scmr_inventorymanagement_masterslidedeckpdf

Moderator: Frank QuinnEditorial Director

Presenter: Ralph CoxDirector

Welcome & IntroductionWelcome & Introduction

Copyright 2011 Tompkins Associates. All rights reserved. www.Tompkinsinc.com

10 Proven Ways to Cut Your Inventory Costs

Businesseso Manufacturerso Wholesale Distributorso Retailerso eCommerce / Consumer Direct

Demand Patternso Routineo Trendo Seasonalityo Level Shifto One-time Event / Promotiono New SKUs

Supply Chainso Domestico Global

Inventorieso In Transito Raw Materialso WIPo Finished Goodso MRO

Inventory Policieso SKU Stocking o Safety Stocko Cycle Stock

Business Processeso Forecastingo Demand Planningo Capacity Managemento Inventory Managemento Production Schedulingo SKU Discontinuationo Reverse Logistics


Organizational /Geographical

Logistical

Product Hierarchical

Company

DC

Category

Region

Bill-to-Customer

Class

Forecast Level

High

Low

Forecast Error (MAPE)

State

Ship-to-Customer

SKU

ForecastingRealms

Organizational / Geographical

Logis

tical

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1. Improve Forecast Accuracy

Editing data in the sales history which would mislead forecasting software algorithms past out-of-stock situations past promotions

Establishing a database of past promotion lifts for forecasting future promotions

Incorporating non-routine demand and structural changes into the future forecast the number of stocking locations

(level shifts) future promotions

Keys:

Why: Improving SKU-location-level forecast accuracy minimizes overstock, reduces out-of-stock situations, reduces unnecessary transportation costs and increases revenue

How: Edit sales history Forecast promotions explicitly Use statistical forecast tools Get input from multiple stakeholders Collaborate with customers


2. Base Safety Stock on Customer Service Levels

Current Customer Service Levels

50%55%60%65%70%75%80%85%90%95%

100%

1 706 1411 2116 2821 3526 4231 4936 5641 6346 7051

Ranked SKUs

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Basing customer service levels on desired unit fill rates.

Calculating the safety stock levels dynamically based on: demand variability / forecast

error lead time and lead time

variability cycle stock policies

Adjusting desired customer service levels based on the actual order fill rates achieved

Keys:

How: Calculate safety stock for each stock SKU-location based on the desired customer service level, by SKU class, either: as a minimum during the

replenishment lead time as a long-term average

Why: Basing safety stock on desired customer service levels provides the most effective use of working capital relative to the fill rates and SKU in-stock percentages achieved


3. Transfer; Avoid Acquiring More

Why: In the reverse direction, between network tiers, transfers reposition inventory from lower to higher demand locations to work it off

In the lateral direction, within the same network tier, transfers minimize purchases

How: Understand the warehousing and transportation costs involved

Identify potential transfers automatically Review transfers and release manually Limit transfers to:

SKUs with very accurate forecasts SKUs with significant overstock Transfers for which the cost is

significantly less than the upcoming annual holding cost

Keys: Lateral transfers work most effectively with medium-volume product which is inexpensive to handle and ship

Reverse logistics transfers, say from branch or store to DC, work most effectively with more expensive product which can be backhauled for free


4. Vendor-managed Inventory (VMI) and Vendor Stocking Program (VSP)

Beginning with extensive due diligence: suppliers demand planning

systems and internal performance management program

results achieved for others Measuring performance and

proceeding slowly based on results Operating with written agreements,

defining responsibilities and goals

Keys:

How: Negotiate an agreement with suppliers for selected SKUS: Difficult to forecast Expensive

If trusted, as well as properly and adequately incentivized: true VMI suppliers have increased

visibility and thus the potential to reduce both inventory as well as unit costs and, sometimes, operating costs

VSP suppliers, most often used for MRO, dont have increased visibility but can reduce inventory, especially when other customers are in close proximity

Why:


5. Think Postponement

How: Understand the concept Identify SKUs with high potential Make appropriate changes in routings,

procedures, etc. Establish semi-finished level inventory

policies

Keys: Identifying commonality in bills of material mirroring the production sequence

Some examples Common formulations with the

exception of color or fragrance Products sold in many package styles

or capacities Product-packages sold under

different labels (the most common example: bright (unlabeled) cans -packaged to inventory and labeled only after receipt of customer orders

Why: Postponement facilitates holding smaller inventories and simultaneously reduces customer lead time


6. Rationalize SKUs and SKU Stocking Locations

Why: SKUs tend to be added faster than they are discontinued, unnecessarily increasing inventory and reducing turnover

Multiple SKU-locations exacerbate inventory, reducing customer transit time, but often only marginally and possibly unnecessarily

Keys: Investigating the GMROI ratio (annual gross margin /

average inventory value) and SKU revenue / number of stock SKU-

locations across the full range of SKUs helps identify opportunities for improvement.

