PROPRIETARY 2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit What top...

PROPRIETARY2000 Optimus Inventory Ltd.All Rights Reserved.

turning inventory into profitturning inventory into profit

What top

management

need to know about

inventory

management


turning inventory into profit

The Challenge

MinimiseCost

MaximiseProduct

Availability



Growth – Customer Pull

13 years200+ customers<90 consultants

South Africa

Australia

USA

UKEurope



Selected Clients



Client Market Profile

P&A35%Industrial

12%

Agriculture10%

Chemical8%

Steel15%

Timber3%

Mining4%

Retail5%

Government3%

Electronics5%



Role of ERP Systems

Inventory Inventory ManagementManagement

Levels

RecommendedOrders

SalesIssues

SonH

SonO

Control System

GoodsReceived/Dispatch

Sales &Issues

Arithmetic

ManagementReports

Exceptionand action

Reports

Modelling& what-if

TargetServiceLevels

MonthlyWeeklyDaily

Management Tools

Policy

Forecasting

LTSafety Stock

Optimisation



• Companies are frustrated in their efforts to improve availability and reduce inventory investment

• Expectations that a new computer system will deliver bottom line benefits have not been met

• Software or consulting alone will not manage inventory and deliver benefits needed to remain competitive

• Management is no longer in control of the key drives of their inventory – The Replenishment Process

Our Experience Shows



There is no link between the level at which top

management sets Corporate Stockholding

POLICY (i.e. Target Investment Levels and Target

Service Levels)

and

The level at which the INDIVIDUAL Line Item is

ordered

The Fundamental Problem



1. Developed a Best Practices Inventory Management

Methodology based on 80/20 principles

2. Developed a breakthrough method for optimizing

line item inventory levels – Line Item Risk Profile

3. Understood that Inventory Management is a

People’s Process

4. Have a Strategic Inventory Optimisation Modeling

Tool that is process-based

How do we do this?



Best Practices Methodology

Supplier Evaluation

Excess Inventory

Management

Management Review

Item Classification

Demand Management

Strategic Planning

Order Management



Computers cannot forecast

Cannot interpretanomalies in history

Have no knowledge of the future

People People People

Exception reports

Fundamental training Predictive models

Measurement of performance Commitment to targets Formalise the process

Demand Management

Can recognisethe anomalies

Trend Analysis



Best Practices Methodology

Supplier Evaluation

Excess Inventory

Management

Management Review

Item Classification

Demand Management

Strategic Planning

Order Management



SUPPLYSUPPLY DEMANDDEMANDMATCH

SAFETYSAFETYSTOCKSTOCK

Lead timeLead timeunreliableunreliable

Forecast Forecast inaccurateinaccurate

Line Item Risk Profiles

CYCLECYCLESTOCKSTOCK

Cycles Batches Min Qty’s

Sources of Risk



Buffer/Safety stock Replenishment Cycle

1

2

3

4

Model

Sto

ck L

eve

l

Time

Replenishment Cycle = 3 months

2.5 months

1 2 3 4 5 6

Time

1

2

3

4

Replenishment Cycle = 1 month

Model1.5 months

1 2 3 4 5 6

Inventory Policy Model

Buffer = 1 month - 40% Buffer = 1 month - 67%



Time

There are only two reasons for holding safety stock :

