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Inventory Management UsingInventory Management Using
Plan, Do, Check, ActPlan, Do, Check, Act
Doug Howardell
San Gabriel Valley Chapter
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Session OverviewSession Overview
PDCA Explained
Definition and Importance of Inventory
Management The Plan, Do, Check, Act Cycle Applied to
Inventory Management
Inventory Management Using the Inventory QualityRatio
Case study results
Summary
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
PDCA ExplainedPDCA Explained
Plan
Define the desired condition
Measure the current condition
Set improvement targets
Do
Take corrective action
Check
Track progress to targetAct
Identify root cause & correct
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Defining Inventory ManagementDefining Inventory Management
management : The organizational process thatincludes strategic planningplanning, setting objectives,
directingdirecting resources, deployingdeploying the human andfinancial assets needed to achieve objectives, and
measuringmeasuring results
inventory management : The branch of businessmanagement concerned with planning and controllinginventories.
aggregate inventory management : Establishingthe overall level (dollar value) of inventory desiredand implementing controls to achieve this goal.
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Why is Inventory ManagementWhy is Inventory ManagementImportant?Important?
It takes cash capital to produce or acquireinventory
That cash tied up in that inventory is not usablefor other parts of the business
It is called working capital
Many companies barrow to support their workingcapital needs
A very real cost to the business
Every dollar in inventory reduction leads to adollar reduction in working capital
Saves cost of capital
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33%
43%
44%
40%
44%
49%
58%
59%
62%
67%
72%
Collaboration
Manufacturing Cycle Times
Plant Utilization
Reducing Mfg. Overhead
Warehouse Operating Costs
Transportation Costs
ATP to Customers
Improved Fill Rate
Reduction in Cycle Times
Decreased Carrying CostsDecreased Carrying Costs
Increased Inventory TurnsIncreased Inventory Turns
AMR Research
Importance of Business Benefits ofImportance of Business Benefits ofSupply Chain ManagementSupply Chain Management
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Why is Getting the Right Level ofWhy is Getting the Right Level ofInventory Hard?Inventory Hard?
Major ReasonsMajor Reasons We have too much inventory to begin with
We dont react to changes in demand soon enough Our inventory systems and metrics are backward looking
turns not demand driven
Our ABC classifications are out of date
Our order quantities and safety stocks are based on pastusage
We are still planning part quantities, rather than managinginventory dollars
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How do you use ABC classes?How do you use ABC classes?
2008 Conference Responses
Not sure what an ABC analysis is 3%
Dont do ABC inventory analysis 15% Use ABC for cycle counting only 29%
Use ABC for managing inventory levels
(days-on-hand, order quantities,etc.) 21%21% Use for both cycle counting and active
inventory management 33%33%
Over half use ABCs to manage inventory
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What is your ABC based on?What is your ABC based on?
