory managersReported top 5 best practicesTabulated by company size

Under 500 employeesOver 500 employees

Ranked 20 practices by overall utilization


Top Ten Reduction PracticesTop Ten Reduction PracticesConduct periodic reviews 65%Analyze usage and lead times 50%Reduce safety stocks 42%Use ABC approach (80/20 rule) 37%Improve cycle counting 37%Shift ownership to suppliers 34%Re-determine order quantities 31%Improve forecast of A and B items 23%Give schedules to suppliers 22%Implement new inventory software 21%


Survey ConclusionsSurvey Conclusions

“Periodic Review” still most popular“Order Quantities” biggest gainUsing more analytical approaches

Past usage and safety stocksLot sizes and order quantitiesABC classifications

Takes more than one best practiceInventory reduction a two step process


Introducing IQRIntroducing IQRA comprehensive approach to reducing inventory investment.

A more useful method of measuring inventory performance.

Developed by 35 materials managers.

Combines 7 of top 10 best practices.


Inventory Quality RatioInventory Quality RatioInventory management techniqueWorks with your existing systemTop-down focus on inventory dollarsMeasures performance by segmentGives planners information they needEnhances any MRP/ERP/SCM system No additional data entry required.


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IQR LogicIQR Logic


Inventory Quality RatioInventory Quality Ratio

IQRIQR ==A1 + A2A1 + A2

IQR =IQR =Active Inventory DollarsActive Inventory Dollars

Total Inventory DollarsTotal Inventory Dollars

Perfect Perfect IQRIQR = 100%= 100%

A1 + A2A1 + A2 + E1 + E2 + E3+ E1 + E2 + E3 + SM + NM+ SM + NM


Inventory Quality RatioInventory Quality Ratio

IQRIQR ==A1 + A2A1 + A2

IQR =IQR =Active Inventory DollarsActive Inventory Dollars

Total Inventory DollarsTotal Inventory Dollars

Average Average IQRIQR = 30= 30--45%45%

10%10%3030--50%50%

A1 + A2A1 + A2 + E1 + + E1 + E2E2 + E3+ E3 + + SM + NMSM + NM


The IQR LogicThe IQR LogicAnalyzes inventory using:

Balance on hand and unit costPast usage and future requirementsABC techniques and user-defined parameters

Develops inventory quality categories:Active: reqmt/use, balance within limitsExcess: reqmt/use, balance over user’s limitsSlow Moving: no reqmt, no use in 6 monthsNo Moving: no reqmt, no use in 12 months

Measures overall inventory performance.Combines BPs with a dollar focus.


Inventory Reduction Strategies Inventory Reduction Strategies with Case Studies of IQR Resultswith Case Studies of IQR Results

1. Identify and Reduce the ExcessRapid Inventory Reduction at IGT

2. Revise Material Ordering GuidelinesWorking Smarter, Not Harder at AGCS

3. Use Continuous ImprovementWorld Class Performance at Steelcase


1. Identify & Reduce the Excess1. Identify & Reduce the ExcessQuick Look

Good and Bad

Focus on Dollars

Action Items

Open Orders

Action Codes


Case 1 Case 1 -- Rapid ReductionRapid Reduction♠ International Game Technology (♠IGT)♠ Gaming equipment manufacturer♠ Markets and products evolving♠ Shortages increasing♠ Inventories growing & turns falling♠ Tired of “Program of the Month”♠ Management’s demands of consultant

Long-term solutionShort-term benefitsReduce inventory $10 million by FY end.


Inventory Dollars by CategoryInventory Dollars by CategoryPurchased and Manufactured at Purchased and Manufactured at ♠♠IGTIGT

Excess 2: The biggest and best reduction opportunities.Excess 2: The biggest and best reduction opportunities.

Quick Look Dollars ($1000) by Purch/Manuf and Quality Category

Purch Active Active Excess Excess Excess Slow No Total IQRManuf 1 2 1 2 3 Moving Moving Value Ratio

P 351 16,994 4,097 26,879 0 1,738 3,400 53,458 32.4%

M 21 695 121 385 18 267 1,507 47.5%

Total 372 17,689 4,218 27,264 0 1,756 3,667 54,965 32.9%

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Rapid Reduction PhaseRapid Reduction Phase♠ By fiscal year end - 3 months

Over $10 million reduction (20%)27% reduction in Excess 2 inventoriesManagement very happy.

♠ By calendar year end - 5 months$16.4 million reduction (31.5%)53% reduction in Excess 2 inventories$14 million increase in cash flow.

♠ Increased turns, cash flow and ROA.


