Inventory managment and improvements

Inventory
Management &
Improvements
-
A selection of ideas
© Stuart Emmett
MSc. BA (Hons).
FCILT. FCIT. FIFP.
MCIPS. MCIPD.
1© Stuart Emmett Inventory

Why hold stock?
 Decouple supply /
demand
 Safety protection
 Anticipation of demand
 Provide service to
customers
Types of stock?
 Raw materials
 Spare parts (MRO’s)
 Components/assemblies
(Work in progress orWiP)
 Consumables
 Finished goods

Other reasons for holding stock
Supply
 Economies from buying in large quantities
 Known upcoming price increases e.g. Commodities
 Unreliable supply lead times
Demand
 Unreliable demand
 Instant order fulfilment
 Balance flows e.g. work in progress (WiP) for production
 Protection from breakdowns e.g. MRO’s
 Value appreciates e.g. timber

Inventory
Fundamentally needed because of:
1) Irreconcilable differences between demand
variation and supply responsiveness/variations
2) Imperfect information from customer, supplier,
transport etc

Inventory
Inventory Management is:
“An approach to manage the product flow in a supply
chain, to achieve the required service level at an
acceptable cost”
Or
The right quality and quantity of the right product
in the right place at the right time with the
right service and the right cost

Inventory Management involves
 Where to store the stock
 The current stock levels
 What and how much has already been ordered
 When it is due to arrive
 When and how much any new stock was received,
by who and in what condition
 When and how much we sell or use
 When (time) next, to order
 How much (quantity) next, to order
 Recognising the importance of: (a) the many
stakeholders involved, and, (b) the supply chain
 Managing/handling uncertainty and variability

Inventory Key aspects
 Determine the products to stock and the location
where they are held
 Manage the right level of stock needed to satisfy
the demand
 Determine when to order (the timing )
 Determine how much to order (the quantity)
 Manage the supply (after the order has been
placed)
 Assess the costs and benefits of holding the right
level of stock (e.g. to achieve the required service level at
an acceptable cost)

Supply Chain connections
The Supply Chain is:
1. Everything in & between Supply<>demand;
2. Movement of materials/inventory/information;
3. From Suppliers>Company>Customers;
4. In a Timely manner to meet Customer
requirements.
 More than one supply chain in any company
 Supply / demand networks may be a better description
 30 to 70% of business cost is in the Supply chain
 Can be “Local” “Regional” “Global” in reach

Main Supply Chain Dynamics
Key Elements
 Demand (D) order predictability/forecast accuracy
 Supply lead time (SLT) predictability
 Cost/Service level (S/L)
The challenge is understanding:
 Complexity
 Dependencies and Variability's (e.g DV, SLTV)
These can be better managed by
 Collaborating, with all the players involved

Supply Chain=joined up processes
Three key features of (all) processes are:
Dependencies
 Sequential and related
 “Knock on effects”
 Most important factor, is the most limiting one
Variability’s
 Certainty to uncertainty
 Measure by statistical influences
Interfaces
 Potential friction points

Inventory in the supply chain
The “Ideals”
 Shorter lead times reduce stock levels and demand
lead times = faster responses
 Fixed and known lead times are critical
 “Uncertainty is the mother of inventory”
 But how far do we “collaborate”?
A Supply Chain Rule:
The format of inventory and where it is held is of
common interest to all supply chain players and must
be to be jointly investigated and examined

Some general truths
 We hold either too much or too little inventory (e.g
we must identify correctly the required cost / service balance,
which means correct assessment of long and variable supply
lead times and, variations in demand)
 Inventory does not happen in isolation (e.g. consider
the whole supply chain. e.g. plant equipment types, e.g. sales/
customers, e.g. organisational policies, etc)
 Stock is only there because someone bought it
before it was needed
 Inventory is the forgotten investment in many
organisations
 There is no “one size fits all” solution (e.g. the
differences between critical and consumable spares)

Some general truths
 Holding the same stock items in more than one
location, increases the safety stock being held.
E.g. 2 locations hold 41% more safety stock; 3 locations hold
71% more safety stock
 Must work with selected suppliers, e.g. Vendor
managed inventory and Consignment stock does not always
cost more
 Software data is not information (and it is
information that is needed to make decisions)

Some general truths
 Inventory software does not solve the main
problems, and whilst it is a very useful tool that
provides data to give information on visibility and
availability, all software has to follow preset
procedures. (e.g. “Rubbish in-rubbish out”)
 These procedures must be determined by policies and
such polices have to be regularly reviewed.
 Also with ICT systems, new staff are increasingly
being only shown how to use the system; but, there is
often no understanding given on the key drivers.
 Therefore over time, we may have no one left who
understands the critical aspects (apart from some
consultants/trainers).

A simple truth
Rule 1
Always have enough
Rule 2
Never have too much
Rule 3
Never let rule 2 overrule rule 1

Inventory
Variable
Levels
Possible
Out
Demand
The Inventory Store
Supply
In
Inventory Aims:
1) Match (as best can)
In with Out
(e.g. JIT; use one/order one)
2) Must understand per SKU:
•Supply Lead Time & Variability
(SLT&V)
•Demand & Variability (D &V)
•Service Level (S/L)
•Reorder Quantity (ROQ)
= Stock levels =Value/Availability
Must also examine:
1) Effective item categorisations
including obsoletes/write offs
2) Supplier managed inventory
3) Total Supply Chain

Inventory Improvements
 Summary of practical inventory improvements
 Summary of keys to reducing stock levels
 The 7 Rules for planning inventory
There are many views and the main message from all of
these views is that you need to note the repeating
similarities.
© Stuart Emmett 17Inventory

