Inventory Management Talk

Online Point of Sale

2009-05-19T06:40:00.000-07:00

Online Point of Sale is the flagship product of many companies.
Online Point of Sale offers complete and streamlined management to buy and sell ticket inventory in real time.
Here are common features:
* Real-time credit card processing, verification, and authorization with PC Charge;
* Seamless integration with most merchant banks;
* Integrated shipping and tracking services with significant discounts;
* Information management to maintain direct customer relationships

Request an Online point of sale Demo

Online Point-of-Sale Solutions

2009-05-19T06:17:00.000-07:00

Online Point-of-Sale Solutions- Web-enabled payment solutions for worldwide potential

Online Point of sale turns your website into an online shopping mall.

E-commerce has turned the Internet into millions of online shopping malls. Online point of sale is an easy-to-use e-commerce shopping solution for you and your customers. With Online point of sale customers buy from you by filling their e-commerce shopping carts and paying for their purchases in a secure online environment1.

Add Verified by Visa to assure each customer paying by a Visa card that the contents of his or her e-commerce shopping cart can be paid for securely.

Security at the Point of Sale

2009-05-19T06:05:00.000-07:00

Cash, cards, inventory and customer data intersect at the online point of sale. Here's how to keep your defenses up to date.

When thieves stole the PIN pads at a cash register in one of his company's stores everyone was amazed. Not that they'd done it—such thefts can happen once a week during the holiday season. But watching it on videotape later, "I couldn't tell they had it with them when they left" the store, says director of systems and data security at one of the stores , a Montreal retailer now owned by The Limited.

They got them back onto the point-of-sale system quickly. But here's where security precautions kicked in: Its PIN pads in effect have their own Media Access Control address, and once they're disconnected, that address is no longer available. So the thieves were foiled—this time.

The point of sale and online point f sale have always been a targets for thieves. While they once went after the cash drawer, retailers often find themselves facing sophisticated networks of thieves intent on the criminal equivalent of volume discounts—reams of credit card data, entire shelves of goods to launder or, in the case of pharmaceuticals like Sudafed, drugs used for making methamphetamines. Retailers, then, operate under the constant threat of having their point of sale either hacked by cyberthieves or spoofed by real ones.

Between them, these various thieves target all the major aspects of a modern online point-of-sale system:
* The cash register
* The bar-code scanner
* Wireless access
* The in-store voice or IP network
* The store inventory management system
(c)By Michael Fitzgerald

so.. developers of this online point of sale paid huge attention to security issues.

online POS

2009-05-19T05:43:00.000-07:00

Online Point Of Sale (Online POS) - is a web based point of sale system designed to help small businesses with keeping track of customers, items, and sales. This program works great for businesses that use cash, check, credit cards or account numbers for their sales.

What is online point of sale 2

2009-05-19T05:38:00.000-07:00

Today, there is a new twist to point of sale strategy. Self-serve kiosks are increasingly used in supermarkets and other retail outlets. The POS terminal allows the customer to scan each item before placing it into a bag, automatically applying discounts or sale prices to each scanned item. Once the customer has scanned and bagged the purchases, the system calculates the taxes and offers the customer several choices in payment method. When cash is used, the retail point of sale software logs the amount of cash deposited and issues any change due the customer. As with the more traditional POS systems, this self-service model also provides the customer with an itemized receipt of the transaction.

Online Point of sale software is found in other retail situations. There are retail online point of sale systems designed for use in bookstores, flea markets, and airports. Restaurant online point of sale equipment includes automated ordering kiosks that the customer can use to place an order and submit payment.

Over time, online point of sale devices have become increasingly popular, showing up at hotels, casinos, sports stadiums, and similar venues. Technology has also made the point of sale an option for online purchasing, making it possible to purchase goods at online stores and pay for them immediately.
Click here to find out more about online point of sale systems.

