Inventory Management Best Practices for 2012 - MDM · Inventory Management Best Practices for 2012...

Inventory Management Best Practices for 2012

event sponsorproduced by

December 1, 2011

[email protected] www.manh.com

http://www.infor.com/

Thomas P. GalePublisher

Modern Distribution Management

Rod DaughertySenior Director of Product Strategy

Demand Forecasting and Inventory Optimization

Manhattan Associates

Jon SchreibfederPresident

Effective Inventory Management, Inc.

Inventory Best PracticesWebcast Speakers

Achieving Effective Inventory ManagementFifth Edition

By Jon Schreibfeder

• 10% off $74 list price

• Free shipping

Order at www.mdm.com/store

Promotion code: Webcast

Special offer for attendees: Get the book!

http://www.mdm.com/store

4

SCOPE® ~ Supply Chain Optimization…Planning through Execution

5

Principles of Inventory Optimization

6Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.

6

First Steps to Achieving

Effective Inventory Management Jon SchreibfederPresident

Effective Inventory Management


“Effective Inventory Management

enables a company to meet or exceed

customers’ expectations of product

availability with the amount of each

item that will maximize net profits or

minimize your inventory investment.”

The Goal of Effective Inventory

Management


• Determining what needs to be stocked in each store, branch

or warehouse

• Liquidating unwanted material

• Analyzing and improving the accuracy of your forecasts of

future demand of products

• Maintaining reserve or safety stock quantities that will

ensure your meet or exceed customers expectations of

product availability at the lowest possible cost

First Steps to Achieve Effective Inventory

Management (EIM)


• Stocking a product is a commitment to have that product

available in reasonable quantities

• Your facilities are probably filled with:

–Stock (Merchandise you intend to stock)

–Stuff (Material that inadvertently got stuck in your facility)

What Do Your Customers Expect You to

Have in Stock?


Over 71% of items in this warehouse had sales in

three or fewer of the past 12 months


Listing of Slow Moving Items

• List in Descending Order By Value of Inventory:


• Do customers realistically expect it to be available

for immediate delivery?

• Is it a critical item that must be stocked in case of

emergency?

• Does the profit margin offset the cost of carrying

inventory for a prolonged period of time?

• Can a more popular item be used in its place?

Question Why Each Slow Moving Product

is Stocked


• The GOOD: Inventory that you stock that provides

an acceptable return on your investment

Types of Stocked Inventory




• The BAD: Inventory that doesn’t provide an

acceptable return on your investment, but

contributes to other profitable sales





• The BAD: Inventory that doesn’t provide an

acceptable return on your investment, but

contributes to other profitable sales

• The UGLY: Inventory that doesn’t provide an

acceptable return on your investment, and doesn’t

contribute to other profitable sales



• Gross Margin is defined as:

Sales Dollars - Cost of Goods Sold Dollars

Sales Dollars

No, gross margin dollars don’t vary as

the amount of inventory increases

Can You Base Actual Profitability on Gross

Margin?


• Sales = $10,000

• COGS = $6,000

• Gross Profit = $ 4,000

• Gross Margin = 40%

ave $12,000 in inventory!–What are the risks of paying commissions on gross

margin?

–How could they have accumulated $12,000 in inventory?

Is This Item Profitable?


• Calculate the Adjusted Margin:

Annual Profit ($) - (Avg. Invty Investment ($) * Carrying Cost %)

Annual Sales ($)

How to Determine if Inventory is

Profitable


Accumulation of all of the costs involved in maintaining inventory in your warehouse

◦ Cost of putting away stock receipts and moving material within the warehouse

◦ Insurance and other charges on inventory

◦ Rent and utilities for the portion of your facility used to store material

◦ Physical inventory and cycle counting

◦ Inventory shrinkage and obsolescence

◦ Opportunity cost of the money invested in inventory

Questionnaire at www.EffectiveInventory.com

Calculated at no cost and no obligation!