Top pressures that drive
inventory optimisation
(Source: Aberdeen Group Report no. 7677 Inventory Optimisation 2012)
1. Reduce carrying costs
2. Improve service levels
3. Reduce product price
4. Improve ROCE
5. Reduce global trading
as increases carrying
costs
18
0%
10%
20%
30%
40%
50%
60%
1 2 3 4 5
© Stuart Emmett Inventory

Inventory Optimisation
1. Are we segmenting products to distinguish their
unique characteristics?
2. For each segment are we using the right supply
chain channel that minimizes risk?
3. Do we really understand customer buying patterns
and how they after inventory?
4. Based on customer insights, do we postpone
inventory decisions?
5. Are we using correct replenishment strategies?
Source after: JDA Transforming Inventory into a Strategic Weapon

Inventory Analysis/1
Why do we need it?
 Is is really a critical?
 Is an insurance item that can be capitalized as
“Capital Spares”?
 Has variety control been used?
Is someone else better equipped to hold it?
 Vendor managed inventory by suppliers?
 Consignment stocking?
 Local distributor?

Inventory Analysis/2
If we must hold inventory, have we categorised it
correctly so that we can plan and manage it better?;
for example:
 Critical triple A items
 For the rest, use ABC Analysis by Volume and ABC
Analysis by Value
 Combine into AA, AB, AC categories etc
 Manage accordingly, including the parameter
reviews
 Conduct the policy reviews on surplus, obsoletes

Reducing Raw materials/work in
progress Stocks
 Production Scheduling
 Rationalise supplier
base
 JIT
 Reduce SLT/V
 Consignment stocks
 Bonded stores for
imports
 Challenge bottlenecks
in processing
 Concentrate first on
high value items
 Review order quantities
 Buy semi assembled
kits/sub-assemblies
 Challenge batch sizes
 Avoid month end peaks
 Consider common/
standardised parts

Reducing Finished goods Stocks
 Conduct an ABC
analysis,(80-20 rule) by
value and by movement
 Concentrate first, on
high value items and on
the fast moving items
 Review stock levels held
 Challenge range of items
being held
 Check on sales forecasts
 Avoid month end peaks
 Review order LT/V
 Challenge processing
times
 Identify obsolete
stocks and sell off
 Assess implications for
new products
 Plan better promotions
(when, what happens to
surplus?)
23
© Stuart Emmett Inventory

Improving inventory
 Buy only what is requested/required
 Reduce product variations
 Ensure ABC analysis is regularly undertaken
 Ensure parameters in use (EOQ,ROP), are all
consistent, at the individual item level
 Improve forecast accuracy
 Measure forecast error
 Measure SLT and work with suppliers to Reduce SLT
and SLTV

All players in the supply chain work
together
However the Marketplace affects what
customers/users want which increases demand
volatility, e.g:
 increased promotion activity
 increased variety
 new products that do not perform as expected
 reduced product life cycles limit historical data
 more competition etc
Emphasises the need for effective internal working /
collaboration with shared cross functional decision
making. E.g. “Silo” management no longer works.

Inventory Optimization
1) Strategy Design
 Must be defined, supported, and enforced with all
stakeholders by senior management
 Periodic evaluation is needed of the supply chain
design, (to address any operational or financial inefficiencies
of the physical network and to ensure sufficient strategic
capacity).
 Customer service levels must be maintained or
improved during the process of transformation, (to
ensure buy-in of stakeholders and give momentum).
 Must have a significant change in replenishment
speed and efficiency, (achieved through planned
collaboration with internal and external suppliers).

2) Implementation of Inventory Processes and
Procedures
 Must be supported by a well defined order
fulfilment process, (use process mapping to identify
critical performance gaps and the assignment of process
ownership for accountability and focus).
 Supplier processes need to be streamlined for
efficiencies and integrated with internal
processes to achieve common business goals.
 Maximize training and education programs,
setting expectations and providing context.

3) Measurement and Continuous Improvement
 Inventory optimization must be monitored via KPI’s
on supplier performance, customer service, and
internal assets, (where adaptable strategy and metrics allow
for continuous improvement).
 The success of inventory optimization is primarily
determined through the quality of the people
involved in the process; hence, every attempt should
be made to support people who have some
involvement in performance/process improvement,
plus right down to giving incentives.

Seven Good Rules for Inventory
1. All inventories should be justified, and, minimised
with the target being less inventory.
2. All staff needs training and motivating (especially those
on stock checking so they can identify, locate and count all
inventory correctly).
3. Safety stock should only be held to protect variable
demand to give customer service, or, against variable
supply.
4. Orders should only be placed when a stock out is
anticipated.

Seven Good Rules for Inventory
5. Re-order just enough to cover demand, until the next
receipt is due.
6. Focus effort on the few important items and not on
the trivial many.
7. ICT can help and take away the “number crunching”,
but manual checks and reviews are still needed.

Inventory Improvements
Prevent the 10 Common Mistakes
Source: Demand Solutions
1. Poor measurement of
performance
2. Unqualified management
3. Informal forecasting
4. Poor internal
communications
5. Not talking to
customers
6. Playing budget “games”
7. Using wrong
replenishment methods
8. Too much stock in too
many places
9. Managing all items the
same
10. Not trying new ways

I hope the above have given you some ideas and
suggestions to make your own inventory
improvements
Full coverage on Inventory is found in our book
“Excellence in Inventory Management”
(Emmett & Granville 2007)
© Stuart Emmett 32Inventory

Inventory managment and improvements

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