2008 Conference Responses
Unit cost 14%
Inventory quantities 12%
Current inventory dollars 13%
Past usage dollars (last 12 months) 36%
Future demand dollars 11%11% Other 10%
Not sure 5%
Only 11% are forward lookingOnly 11% are forward looking
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Inventory Management Using PDCAInventory Management Using PDCA
Plan
Define the desired amount of inventory
Measure the current amount of inventory Set inventory improvement targets
Do
Take steps to reduce inventoryCheck
Track progress to target
Act Identify root cause of high inventory levels &
correct
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Inv Mgt thru InventoryInv Mgt thru Inventory Quality RatioQuality Ratio
aggregate inventory management : Establishing the overall level (dollar value) of inventorydesired and implementing controls to achieve this goal
IQR is a metric A more useful method of measuring inventory
quality Measures overall inventory performance Measures performance by segment
IQR is a methodology A comprehensive approach to improving
inventory performance
Follows PDCA
IQR is a tool Software to automate the metric & methodology
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Inventory Quality RatioInventory Quality Ratio
Metric, Methodology & Tool
Top-down focus on inventory dollars Works with your current systems
Enhances any MRP/ERP/SCM system
No additional data entry required Gives planners and buyers the information they need to
free-up working capital
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IQR Inventory AnalysisIQR Inventory Analysis
Usage HistoryUsage History Future DemanFuture DemandToday
Va
lue
Va
lue
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
Today1-6-12 -3 2 3
400K
200K
300K
100K
Usage History Future Demand
Va
lue
Va
lue A B CDEFGHI
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
Today1-6-12 -3 2 3
400K
200K
300K
100K
Rule
Va
lue
Va
lue A B CDEFGHI
TimeTime
Usage History Future Demand
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IQR Inventory AnalysisIQR Inventory Analysis
Today1-6-12 -3 2 3
400K
200K
300K
100K
Part no. 1-1Class D
Usage History Future Demand
Rule
Va
lue
Va
lue
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
Today1-6-12 -3 2 3
400K
200K
300K
100K
A1A1
A1A1
E1E1
Usage History Future Demand
Rule
Va
lue
Va
lue
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
Today1-6-12 -3 2 3
400K
200K
300K
100K
A1A1
A1A1
E1E1
Usage History Future Demand
A2A2
A2A2
E2E2
E2E2
E2E2
Part No 2Part No 2--22Class AClass A
Rule
Va
lue
Va
lue
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
Today1-6-12 -3 2 3
400K
200K
300K
100K
A2A2
A2A2
E2E2
E3E3
E3E3
A1A1
A1A1
E1E1
E2E2
E2E2
Usage History Future Demand
Va
lue
Va
lue
E3E3Part No.Part No.
33--33
Class AClass A
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
Today
1-6-12 -3 2 3
400K
200K
300K
100K
A2A2
A2A2
E2E2
E3E3
E3E3
SMSM
SMSM
A1A1
A1A1
E1E1
E2E2
E2E2
Usage History Future Demand
Va
lue
Va
lue
E3E3
TimeTime
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IQR Inventory AnalysisIQR Inventory Analysis
NMNM
Today 1-6-12 -3 2 3
Va
lue
Va
lue
400K
200K
300K
100K
A2A2
A2A2
E2E2
E3E3
E3E3
SMSM
SMSM
A1A1
A1A1
E1E1
E2E2
E2E2
Usage History Future Demand
E3E3
TimeTime
I t Q lit R ti M t iI t Q lit R ti M t i
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Inventory Quality Ratio MetricInventory Quality Ratio Metric
Active Inventory DollarsActive Inventory Dollars
Total Inventory DollarsTotal Inventory Dollars
IQRIQR ==
Active inventoryActive inventory = Material you need now
Total inventoryTotal inventory = Active inventory plus all the other stuff youhave on hand
PerfectPerfect IQRIQR = 100%= 100%
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR CalculationIQR Calculation
A1 + A21 + A2A1 + A21 + A2 + E1 + E2 + E3E1 + E2 + E3 + SM + NMM + NMIQRIQR =
Today 1-6-12 -3 2 3
Inve
ntory
Value400K
200K
300K
100K
A2
A2E2
E3
E3
NM SM
SM
A1
A1E1
E2
E2
TimeUsage History Future Demand
200k + 200k200k+200k+100k+300k+200k+100k+300k+200k+200k+100k200k+100kIQRIQR =
31%IQRIQR =
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Measuring Inventory PerformanceMeasuring Inventory Performance
Inventory Turns is the traditional measure
Cost of Goods Sold for the past 12 months
Current Inventory
i i i
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Problems with Traditional MeasuresProblems with Traditional Measures
Inventory turnover ratios produce information that is:
Too little, too late, and too distorted
Turnover calculation is a trailing indicator
Based on past sales
Inventory turns data is aggregate
Does little to help track problems to their root
causes Inventory data is provided on a monthly basis
Planners are always reactive
Best practice for Inventory Management:Data must be provided frequently & at the
part number level
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Examples of IQR MetricExamples of IQR Metric
Quick Look
Actionable Information
E l f IQR M iE l f IQR M t i
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Example of IQR MetricExample of IQR Metric
Note that inventory is displayed in the IQRcategories in terms of dollars, not pieces
The IQR metric is 39.2%
E l f IQR A ti bl I f tiE l f IQR A ti bl I f ti
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Example of IQR Actionable InformationExample of IQR Actionable Information
You want to be able to see IQR in segments thatallow you to take action
A ti bl I f t th P t L lA ti bl I f t th P t L l
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Actionable Info at the Part LevelActionable Info at the Part Level
From any IQR category summary you can drilldown to the list of parts in the category
IQR M th d lIQR M th d l
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR MethodologyIQR Methodology
Plan
Set Rules
Quick Look Target Setting
Do
Action Codes
Check
Performance
Act
Action Items
Root Cause Analyses
E l f IQR M h dE l f IQR M th d
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Examples of IQR MethodExamples of IQR Method
Plan
Set Rules
Quick Look
Target Setting
Do
Action Codes
Check
Performance
Act
Action Items
Root Cause Analyses
PlPlan S t th R l & T tSet the Rules & Targets
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PlanPlan Set the Rules & TargetsSet the Rules & Targets
Set a rule in weeks of inventory for each IQR class
Plan how much inventoryreduction you will make
Calculate the impacton the bottom line
Do Take Action to Reduce InventoryDo Take Action to Reduce Inventory
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Do Take Action to Reduce InventoryDo Take Action to Reduce Inventory
Work the parts with the highest excess first
Drill down to see all the detailed data you needabout a part
Do Take Action to Reduce InventoryDo Take Action to Reduce Inventory
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Do Take Action to Reduce InventoryDo Take Action to Reduce Inventory
Determine the action you want to take and applyan action code
Make appropriate comments
Check ProgressCheck Progress
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Check ProgressCheck Progress
Two types of progress reports, a snapshot andtrend chart
Act to Make the Change PermanentAct to Make the Change Permanent
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Act to Make the Change PermanentAct to Make the Change Permanent
Identify root cause through Action Items
Act to Make the Change PermanentAct to Make the Change Permanent
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Act to Make the Change PermanentAct to Make the Change Permanent
Identify root cause through adjusting planning factors
Safety Stock Greater than 3 months requirements
Minimum order quantity Greater than 3 months requirements
Lot size Greater than 3 months requirements
Inventory Quality RatioInventory Quality Ratio
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Inventory Quality RatioInventory Quality Ratio
Provides A Dollar FocusProvides A Dollar Focus
Today 1-6-12 -3 2 3
Invento
ryValue400K
200K
300K
100K
A2
A2
E2
E3
E3
NM SM
SM
A1
A1
E1
E2
E2
Time
Usage History Future Demand
Inventory Quality RatioInventory Quality Ratio
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Inventory Quality RatioInventory Quality Ratio
Measures Inventory PerformanceMeasures Inventory Performance
Based on Future RequirementsBased on Future Requirements
Today 1-6-12 -3 2 3
InventoryV
alue400K
200K
300K
100K
A2A2
E2
E3E3
NM SMSM
A1A1
E1
E2
E2
TimeUsage History Future Demand
Inventory Quality RatioInventory Quality Ratio
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Today 1-6-12 -3 2 3
InventoryValue400K
200K
300K
100K
A2A2
E2
E3E3
NM SM
SM
A1A1
E1
E2
E2
TimeUsage History Future Demand
80 15 5A B C80155D E F80155G H I
Inventory Quality RatioInventory Quality Ratio
Dynamically Calculates A B CDynamically Calculates A B CClassesClasses