Carrying Cost (“K” Cost)

http://www.effectiveinventory.com/


Calculating the Adjusted Margin

Sales = $1,000 Gross Profit = $150

Gross Margin Percentage = 15%

K Cost = 20%

Average Inventory = $250

[$150 – (20% * $250)]/$1000 = 10%


[$150 – (20% * $500)] /$1000 = 5%


[$150 – (20% * $750)]/$1000 = 0%


A Combined Adjusted Margin for

Complementary Items

Supported Line

◦ Sales = $50,000

◦ COGS = $42,500

◦ GP$ = $7,500

◦ Avg Invty = $5,000

◦ K Cost% = 20%

“Bad” or “Ugly” Item

◦Sales = $500

◦COGS = $400

◦GP$ = $100

◦Avg Invty = $500

◦ K Cost% = 20%

[$7,600 – (.20 * 5,500)] ÷ $50,500 = 12.9%


Use total sales and profitability for the customer and the average inventory investment for the inventory

maintained primarily for that customer

Sales = $ 100,000 Profit = $ 15,000

Avg Invty = $ 50,000 KCost% = 21%

[$ 15,000 – ($50,000 x .21)] ÷ $ 100,000 = 4.5%

Note that the Gross Margin Percentage is 15%!

An Adjusted Margin for a Specific

Customer


• A report should list items in descending order based on the value of the value eligible to be liquidated.

• Remember that inventory is a sunk expense. It is not worth what you paid for it, it is worth what someone is willing to pay you for it.

• “Don’t get emotional about stock, it clouds your judgment” (Michael Douglas’ character Gordon Gecko in the movie Wall Street)

Liquidating Stuff and Excess Inventory


Examples of Dead or Very Slow Moving

Inventory


• Transfer excess stock to another company location where

the inventory is needed

• Reduce the price

• Offer salespeople a “spif” to sell the product

• Advertise the availability of this material to other suppliers

• Substitute the product for a less expensive item

• Return the material to the vendor

• Donate the material to a non-profit organization

• Throw it away

The Liquidation of Unwanted Inventory


Transfer Inventory to Where it is Needed


• Search the web with the words “Surplus Inventory [Product Line]:

• Some sites for liquidating industrial goods:– www.partsforindustry.com

– www.excessconnect.com

– www.industryrecycles.com

– www.sbmac.com

• Some sites for liquidating consumer goods:– www.sellmyinventory.com

– www.liquidation.com

– www.directexcess.com

– www.instantliquidators.com

Advertise Material to Other Suppliers

http://www.partsforindustry.com/

http://www.excessconnect.com/

http://www.industryrecycles.com/

http://www.sbmac.com/

http://www.sellmyinventory.com/

http://www.liquidation.com/

http://www.directexcess.com/

http://www.instantliquidators.com/


• New stock items should be maintained with manually set

parameters until enough usage history has been

accumulated to accurately forecast demand

• New stock items are usually the source of most dead

inventory. That is, it’s dead on arrival

New Stock Items


Who will buy this product or product line?

What are the estimates of usage for each of the upcoming six months?

What is the anticipated gross margin for sales of this item?

What affect will usage of this product have on usage of other existing stock

items?

How many month’s supply must initially be purchased? What investment is

necessary?

Where will this new inventory be stored?

How can any unsold stock be liquidated?

New Item Questionnaire


• Committee of marketing, sales, management and

purchasing

• How accurate has the source been in the past?

• Three or more members must agree to add the product to

stock inventory in that location

Evaluating New Item Questionnaires


Provide salespeople with a weekly report of the sales of new stock products. For each item:◦ Item and Description

◦ Sales and Gross Margin Projections

◦ Actual Sales and Gross Profits

◦ Current Available Quantity

◦ Value of Available Quantity

◦ Person requesting that the product be stocked

Consider a budget for new inventory items

Keep Sales and Marketing Focused On

New Stock Items


• If a product is needed that is not on the approved stock list:

–Customer must buy the entire quantity that must be ordered

–Customer must pay for the entire quantity that must be ordered

–Salesperson must pay for any stock that the customer doesn’t buy or pay for

–Any remaining inventory is expensed against the transaction

Working with Non-Stock Items


A demand forecast is a prediction

of the quantity of a product that will

be sold, transferred or otherwise

used during a specific time period.

How Much of Each Stocked Item Will

be Used at Each Location?


• Who forecasts?

• What method do you use to forecast?

• What do you consider when you forecast?

• When do you forecast?

• How far out into the future do you forecast?

• Historically how accurate are your forecasts?

How Do You Forecast Future Demand

Now?


• The “if it’s on paper it must be true” syndrome

• Most systems base demand solely on some average of past usage. Often buyers/planners don’t know formula!

• Usually one formula is used to calculate demand for all products

• There is usually no verification to see if the quantity forecast for a certain month was actually sold or shipped in that month

• No system for reliably obtaining future predictions of demand from customers

Common Problems with Demand

Forecasting


• Past usage of the product–A formula that includes observed increasing or

decreasing trends as well as possible seasonality

• External trends ––Economic or environmental factors

• Events–Promotions, holidays, etc.