For multi-tier networks, use a hierarchical strategy

Make SKU stocking decisions based on: For single locations, comparative lead

time and order quantity logic For networks, minimum cost

How:


7. Reduce Lead Times

LOWER SHORT-TERMDEMAND RATESTHAN ANTICIPATED

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RE-ORDERPOINT

SAFETYSTOCK

FORECAST

HIGHER SHORT-TERMDEMAND RATESTHAN ANTICIPATED

"OUT OF STOCK"CONDITION

ACQUISITION LEAD TIMEZERO

NO DEMAND

INFINITE DEMAND

How: Understand lead time components Measure supplier lead time and variability

vs. the average supplier as part of a mutually-beneficial Supplier Relationship Management (SRM) program with the current replenishment structure

Change to a different replenishment logistics structure

Identify options to reduce lead time component times

Keys: Stratify suppliers based on past performance and need for the business

Measure lead time (and inbound fill rate) against first receipt date

Its not all about suppliers Pre-purchase manufacturing

capacity

Longer lead times increase safety stock increase cycle stock increase forecast error

Why:


8. Minimize MOQs (Minimum Order Quantities)

How: Calculate the excess inventory value due to MOQs, by vendor

Train purchasing personnel in the impact of MOQs on inventory and its turnover

Train purchasing personnel in win-win negotiating techniques

Why: MOQs, regardless of how defined ($, units, pallets, etc.) at the vendor- (least harmful), SKU- (less desirable) or SKU-location-(worst) level require inventory to be acquired prior to when it would have otherwise been acquired

Concentrating on the larger opportunities, first: Long-term vendors Many SKUs (facilitates

negotiating better agreements)

Inventory impact of MOQS > 15%

Keys: Maximum Past Sales Rate

Average

Economics-based

Re-orderPoint

Forecast Sales

Safety StockBusiness / Marketing Philosophy - based

Time Acquisition Lead Time

On-hand Inventory Balance

Cycle Stock

Safety Stock

Maximum Past Sales Rate

Average

Economics-based

Re-orderPoint

Forecast Sales

Safety StockBusiness / Marketing Philosophy - based

Time Acquisition Lead Time

On-hand Inventory Balance

Cycle Stock

Safety Stock


9. Extend Payment Terms

Owned Inventory as a Percent of Total Inventory

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1 1.5 2 2.5 3 4 6 8 10 12

Annual Inventory Turnover

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d 15 Day Payment Terms30 Day Payment Terms45 Day Payment Terms60 Day Payment Terms75 Day Payment Terms90 Day Payment Terms

How:

Calculate the relative ownership percent of various inventory categories [(balance less AP portion) / average balance] to identify highest priority concerns

Train purchasing personnel in the ownership relationships between turnover, payment turns and discounts

Train purchasing personnel in win-win negotiating techniques

Keys: Concentrating on the larger opportunities, first: Long-term vendors Low aggregate inventory turnover

for vendors SKUs Long payment terms Ownership > 75%

Paying on time

Why: The economic impact of high inventory levels is only the portion of inventory actually owned, i.e., the total on hand, and possibly in-transit depending on the freight terms, less the portion currently in accounts payable (AP)


10. Sales and Operations Planning (S&OP)

How: Learn how the best work Develop the process:

Participants Facilitator Purpose Required pre-work Agenda Best aggregation level

Implement, refine, train, repeat Measure meeting time and its

reduction

Keys: Management support Participation by all stakeholders

Existing SKU demand (Sales) New SKU demand (Product

Development and/or Marketing) Supply (Manufacturing and/or

Purchasing) Planning Finance

Why: S&OP programs provide a structured decision-making process for coordinating supply and demand and for addressing inevitable conflicts between priorities

S&OP Decisions

Finite

Capaci

ty

Real Le

ad Tim

es

Cost Co

ntrol

DEMAND

Open C

ustom

er Orde

rs

New Cu

stome

r Orde

rs

Foreca

st Dem

and

Current Requirements

WIPFuture Needs

Cash Working Capital

Profitability

PLANNING

SUPPLY

FINANCE

Moderator: Frank QuinnEditorial Director

Presenter: Ralph CoxDirector

Questions & AnswersQuestions & Answers

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