What is online point of sale

2009-05-19T05:32:00.000-07:00

Also known as the point of service or POS, the online point of sale is the exact point in a transaction when goods or services are provided to the customer and payment is rendered for those products. While the specifics of a point of sale system will vary somewhat from one situation to another, the final outcome is always the same. Today, there are professionals who analyze and develop tools that help to create an environment for the exchange to take place, many of them related to specific retail situations.

One of the most basic point of sale systems is found in the supermarket. This POS system consists of the check out counter, a scanner, and the cash register. As each item is scanned, the system notes the cost. Once all the items selected by the customer are scanned, the system calculates the taxes applicable to the purchases and provides the customer with the total amount due. The customer renders payment, which the point of sale hardware logs, generating a receipt of the transaction for the customer.
Same system could be done as the web application- in that case such system will be called online point of sale system.
Click here to get acquainted with one of the online point of sale systems.

Online pont of sale features

2009-05-19T05:27:00.000-07:00

Online point of sale software should be able to track and record the date-time of every sale ever made in your store. This information is useful for a number of different analytical tasks. For instance, are sales slowing down for tabletop fountains because they are just 'over', or because their sales always drop in the summer months? The most unexpected items turn out to be 'seasonal', and your point of sale software should be able to help you determine what demand is likely to be.

If you are purchasing your first online point of sale system, it is vital that it be able to export your information in a universal format. This is philosophically akin to the premarital agreement — you must plan ahead for the day when this system no longer serves your needs and you will want to be able to easily move your entire inventory data and sales history data to your new system.

Purchase your online point of sale system from a company that has a reasonably stable history and expected future (click here to view online point of sale of one of such reliable companies); orphan software that breaks down or starts garbling your data can cause enormous unplanned-for expenses.

A poorly-designed or simply ill-suited online point of sale system can be a daily management headache; a good one that fits well with your business can be your most valuable 'employee'.

Online point of sale systems

2009-05-19T05:11:00.000-07:00

Online Point of sale software (online POS software) is software that retailers use to calculate sales and operate the cash drawer; it is the computerized cash register which retailer may access in the Web. Online Point of sale software adds up the sales total, figures the state sales tax, calculates the change back from the amount tendered, and automatically adjusts the store's inventory levels to debit the amount of inventory sold.

Online Point of sale software packages can vary considerably in capability, so the savvy retailer will want to assess their own situation in web and needs before making a selection decision. Inventory management capabilities suitable to a multi-store chain are probably overkill for a single boutique store and the care and feeding it would require is probably not worth the additional effort.

At a minimum, your online point of sale system should handle sales, manage your inventory database, run a barcode scanner and allow you the capability of querying your inventory and sales database in a flexible way.

Make sure your online point of sale system can search your inventory database not only on item description and SKU (stock keeping unit - a unique ID you assign to all items you carry), but by category, vendor and keywords. Without the keyword search capability, all your employees must know and remember the exact SKU for every product; a keyword search informs your employees that the hair bows for baby girls, for instance, are entered as 'girls hair bows' and not 'hair bows for girls'.

Click here to get acquainted with one of the online point of sale systems!

Introduction to POint of Sale systems

2009-05-19T05:03:00.000-07:00

Point of sale or point of service (POS ) can mean a retail shop, a checkout counter in a shop, or the location where a transaction occurs. Point of sale often refers to a POS terminal or more generally to the hardware and software used for checkouts – the equivalent of an electronic cash register. Point of sale systems are used in supermarkets, restaurants, hotels, stadiums, and casinos, as well as almost any type of retail establishment.

Click here to find out about one of the online point of sale s!

