Wednesday, August 6, 2008

Inventory Investment Requirements

First, understand market, customer needs and service expectations; your own company needs, expectations, process, abilities; supplier abilities and mindset; industry norms and mindset; world-class best practices. You might figure out how to procure better or manufacture better in a way that allows you to carry less inventory.
The result of this step is to establish what industry inventory standards might be and what is possible.
Measure current and historical company inventory levels and performance, not just overall statistics, but broken down into levels of responsibility, commodity, area, type (raw material, work-in-process, finished goods, consignment) and market. Do this to help isolate figures down to levels of accountability and to show inventory investment performance by market, process or even product line. You may find that your systems are unable to do that, meaning that it is past time to make changes to them, whether that be to replace them, modify them or put in separate inventory tracking and control systems (recommended as a last resort).The result of this step is to establish how your own company is doing and has been doing with inventory management.
Establish performance metrics - Inventory is usually measured in currency value, such as U.S. Dollars ($USD).
More turns (or "turnover") is usually good, provided that cost, service or quality aren't unacceptably affected. If they are, the answer is not simply to increase inventory, but to try to improve the underlying "drivers" influencing it instead, if possible and cost-effective. There are variations of the turnover (this term should not be confused with the European "turnover," which usually refers to total sales for a period) formula, mainly in addressing how to calculate average cost of goods sold or inventory.turns are calculated by comparing full sales value with average inventory cost or even equivalent sales value.It is becoming more common to measure inventory performance in days coverage instead of turnover. People seem to relate to it better.

Inventory and sales may also be commonly measured in more industry-friendly terms, such as tons (steel), bushels (corn), housing units (construction or real estate) or ounces (gold).

A further refinement is to stratify the inventory by "Quality," as asserted by Gary Gossard of IQR International. The idea of classifying inventory as active, slow-moving or obsolete has been around for a long time. Constantly track it, to highlight any change in inventory quality or condition, such as a new requisition for an item which is already in excess or obsolete.
Here are typical Inventory System Metrics, which should be broken down by organization/responsibility, area, type, commodity, market/product, and time phased, with targets and actual values:
• Inventory Turnover or Days Coverage
• Inventory value or other unit of measure, such as tons
• Inventory "Quality," including IQR and summaries of amounts of each type
• Customer service level, expressed how the CUSTOMER perceives it

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