First Year ResultsFirst Year Results Pharmaceutical Company
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0
10000
20000
30000
40000
50000
60000
70000
80000
0
10000
20000
30000
40000
50000
60000
70000
80000
Active 1
Active 2
Excess 1
Excess 2
Excess 3
Slow Moving
No Moving
Total Inventory by CategoryCombined.IQR (Run Date 30/04/2004)
First Year ResultsFirst Year Results Pharmaceutical Company
22% Overall Inventory Reduction & 46% Excess Reduction
Total Inventory by IQR Category
ResultsResults -- Inventory Dollars and IQRInventory Dollars and IQR
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ResultsResults -- Inventory Dollars and IQRInventory Dollars and IQR
Purchased Parts by Category and IQR Performance
0
2,000
4,000
6,000
8,000
10,000
12,000
0 1 2 3 4 5 6 7 8 9
Months After Implementation
InventoryD
ollars($1000)
0
5
10
15
20
25
30
35
40
45
50
InventoryQ
ualityRatio(%)
Active
Excess
SM+NM
IQR%
Lucent Technologies & GTE
Inventory Analysis at Any LevelInventory Analysis at Any Level
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Inventory Analysis at Any Levely y y
Plant 1 -- Oracle
Business Units
Planner A
Products Contracts
Planner B Planner C
Planning Mgr
Make Parts
Buyer D
Suppliers Commodity
Buyer E Buyer F
Purchasing Mgr
Buy Parts
Materials Director Finance
Plant 2 -- SAP VP Supply Chain
Division A
Corporate
Inventory Analysis at Any LevelInventory Analysis at Any Level
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y a y a yy y y
ProductTeam 1
ProductTeam 3
ProductTeam 2
First Year ResultsFirst Year Results Electronics CompanyElectronics Company
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
First Year ResultsFirst Year Results Electronics CompanyElectronics Company
18% reduction in 5 months & 32% reduction in 12 months
All Teams Combined 3/29/2009
Typical Results of Using IQRTypical Results of Using IQR
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Typical Results of Using IQRTypical Results of Using IQR
Improve cash flow & capital immediately
Reduce inventory 20% to 40%
Increase turns with fewer shortages
Maximize planner & buyer productivity
Continuously improve overall inventory performance
IQR EnvironmentsIQR Environments
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IQR EnvironmentsIQR Environments
Manufacturing companies material planners
buyers
production schedulers
operations management
financial management
Distribution and logistics
Utilities and MRO stores
Management consultants
Use of IQR is SpreadingUse of IQR is Spreading
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Use of IQR is SpreadingUse of IQR is Spreading
Airtechnics Alcatel Allergan Medical American Capital Andrew Corporation Armstrong ArvinMeritor Avery Dennison Banner Pharmacaps Beckman Coulter
Binney & Smith Black & Decker Bosch Corporation Boston Scientific Bunn-O-Matic Corp Carrier Corporation
Cummins Inc. Dana Corporation Dialogic - Intel Corp.
Dow Chemical Dr Pepper Snapple Eastman Chemical Engenio - LSI Logic ERICO Incorporated Esterline Corporation Hendrickson Intl Hope Global HunterDouglas Hyundai
Johnson & Johnson Kinetic Concepts Korry Electronics Kohler Companies Krebs Engineers LuK Automotive
Motorola Natures Way Newell-Rubbermaid
Oakley Ocean Cuisine Pfizer - Pharmacia Rheem Manufacturing Sanford Corporation Schering-Plough Schlumberger Sikorsky Aircraft SP Richards Company Telex Communications
Tighe Industries Tyco Electronics Unilever Bestfoods Valmont Industries Vita-Tech International Wellman Products
Wenger Corporation Woodward Governor Yamaha Corporation
SummarySummary
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yy
Inventory systems are backward looking
Future demand is better than past usage
IQR is a metric, a method and a tool
IQR logic is demand-driven & dollar-focused
Keys to improving inventory & working capital
Plan: Identify excess by segment
Plan: Focus on the dollars Do: Prioritize reduction opportunities
Check: Monitor and track performance
Act: Update MRP inventory settings
Makes the planner & buyer jobs easier Improves turns, cash flow and profits!
Thanks for attending!Thanks for attending!
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
gg
Questions?Questions?
Things to think about in any economy
Are we being proactive in managing inventory?
What are my specific reduction opportunities?
How can a dollar focus help me? For future questions or information
626-836-6935
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