Vendor managed inventory features

2008-08-21T05:06:00.002-07:00

A Vendor Managed Inventory program implementation should include:

1. A way for the supplier to monitor the status of inventory at the customer site. This is often accomplished by sending electronic data interchange (EDI) transactions between the supplier's and customer's computer systems. Automated dispensers (similar to vending machines) are also utilized to record material consumption.
In order to determine when products should be replenished as well as the quantity that is needed, the supplier must have current information as to how much of each product is being consumed at the customer site, when stock receipts arrive, and other transactions that affect on-hand quantities.
The recalculation of replenishment parameters for each item at least once a month. These replenishment parameters include:
* For items with recurring usage: These are products that are sold or used on a regular basis. For each of these products, the supplier must calculate the anticipated demand of each product between deliveries along with a safety-stock quantity. The safety stock is reserve inventory maintained in case actual usage exceeds anticipated demand. Larger safety-stock quantities require a greater investment by the customer, but will help avoid stockouts of products whose actual usage is hard to predict. Good replenishment software can show the customer different inventory investments and the resulting service level – that is, a realistic estimate of the percentages of requests that can be completely filled from stock inventory.
The average inventory investment is the sum of the safety-stock investment along with the average value of inventory that will be on hand between deliveries from the vendor. Notice that a much greater investment is needed to increase the service level by a small percentage.
For items with sporadic usage: These products are used infrequently, and are typically maintained based on a multiple of the number of normal order quantities that should be able to be filled from stock inventory. The normal order quantity is the number of pieces typically sold or used at one time. For example, if the item is sold by the dozen, the normal order quantity would be 12 pieces, Typically, one normal order quantity will be maintained for each of these items, but two normal order quantities may be maintained for very critical parts. Again, this depends on the amount of money the customer is willing to invest in this type of inventory.
2.The normal time period between deliveries to the customer.
3. A method of transmitting collaborative forecast information to the supplier. Collaborative information is normally gathered from customers, salespeople, and other sources and reflects anticipated changes in future usage of products. Note that it is common practice for the customer to assume full responsibility for additional inventory delivered due to collaborative forecasts – that is, there is a handling charge if this speculative inventory must be returned.
The automatic return of material that has not been used for "x" number of months. Remember that under a VMI agreement a customer has purchased stock on the advice of the supplier. If that inventory is not used within six to nine months after delivery (and is not designated to be a critical repair part), the supplier should automatically issue a return-goods authorization and give the customer full credit for the return.

Guarantees of performance. When it enters a VMI agreement, a customer invests in a specific amount of inventory anticipating a forecasted service level for the products supplied under the agreement. But what happens if this service level is not achieved? For example:
* The supplier may not retain enough inventory to adequately replenish the customer's stock.
* The supplier may not replenish inventory as promised.
* The supplier's forecasting and replenishment system may not result in the agreed-upon service level.
If each partner concentrates on its core competences, both firms can increase their productivity and profitability.

Vendor-Managed Inventory

2008-08-21T04:39:00.002-07:00

Many firms are trying to concentrate on the "core competences." They want to outsource minor tasks and activities when it is cost effective to do so. For a distributor, an example of one of these tasks is the replenishment of less-expensive products. For a manufacturer, it may be the procurement of MRO (maintenance, repairs, and operations) inventory. A popular way to outsource these procurement activities is a vendor-managed inventory (VMI) agreement. Under a VMI agreement, a supplier takes full responsibility for maintaining stock of its products at a customer's facility. VMI agreements differ from traditional consignment agreements in that the customer is billed for material when it is delivered, not when it is consumed or issued. When establishing a VMI agreement, the supplier and customer must agree on:
* The specific products that will be covered under the VMI agreement.* "Acceptable availability" of these products at the customer's site and the corresponding investment required by the customer. Usually the supplier and customer will agree on a "service level," which is the percentage of orders for a product that can be completely filled out of the VMI stock inventory. The higher the agreed-upon service level, the more the customer will have to invest in the supplier's products.
* How often the stock of these products will be replenished.
* The automatic return of material that is no longer needed by the customer.
Potential advantages for a customer participating in a VMI program include:
* Eliminating the cost of managing replenishment parameters and issuing purchase orders.
* Establishing an extremely reliable source of supply for products that are very important to its operations but represent a relatively small investment.
Advantages to the supplier include:
* Securing all of a customer's business for the types of products it supplies.
* The ability to better plan its own inventory replenishment needs because the supplier's buyers can monitor the actual sales or use of its products at the customer's site.

