Best practices in Inventory Management
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This document outlines best practices for inventory management. It discusses balancing operations, sales, purchasing, and finance objectives. Key strategies include using ABC analysis to classify inventory and adjust policies, optimizing delivery times, ordering optimal quantities, reducing lead times, and improving forecasting. The goal is to optimize customer service, inventory costs, and operating costs using techniques like JIT management. Key performance indicators help measure inventory accuracy, turnover, and costs. The overall approach is to improve the entire supply chain rather than any single step.
Best practices in Inventory Management
- 1. BEST PRACTICES IN INVENTORY MANAGEMENT INTM – Supply Chain Management By Rafel Mayol
- 2. Introduction Definition: Activitythat organizes the availability of goods to the customers, from sales items to consumables and spare parts. A balancing act : Operations: long runs for better efficiency. Sales: high inventory ready to sell. Purchasing: large orders for better prices. Finance: working capital and cash flow concerns.
- 3. Objectives To optimize: Customer service (availability, delivery, etc.) Inventory costs (tied cash, space, etc.) Operating costs (linked to logistics) “Improve three objectives simultaneously, not one at a time.” “High stock levels are the result of poor control and low availability”
- 4. Customer Service Availability polices: Separate products by Core1:increase portfolio of these products. Non-core (and seasonal): lower its inventory levels and establish product life cycle management2. Estimating delivery times accurately: high impact on customer satisfaction. 1Core:things you don’t want to run out. 2Product life cycle management: inventory levels function of actual cycle time.
- 5. Manage Inventory Use ABC Analysis: Policy Method Stock Target Class A Tight control Frequent monitoring 1 to 4 weeks 10% of JIT Advanced forecasting inventory approach Service-level policy 65% of turnover Class B Lean stock Sophisticated method 2 to 8 weeks 20% of policy Computerized inventory management 25% of turnover Exception reporting Class C Minimum Infrequent ordering 3 to 20 70% of supervision Automatic system weeks inventory Large Class O or Xof turnover orders 10% for non-movers. Include Class Z for non-stock items considered in ABC Analysis
- 6. Manage Inventory Supplier delivery quantities are very important. Little and often for A class. Apply just in time in A class items. FIFO1 approach in warehouse movements. Periodically identify and remove obsolete items. Manage excess items (O class). 1First In, First Out
- 7. Just In Time management JIT is the aim of best practice inventory control. JIT is the result of successful management of: High-qualitysupply Inventory control Process planning & plant design Workforce motivation Logistics MRP Continuous improvement
- 8. Just In Time management JIT ideal environment: Narrow product portfolio with stable demand. High volume manufacturer in stable market. Local, reliable and dependent suppliers. Fast-cycle processes. Key concepts: Only buy when needed. Make and buy small quantities. Balance flow throughout supply chain. High reliability for supply, products and processes.
- 9. Organization Inventory management as a senior management activity Set objectives Customer service Stock availability and delivery on time Satisfaction surveys Inventory Value Stock cover ratio Operating costs Warehousing and inventory operations Cost per transaction, movement and purchase. Work closely with less suppliers
- 10. Safety stock Collect data Analyze demand in variability. Demand for slow movers is a Poisson distribution. Safety stock depends on Company policy Variability of demand Reliability of supply Dependability of transport
- 11. Ordering size EOD1 doesn’t work in reality; too high stock level. Order size considerations Min order value: place order for phased delivery. Negotiate on annual volume. Min shipment size: coordinate orders mix. Change shipping method. Min order quantity per line: order for phased delivery. Schedule payment once stock is used. Min delivery quantity per line: share items with others. Renegotiate or look for alternative supply. 1Economic Order Quantity
- 12. Reduce cumulative lead times Benefits of reducing lead times: Shorter lead times with smaller lot sizes. Demand forecast becomes less important. Customer service levels improve. Safety stocks reduced.
- 13. Reduce cumulative lead times Make to order business: Purchase raw materials before finalization of engineering process. Publish and measure lead time for every business unit activity. Use a Project Manager for big proposals. Consider outsourcing on bottleneck activities. Use real time procedures.
- 14. Reduce cumulative lead times Make to stock business: Smaller lot sizes reduce lead time. Analyze material planning MRP system and its lead times in the procurement process. Reduce purchasing cycle lead time with suppliers. Vendor managed inventory. Improve forecast accuracy. Analyze inbound and outbound warehousing and distribution lead times. Consider outsourcing. Use real time procedures.
- 15. Forecasting Good forecasting results in low costs Predicting for a group is more accurate than for each item. Use right forecasting technique for each product Market research Market demand models Historical techniques Minimum stock levels Demand patterns Consider product life cycle: introductory, supply and obsolescence. Sales and demand are different things Inclusion of offers & campaigns after forecasts are made.
- 16. Key Point Indicators for Inventory At least Accuracy +95% (both deviation and frequency). Inventory and Bill Of Materials accuracy. Inventory turnover. Additionally Perfect order rate. top-line and bottom-line growth. maintained gross margin. initial customer order fill rate. final fill rate/returns/cancellations. gross margin return on investment (GMROI). cost of backorders. age of inventory. measures of overstock. write-downs as a percentage of costs.
- 17. Finally Improve whole supply chain rather than one step (see the big picture). Minimize logistic costs while exceeding customer expectations. Decide best locations and quantities to hold stock. Use inventory pooling if possible. Use of automated systems to allow managers to focus on value added activities. Involve in vendor-managed inventory programs.
- 18. Finally Sales, Inventory and Operations Planning. Develop processes to address their particular own interests. Supply chain oriented product development to take advantage of its capabilities. Identify deteriorated stock early in the chain and take action Make purchasing and inventory people work together Use lean principles Move from ABC to multi-echelon optimization
- 19. QUESTIONS? Rafel Mayol