• Collaborative information from customers or salespeople

• Appropriate forecast horizon or time period

Accurate Demand Forecasts Are Based On

Five Elements


Improving the Forecast Accuracy

Average forecast error percentage reduced from

583% to 15%

Now 18 months into the program turnover exceeds four

annual turns!


Calculating the Forecast Error

A100 Usage Forecast Calculation Error%

Oct 100 50 [ABS(100 – 50)] 50 100.0%

Sep 50 100 [ABS(50-100)] 50 100.0%

Aug 95 100 [ABS[(95-100)] 95 5.3%

[Absolute Value of (Usage – Forecast)]

Lower of Forecast or Usage


In a study done by EIM of a wide range of distributors using a wide range of computer systems:◦ The mean forecast error was 682%

◦ The median forecast error was 381%

“Best Practice” companies had an error that was approximately 1/10th of the average forecast error in their industry

The better your forecast, the less you need to stock to maintain your desired level of customer service

The “Average” Forecast Error

../Seminar Documents/Sample Forecasting Spreadsheet Std 08-2011.xlsx


Different Patterns of Usage Require

Different Forecasting Methods

Item Nov ‘11

Oct ‘11

Sep ‘11

Aug ‘11

Jul ‘11

Jun ‘11

May ‘11

Apr ‘11

Mar ‘11

Feb ‘11

Jan ‘11

Dec ‘10

A100 100 120 80 90 110 105 88 109 98 118 112 108

B200 300 260 220 188 160 142 138 122 109 98 80 76

C300 1020 28 1030 34 990 36 1033 27 1004 39 1034 26

D400 41 85 160 241 370 398 224 129 57 36 24 20


Different Items Have Different Patterns

of Usage……

0

100

200

300

400

B200

B200

0

500

1000

1500

C300

C300

0

200

400

600

D400

D400

0

50

100

150

A100

A100


• Events do not occur at exactly the same time each

year–Some holidays

–Promotions

• External factors are outside of your control but may

affect usage–Changing market tastes

–Economy

–Weather

Events and External Factors will Affect

Usage


1. Hypothesis: I think this event will affect usage

2. Test: Does it affect usage?

3. Record results: When this occurs again, I can adjust the forecast to take into account the results of this event or external factor

4. Clean usage history: Adjust out the effects of the event from usage history. After all, this event will not occur at exactly the same time next year.

Analyze Each Event & External Factor


Measuring the Effect of Events

Event Start Day End Day Prior –Event %

Prior–Post Event%

Centennial Founders’

Day

04/23/2011 04/30/2011 -25.0% 10.0%

Promo-1 06/01/2011 06/07/2011 26.8% -0.8%

Promo-1 09/01/2011 09/07/2011 14.0% -4.7%

Promo-2 10/01/2011 10/07/2011 13.2% -13.0%


120

April 0

2

120

125

April 9

125

119

April 1

6

119

89A

pril 2

3

+30

119

Actual Sales

Adjustment for

Event

Normalized

Usage

Effect of 100 Year Celebration

The 25% decrease in usage during Centennial Founders’

Day will not reoccur. The 25% decrease in sales is

compensated for in Normalized Usage. Formula:

Actual Usage ÷ (1 ±% Difference from Normal Usage)


488

May 1

1

488

524

May 1

8

524

462

May 2

5

462

595

June 1

-126

469

Actual Sales

Adjustment for

Promotion

Normalized

Usage

Effect of Promotion #1

Promotion #1 resulted in a 26.8% increase in sales. This

increase should be adjusted out of usage history. When

Promotion #1 is offered in the future, the forecast for that

week should be adjusted by the average previous results of

Promotion #1.


• Even after automatic adjustments to usage have been applied there still may be significant differences between the demand forecast and actual usage

• Salespeople are closest to the customers

• Salespeople can best determine if possible unusual usage is:–Activity that will not reoccur–Start of a new trend

Buyers Should Bring Possible Unusual

Usage to Sales


Usage This Inventory Period >

“x%” of the Forecasted Demand

For Example: Usage in June (1500 pieces) is

greater than four times forecasted demand

Ju

ne

May

Ap

ril

Marc

h

Feb

ruary

Jan

uary

Usage 1500 410 290 375 450 303

Forecast 368 420 305 368 404 334


Usage this Inventory Period < “y”% of

the Forecasted Demand

For Example: Usage in June is less than 20% of

the forecasted demand

Ju

ne

May

Ap

ril

Marc

h

Feb

ruary

Jan

uary

Usage 40 210 260 185 290 160

Forecast 224 208 274 202 269 204


• We have noticed that products with an item number starting

with “A” or “1” have better performance than products with

an item number beginning with “Z”