To compensate for -

Inaccurate forecastInaccurate forecastof demandof demand

Unreliable supplyUnreliable supply

PrimaryPrimarysourcessourcesof riskof risk

Inventory Policy Model

Buffer/Safety stock

Time

1

2

3

4

Model

Sto

ck L

eve

l

Time

Replenishment Cycle = 3 months

2.5 months

1 2 3 4 5 6



Mo

nth

s o

f C

ov

er

Time

ForecastAccuracy

Lead TimeReliability

Replenishment Cycles

Cycle StockCycle Stock

Safety StockSafety Stock

Review PeriodsReviewPeriods

Target Service LevelsTarget Service Levels

Lead Time

Six Dimensional Problem



Forecast Error

Lead TimeError

Lead TimeInvestment

Risk Profiles

TargetServiceLevels

Service ormarketing Strategies

Management ProcessesManagement ProcessesInvestmentInvestmentDecisionsDecisions

Strategic PlansStrategic Plans

Functional IntegrationFunctional Integration

RISKRISKSOURCESSOURCES

RISKRISKMULTIPLIERSMULTIPLIERS

STRATEGICSTRATEGICOBJECTIVESOBJECTIVES

XXReview Period

Repl. Cycle

The Methodology Scope



Safety StockSafety Stock

70 %

75 %

80 %

85 %

90 %

95 %

100 %

Av

aila

bili

tyA

va

ilab

ility

ImproveImproveAvailabilityAvailability

ReduceReduceInvestmentInvestment

½ monthmonth 1 month1 month ½ monthsmonths

10 %10 %

3 %3 %

11

Optimising the Investment



WATER LEVELWATER LEVEL INVENTORY LEVELINVENTORY LEVEL

ROCKS INVENTORY RISK PROFILES

StockoutStockout

JIT Principles - Covering the Defects



WATER LEVELWATER LEVEL


INVENTORY LEVELINVENTORY LEVEL

Covering the Defects



WATER LEVELWATER LEVEL

ROCKS INVENTORY RISK PROFILESROCKS INVENTORY RISK PROFILES

INVENTORY LEVELINVENTORY LEVEL


Covering the Defects



2.2. What about …What about … Shopping basket Shopping basket effect?effect?

one stop shopping?one stop shopping?

Quantify the cost of stockoutsQuantify the cost of stockouts

1.1. What % of stockouts result in lost sales?What % of stockouts result in lost sales? 60%60%

3.3. What about losing customers?What about losing customers?

LSMLSM0 0.5 1.51.0

£1m£1m GP pm GP pm 1%1% increased avail.increased avail. £13 000 p.m.

Lost Sales Multiplier



Demonstration



People doPeople do

Software does not manage inventory…

Experience

Tools

Training and motivation

Measurement of performance

Targets & Goals

Formal structure & procedures



0

50

100

150

200

250

300

350

400

CorporateFunding

InventoryManagement

CreditorManagement

DebtorManagement

Customary skills level

(HAY EVALUATION UNITS)

Experience



Causes of Inventory

Inaccurate Data

Internal Processes

Inefficient Distribution Network

Ineffective Mgmt of Excess

MOQ’s

Product Range

Lengthy Cycles

Unreliability of Supply

Excess Lead Times

Unacceptable Forecast Error

Inappropriate Safety Stock

Inve

stm

ent

in I

nve

nto

ry

Most Leverageable?

1. Identify the “causes of 1. Identify the “causes of inventory”inventory”

2. Quantify each cause2. Quantify each cause

3. Prioritize (80/20)3. Prioritize (80/20)

4. Attack each Area4. Attack each Area

5. Ongoing Process5. Ongoing ProcessBar

riers



Scenario Modeling

OPTIMUS Recommended Actions with Quantified Targets

Shorten Lead Times

Current

IncreaseAvailability

Set Safety Stock

ActionExcess

Rationalize Product Range

Improve Forecasting

Inve

nto

ry V

alu

e

Initiatives

Improve Supply Reliability

Time Phased Targets



Best Practices Checklist

Does your organisation……your organisation……• Buy into your inventory and availability objectives?Buy into your inventory and availability objectives?

• Set Safety Stock based on individual line item forecast accuaracy and lead time Set Safety Stock based on individual line item forecast accuaracy and lead time

reliability?reliability?

• Model the effects of different stockholding policies using Target Service levels?Model the effects of different stockholding policies using Target Service levels?

• Use a home-grown spreadsheet system to model inventory policies?Use a home-grown spreadsheet system to model inventory policies?

• Have a low order intervention rate – measured and audited?Have a low order intervention rate – measured and audited?

• Know what your forecasting and supply performance is?Know what your forecasting and supply performance is?

• Set excess stock targets on the top 20 excess stock items monthly?Set excess stock targets on the top 20 excess stock items monthly?

• Hold a monthly Inventory Manangement meeting to review performance against Hold a monthly Inventory Manangement meeting to review performance against

agreed targets and set new targets?agreed targets and set new targets?

PROPRIETARY 2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit What top...

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Transcript of PROPRIETARY 2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit What top...