three techniques to reduce your inventory mark k. williams, cfpim, cscp qad supply chain solutions...
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Three Techniques to Reduce Your Inventory
Mark K. Williams, CFPIM, CSCP QAD Supply Chain Solutions Center
QAD Explore 2012
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The following is intended to outline QAD’s general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, functional capabilities, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functional capabilities described for QAD’s products remains at the sole discretion of QAD.
Safe Harbor Statement
Three Techniques to Reduce Your Inventory
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• Why is reducing inventory so hard?• Eliminating obsolete inventory• Using ABC analysis• Implementing cycle counting• Questions
Agenda
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Why Is Reducing Inventory So Hard?
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• Improve productivity• Improve customer service• Reduce inventory investment
The Conflicts
Three Techniques to Reduce Your Inventory
Finance(Low Capital Usage)
Customer Service (Many Parts--Always Available)
Productivity (Long Runs--Few Parts)
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Cost of Capital 10 - 15%
Warehouse space 2 - 5%
Obsolescence and shrinkage 4 - 6%
Insurance 1 - 5%
Material Handling 1 - 2%
Taxes 2 - 3%
Total Annual Costs 20 - 36%
Inventory Costs Add Up!
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Cost of Capital $100,000 – 150,000
Warehouse space $20,000 – 50,000
Obsolescence and shrinkage $40,000 – 60,000
Insurance $10,000 – 50,000
Material Handling $10,000 – 20,000
Taxes $20,000 – 30,000
Total Annual Costs $200,000 – 360,000
For Every Million Dollars of Inventory
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Finding & Eliminating Obsolete Inventory
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• Not purchased or used in 6 – 24 months?• Not in sales catalog?• Not in any bill of material?• Spare part for a machine sold last year?
Aged Inventory
Three Techniques to Reduce Your Inventory
Cost of carrying aged inventory
$3,000,000 x 10% = $300,000
$300,000 x 33% = $100,000
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Part # On Hand Last Used Cost
69543 65 12/5/2007 $65082689 986 3/18/2009 $5,763,90754987 28,965 5/03/2009 $132,97665715 1,899 8/29/2009 $72,43694587 38 11/15/200
9$8,385
48359 653 2/27/2010 $730,50328698 201 3/03/2010 $87596876 15,411 5/19/2010 $62,311
Finding Aged Inventory
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How Long Will the Inventory Last?
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Part # On HandMonthly Usage
# of Months
On Hand Cost96815 75,642 1,285 58.9 242,054$ 56879 3,615 85 42.5 1,392,137$ 14863 42,937 1,124 38.2 558,181$ 63258 987 28 35.3 5,527$ 75935 54,856 1,642 33.4 301,708$ 56478 35,483 1,153 30.8 780,626$ 25186 15,637 515 30.4 140,733$
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1. Verify inventory is truly aged and/or excess
2. Discount it to a “special” customer3. Sell it on promotion4. Sell it to a sister company5. Return to supplier – pay restocking fee6. Sell to company that handles distressed
merchandise7. Throw away & take the tax break
7 Steps to Dispose of Aged Inventory
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Using ABC Inventory Management
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First noted by Pareto• A items
- 20% of items = 80% of usage
• B items- 30% of items = 15% of usage
• C items- 50% of items = 5% of usage
ABC Inventory Management
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What a Difference ABC Makes
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CompanyXYZ
Monthly Cost of Sales
% of Total
8 Weeks of Inventory
A $800,000 80% $1,600,000
B $150,000 15% $300,000
C $50,000 5% $100,000
Total $1,000,000 100% $2,000,000
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What a Difference ABC Makes
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CompanyXYZ
Monthly Cost ofSales
8 Weeks ofInventory
A=4 B=8C=16
PercentDifference
A $800,000 $1,600,000 $800,000 -50%
B $150,000 $300,000 $300,000 0%
C $50,000 $100,000 $200,000 100%
Total $1,000,000 $2,000,000 $1,300,000 -35%
ABC method yields a 35% decrease in inventory!
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• “A” Customers- Top 15% - 25% that generate 60% - 85% of
revenue- Try to obtain future purchase requirements- Work closely on promotional planning
• “B” Customers- Next 20%-40%, 10%-20% of revenue- Standard service
• “C” Customers- Bottom 50% of customers, 5%-10% of revenue- During times of a shortage, they bear the brunt
ABC Customer Segmentation
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• “A” Suppliers- Top 15% - 25% of suppliers, 60% - 85% of
spend- Share future purchase requirements- Work to reduce lead times
• “B” Suppliers- Next 20%-40% of suppliers, 10%-20% of spend- Standard treatment
• “C” Suppliers- Bottom 50% of suppliers, 5%-10% of spend- Try to consolidate
ABC Supplier Segmentation
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Implementing Cycle Counting
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• The efficient use of a few experienced people continuously throughout the year results in:• Timely detection and correction of
causes of errors• Fewer mistakes in item identification• Minimum loss of productive time
Advantages of Cycle Counting
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• Flowcharting• Control group counting• Establishment of initial balances• Determining count frequency
4 Phases of Implementing Cycle Counting
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Flowchart Your Process
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Unload TruckCount
Incoming Product
Compare to Packing Slip
Does Count Match?
Sign Packing Slip
Contact Purchasing
Yes
No
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Flowchart Your Process
Three Techniques to Reduce Your Inventory
Unload TruckCount
IncomingProduct
Compare toPacking Slip
Does CountMatch?
SignPacking Slip
ContactPurchasing
Yes
No
Enter Within30 Minutes
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• Select 10-20 of your highest velocity items• Assure complete synchronization between
shelf count and perpetual inventory• Count items each day• Investigate every inconsistency• Change procedures to eliminate problems• Train individuals to execute new
procedures• Continue until consistently at 90 percent
compliance
Control Group
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• Ready to “graduate” to cycle counting• Thorough – and accurate – physical
inventory• Double-blind count preferred• When complete, ready for cycle counting
Establishment of Initial Balances
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• Prepare for cycle count• Enter all transactions• Count items• Compare counts with system inventory• Determine reasons for variances• Correct causes of variances
Steps for Cycle Counting
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Typical ABC Cycle Count Frequency
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Inventory Record Accuracy
“A” Items “B” Items “C” Items
Once a month Once a quarter Annually
High frequency of order/usage
Intermediate frequency of order/Usage
Low frequency of order/usage
High cost of error Moderate cost of error
Low cost of error
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Determining Daily Cycle Counts
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Inventory Record Accuracy
A 200 12 2,400 250 10B 300 4 1,200 250 5C 500 1 500 250 2
Total 1,000 4,100 17
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Summary
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• Using the three techniques - Eliminating obsolete inventory- Using ABC inventory management- Implementing a cycle counting program
• You can reduce your inventory without sacrificing customer service
In Summation
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• Find out what your inventory level is• Investigate your obsolete inventory • See how you are using ABC inventory
management• Determine your inventory accuracy
When You Get Back Home
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Mark K. Williams, CFPIM, CSCPQAD Supply Chain Solutions [email protected]
Questions & Answers
Three Techniques to Reduce Your Inventory