Goal of Effective Inventory Management

2008-08-21T04:33:00.001-07:00

The goal of effective inventory management – that is, to meet or exceed customers' expectations of product availability while maximizing the organization's net profits or minimizing its inventory related costs.One of our primary areas of concentration has been the improvement of future predictions of product sales or usage, otherwise known as "demand forecasts." the accuracy of any demand forecast is dependent on the "goodness" of your sales or usage history. Does this data truly reflect what would have been sold or used under "normal" circumstances?
Many software packages identify possible unusual usage at the end of each week, month, or other inventory period. The simplest of these systems compare usage in the month just completed to the total usage recorded over the previous "x" months, or inform you if you were out of stock for more than "y" days. More advanced systems bring to the attention of a buyer significant differences between the demand forecast and actual sales or usage recorded during the inventory period just completed. A common feature of both methods is a belief that usage history has been recorded correctly.

Safety Stock and Inventory Management

2008-08-21T04:29:00.001-07:00

Computer systems maintain the stock of inventory items with parameters such as minimum and maximum quantities. Some of these parameters are objective – that is, there is one right or optimum answer. For example, an economic order quantity balances the actual cost of a product, inventory carrying costs, and costs of purchasing to determine the specific replenishment amount that results in the lowest total cost of each piece of the product.

Other inventory parameters are subjective in nature. There is no one best answer. Safety stock (also known as safety allowance) is one of these. Safety stock provides protection against stock-outs due to unexpected demand for a product or delays in receiving a replenishment shipment from a supplier. It is insurance. Like many other types of insurance there is no "right" or optimum amount. If you talk to three different life insurance agents, they will probably suggest you buy three different amounts of insurance. When you are determining safety stock quantities you have to ask yourself, "how much do I want to invest in preventing stock-outs?"
The answer will probably be different for various products you stock. In determining the safety stock amount, you have to ask:

* What is the likelihood that this product will experience a stock-out?
* How disappointed will customers be if this product is not stock?

Products are more likely to be out of stock if they experience:
* Inconsistent supplier lead times. If vendor shipments are often several weeks late, you may want to keep some extra stock to "cover" customer demand during these unexpected delays in receiving a replenishment shipment.
* Large fluctuations in sales or usage. You might sell 10 pieces or 1,000 pieces of a product in a month without much advance notice of when usage will significantly increase.
In deciding how much safety stock you want to maintain, perform this analysis for all of the items in your inventory to see how many total potential stock-outs you will experience with the various levels of safety stock. Also note when all of the resulting ending balances for a product represent a very high level of inventory. These products probably have fairly predictable usage and consistent lead times.
With this information the customer began to fine-tune their investment in inventory. They examined the stock-outs of painful backorder items and selectively increased the safety stock until there were no out-of-stock situations.
Your investment in safety stock is subjective. There is no "right" answer. But with some simple tools and analysis you can make an informed decision that will ensure that the funds you make available for safety stock are invested as wisely as possible

Inventory ranking

2008-08-21T04:21:00.001-07:00

Distributors, manufacturers, and retailers often stock thousands of products. Properly managing the physical inventory and replenishment of these items is a challenging task. While most buyers and salespeople realize that not all items are equally important to customers or their company, it often difficult to identify those products that demand the most attention.
* 80% of your sales are generated by 20% of your salespeople.
* 80% of your sales come from 20% of your customers.
* 80% of your stock sales involve 20% of your inventory items.
But this rule is not always true. In fact for many companies, 80% of sales are generated by only 10% to 13% of stocked inventory items!
Rank or classify your products based on their contribution to total sales. The products that account for 80% of your sales are typically referred to as "A" ranked items. This may be 5%, 10%, or 20% of your products.
While this type of ranking is important to identify those products that have the most potential for inventory turnover (i.e., opportunities to earn a profit), it is not as valuable in answering other inventory-related questions, such as:

* What products should be maintained in stock?
* Where should a specific inventory item be located in your warehouse?
A special-order item is not maintained in stock inventory, but is ordered and received to fulfill a specific customer requirement.
Reorder quantities of a product with a high cost of goods sold ranking should be carefully determined to achieve a high level of inventory turnover. At the same time you might consider maintaining additional safety stock for products with a high hit rank to minimize the chance of stock-outs. You also might want to include a third type of ranking in your classification analysis, one based on profitability.Ranking products based only on annual cost of goods sold provides an incomplete picture of inventory performance. Three-way ranking provides valuable information concerning each stocked product's contribution to the overall profitability of your organization, information that is vital in your quest to achieve Effective Inventory Management.

Inventory problems solving

2008-08-21T04:19:00.001-07:00

Many companies suffer from several, apparently conflicting, inventory problems:

* Frequent stockouts of critical products.
* Large quantities (and value) of excess inventory and dead stock.
* Inaccurate product availability information in the computer system.
The underlying cause of these problems are the strategy companies hope would enhance their ability to effectively serve customers. Let's look at some of the reasons why their branch replenishment policies were doing more harm than good:
1. Any available stock could be transferred out of any other branch at any time if it was needed to fulfill an immediate customer need. On the surface this policy may make sense. Why keep four units of a product on the shelf in one location if it can be sold by another branch? Isn't that what inventory turnover and customer service is all about?
2. Salespeople buy because they know what customers really need.
3. Branches may overbuy in order to place vendor "target" purchase orders on a regular basis. A target order meets a vendor's requirements that enable a company to receive the discounts or terms that allow them to competitively sell the vendor's products. If each branch has to meet the vendor's target requirement when placing a replenishment order, they may have to purchase more of a popular item than they would if they could split shipments with other branches. They also might have to buy full package quantities of slow-moving products as opposed to "sharing" a package with other company locations.
At these companies, these problems and others could be solved by putting specific buyers in charge of replenishing inventory of specific product lines in all customer locations. These individuals had both customer service and inventory turnover goals they were expected to meet or exceed. This could be done through:
* Ensured that replenishment orders were issued as soon as the replenishment position of a product fell below its order point (lead time usage + safety stock or reserve inventory)
* Split replenishment orders between branches and centrally-warehoused slower-moving items.
* Possible unusual usage is identified and analyzed.
* Buyers approve all inter-branch transfers. After all, they are responsible for maximizing both customer service (i.e., minimizing stockouts) and inventory turnover.

All buyers were not necessarily physically located in the same office, but each was responsible for specific product lines throughout their company. As a result we achieved the results that every company desires: a maximization of both customer service and corporate profitability through effective inventory management.

Effective inventory management again

2008-08-21T04:12:00.001-07:00

Lean manufacturing is helping producers throughout the world reduce inventories, lower labor costs, and increase their overall efficiencies. The same concepts embraced by lean manufacturing practitioners can help distributors achieve the goal of effective inventory management:
"Effective inventory management allows an organization to meet or exceed customers' expectations of product availability with the amount of each item that will maximize net profits or minimize costs."
There is a common philosophy that states, "The definition of insanity is repeatedly doing the same procedure, the same way, expecting different results." Are there re-occurring problems in your warehouse? Is there an easy to record damaged or stock inventory that for some reason cannot be used? This material includes:

* Damaged material found in the warehouse.
* Unintentional scrap created when a mistake was made in filling an order.
* "Drops" or quantities of a product that are too small to be sold or used.

In many organizations, damaged or unusable inventory is hidden. Maybe it is thrown in a scrap pile or discarded. But the best-run organizations encourage or (better yet) insist that employees record these "unquality events." Recorded events are analyzed to determine if polices or procedures can be changed to prevent the same mistakes from occurring again in the future.