• Examine transactions, talk with salespeople and customers

to determine if any unusual activity occurred

List by Rank of Product by Size of the

Discrepancy


• Quantity sold or used during the month was affected by

activity that won’t reoccur

• A new sales trend has begun

• The wrong forecast formula is being used to predict future

demand of the product

Reasons for Possible Unusual Usage


Compensating for an Unusual Sales

Quantity

In reviewing all of the transactions for June, the buyer notice an unusual sales of 1,000 pieces. After talking to the

salesperson or customer it was decided that this transaction was unusual

Ju

ne

May

Ap

ril

Marc

h

Feb

ruary

Jan

uary

Usage 1500 410 290 375 450 303

Adjustment -1000 0 0 0 0 0

500 410 290 375 450 303Normalized

Usage


Ju

ne

May

Ap

ril

Marc

h

Feb

ruary

Jan

uary

Usage 1500 410 290 375 450 303

Adjustment 0 1000 1000 1000 1000 1000

1500 1410 1290 1375 1450 1303Normalized

Usage

Compensating for a New Sales Trend

A new customer will continue to buy

approximately 1,000 pieces a month for the

foreseeable future


Forecast Horizon

If the anticipated lead time for a product is 90 days, you’re buying in early February to satisfy demand in May

The forecast horizon starts at today’s date plus the lead time

January February March April May

Place Order with

Supplier

Anticpated Lead Time

Anticpated Stock

Receipt2

8

Da

ys

59

Da

ys

89

Da

ys


Maintain Adequate Safety Stock

• Safety stock is reserved inventory maintained to protect

customer service in case of unusual demand or delays in

receiving a stock receipt during the time it takes to replenish

inventory.

• Like any other type of insurance safety stock is an expense,

not an investment


•“Painful Backorder” - items (1/2% - 11/2%) of the

products you stock

• Products with erratic usage

• Products with erratic lead times

• High profit items

• Stock reserved for a specific customer

Items That Require More Safety Stock


• Items with very consistent usage and lead times

• Products with a large number of “hits”

• Low usage items, especially very expensive low usage

items

Items That Require Less Safety Stock


50

100

150Jan

uary

Feb

ruary

Marc

h

Ap

ril May

Ju

ne

Forecasted

Monthly

Demand

Safety Stock Based on the Deviation

Between Forecast Demand and Usage


50

100

150

Jan

uary

Feb

ruary

Marc

h

Ap

ril

May

Ju

ne

Forecasted

Monthly

Demand

Safety Stock Based on the Avg. Deviation

Between Forecast Demand and Usage


# o

f tim

es E

ach

To

tal

Usa

ge

Qty

wa

s R

eco

rde

d

Total Usage Recorded in a Month

A lot more

safety stock

needed for

relatively few

months with

large

quantities

Deviation Multiple

Approx Service Lvl

1 65.0%

2 95.0%

3 97.5%

4 98.5%

5 99.0%

The Deviation Multiple


Determining the “Right” Amount of Safety Stock

Safety Stock Amount↓ Avg Total SS$ Average Res$

Service

Level

2 * Average Deviation $1,146,066.11 $1,690,213.52 94.4%




“Effective Inventory Management

enables a company to meet or exceed

customers’ expectations of product

availability with the amount of each

item that will maximize net profits or

minimize your inventory investment.”

The Goal of Effective Inventory

Management


• Determining what needs to be stocked in each store, branch

or warehouse

• Liquidating unwanted material

• Analyzing and improving the accuracy of your forecasts of

future demand of products

• Maintaining reserve or safety stock quantities that will

ensure your meet or exceed customers expectations of

product availability at the lowest possible cost

First Steps to Achieve Effective Inventory

Management (EIM)


Jon Schreibfeder, President

Effective Inventory Management, Inc.

120 South Denton Tap Road

Suite 450 – 200

Coppell, TX 75019

Phone - 972 304-3325

Fax - 972 393-1310

[email protected]

www.EffectiveInventory.com

If you have questions…..

mailto:[email protected]

Inventory Management Best Practices for 2012 - MDM · Inventory Management Best Practices for 2012...

Documents

Transcript of Inventory Management Best Practices for 2012 - MDM · Inventory Management Best Practices for 2012...