Rapid Inventory Reduction Rapid Inventory Reduction ♠♠IGTIGTInventory Dollars and IQR Performance

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Rapid Reduction Phase Continuing Improvement Phase

Added 10,000 moreinventory items

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Continuing Improvement PhaseContinuing Improvement Phase♠ Deployed IQR to all planners

♠ Doubled the parts managed with IQRAdded 10,000 items and $14 millionNew items lowered overall IQRTotal inventory base $69 million

♠ $30 million reduction (43% in 14 months)

♠ Purchased parts reductionsExcess 2: $20.3 million (61%)SM + NM: $3.8 million (52%)


2. Revise Ordering Guidelines2. Revise Ordering GuidelinesInventory Profile

Target Setting

What Ifs

Custom Analyses

Safety Stocks

Ordering Rules


Case 2 Case 2 -- Working SmarterWorking SmarterAG Communication Systems (AGCS)

Lucent Technologies and GTE$350 million total sales

Central office switching networksGenoa, IL: 800 employees, 300K s.f.Inventories

20,000 active part numbers$16 million purchased parts$9 million WIP and finished goods


Inventory Performance Inventory Performance Pressures MountingPressures Mounting

Aggressive growth planShorter product life cyclesInventory investment increasingInventory turns deterioratingObsolescence exposure growing

20% of inventory balanceReserve funded from net income


New Approach NeededNew Approach NeededHad been using

State-of-the-art systemsEvent-driven replenishmentMake-to-order assemblyExperienced planners

“The results just weren’t there!”Spending too much time on C itemsNeed to focus on $$$, not quantities

Saw IQR as a more effective method


Improvement Strategy Improvement Strategy A Three Step ApproachA Three Step Approach1. Stop the Bleeding

Cancel or defer excess open orders

2. Clean HouseIdentify slow and obsolete inventoriesAssess potential for reducing write-offs

3. Take Away the KnifeApply ABC classificationsRe-evaluate ordering guidelinesSynchronize IQR and MRP


Inventory Dollars and IQR AGCS

Purchased Parts by Category and IQR Performance

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The Results and BenefitsThe Results and BenefitsIQR doubled in nine months35% reduction in excess inventory$3.8 million inventory savingsDoubled active inventory availableFine tuned their MRP systemOrders now consistent with targetsEveryone working smarter, not harderQuicker response to product changes


3. Use Continuous Improvement3. Use Continuous ImprovementThe Second Step

Movement Matrix

Flag Changes

Financial Impact

Track Results

Root Causes


Three Causes of Bad InventoryThree Causes of Bad Inventory

MaterialsMaterials SalesSales EngineeringEngineering

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Case 3 Case 3 -- SteelcaseSteelcase (four plants)(four plants)

World Class PerformanceWorld Class Performance4 - 12 - 24 IQR= 80-90% 30 turns1 - 2 - 6 IQR= 40-50%6 months IQR= 55-70% 40 turns

Over 42 turnsMake to order

BenchmarkRevise rulesDon’t outgrowThe best get better.


Best Practices and IQRBest Practices and IQRConduct periodic reviewsAnalyze usage and lead times Reduce safety stock levelsUse ABC approach (80/20 rule)Shift ownership to suppliers Re-determine order quantitiesUpdate inventory systems

IQR adds the dollar focusIQR adds the dollar focus


IQR EnvironmentsIQR EnvironmentsManufacturing companies

material plannersbuyersproduction schedulersoperations managementfinancial management

Distribution and logisticsUtilities and MRO storesManagement consultants


Best Practice Criteria Best Practice Criteria

A “Best Practice” is a process or technique that has a proven record of success in providing significant improvement.

It must be implementable, replicable, transferable, and adaptable across industries.


IQR Use is SpreadingIQR Use is SpreadingAirtechnicsAlcatelAllergan Medical Amtrol IncorporatedAndrew CorporationArvin MeritorAvery DennisonBanner PharmacapsBeckman CoulterBiltBest ProductsBinney & SmithBlack & DeckerBosch CorporationBunn-O-Matic CorpCarrier CorporationChamberlain GroupDana Corporation

Dialogic - Intel Corp.Dow ChemicalEastman ChemicalEngenio IT - LSI LogicErico IncorporatedGKN AutomotiveHoneywellHyundaiJohnson & JohnsonKaty IndustriesKorry ElectronicsKohler CompaniesKrebs EngineersLuK Automotive MotorolaNational OilwellNational RVNewell-Rubbermaid

Nilfisk-AdvanceOakleyOcean CuisineO’Sullivan IndustriesPharmacia ItaliaRheem ManufacturingRicon CorporationSchering-PloughSchlumbergerStanley - MAC ToolsTelex CommunicationsTyco ElectronicsUnilever BestfoodsWellman ProductsWenger CorporationWoodward GovernorValmont IndustriesVita-Tech International


ConclusionsConclusionsMRP/ERP good for planningBest practices needed to manage IQR combines best practices with $ focusKeys to reducing inventories:

Focus on the dollars – prioritize opportunitiesIdentify the excess – stop the bleedingApply dynamic ABC analysis – work smarterRe-evaluate ordering rules – fine tune MRPMonitor movement – address root causes

Make the planners’ job easier.Improve turns, cash flow and profits.


Thanks for attending.

Questions?Questions?

[email protected] (949) 487-5400

Best Practices for Inventory Reduction

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