Out-of-stock reports

2008-08-21T04:07:00.001-07:00

Most computer systems provide buyers with out-of-stock reports. These are listings of stocked products with no available inventory. Because the stock-out sales orders cannot be filled, salespeople cannot provide the service their customers expect. Buyers scramble to obtain inventory to prevent the "crisis" of the out-of-stock situation from becoming the "catastrophe" of losing those valuable customers.

Out-of-stock reports are, in fact, "gotcha" reports: They inform a buyer of a problem that already exists. Wouldn't it be better if a computer system warned a buyer of an impending crisis? That is the goal of an "early warning system."

It is unbelievable that the report writers available in almost every system have the ability to create "early warning" stock-out reports, but few organizations utilize them. Check with your IT department or software company to see if the following reports or inquiries can be created for your top-selling "A"-ranked items as well as for other products that are crucial to maintaining a high level of customer service:

The available quantity (on-hand – current committed) is below the safety stock level. Safety stock is "insurance" inventory designed to fill unusual customer demand during the lead time or to compensate for delays in receiving replenishment shipments. Buyers should be informed if reserve inventory is being used to fill orders so they can expedite existing incoming shipments or obtain the product from an alternate source. At the very least, if a stock-out does occur, the buyers will not be caught off guard; they will have information in hand as to when the out-of-stock product will be available.

The actual usage by the 7th day of the current month is greater than 50% of the forecast demand for the month. Often, a buyer will be unaware of a surge in sales of a particular product until it is out of stock. If buyers know that sales of a product have suddenly "taken off," they can bring more of the product into inventory before a stock-out occurs.

The actual usage by the 14th day of the current month is greater than 75% of the forecast demand for the month. This is another check to identify products that suddenly have an unexpected dramatic increase in sales or usage activity.

The actual lead time for the just-received stock receipt is more than 50% over the anticipated lead time. The buyers can contact the vendors to determine if the delivery of the latest stock receipt is reflective of future lead times for the item. If so, the buyers can issue replenishment orders for the item earlier than they have done in the past to avoid a future stock-out.

The available quantity of the item at the time of stock receipt is less than an "x"-day supply. You didn't quite run out of the product during this replenishment cycle, but what is the possibility of a future stock-out? Does the forecast, lead time, safety stock quantity, or some other replenishment parameter for the item need to be adjusted?

Restricting the early warning system to fast-moving items and products that are critical to your corporate image will ensure that your buyers aren't buried in data. They won't receive a multitude of alerts, but every one they do get will require their attention. When we propose early warning reporting to our customers, their buyers, inventory planners, and purchasing agents often ask, "Why haven't we had this type of notification all along?" Some buyers prefer alerts in a daily end-of-day report, others as an inquiry, and still others as an email as soon as the situation is identified. The format doesn't matter as much as getting the information. Tell your software people that you want to immediately implement this critical reporting. Countries need an early warning system to prevent attack from foreign powers; you need one to protect something that is crucial to the survival and success of your firm: your customer service!!!

How much to stock?

2008-08-21T04:03:00.001-07:00

How do you know if you have too much, too little, or just the right amount of stock inventory? One way is to compare the value of your current inventory to an "ideal inventory investment." In this article we will discuss how to calculate the value of this "right" amount of inventory. As with many of our other inventory analysis tools, calculating the ideal inventory investment requires that we first separate those inventory items with recurring demand from those items with sporadic usage.

Recurring Usage Items
Recurring usage products are sold or used on a regular basis. Typically these items:
* Have had usage in at least eight of the last twelve months.
* Have had usage in at least four continuous months in the last twelve months (this second condition identifies seasonal items that are only sold during certain times of the year).

Replenishment of these items is normally based on safety stock quantities, order points, line points, and standard order quantities:
* Safety Stock Quantity: The "insurance" inventory maintained in stock to protect you from stock outs resulting from unexpected customer demand or vendor shipment delays.
* Order Point: The Safety Stock Quantity plus predicted demand during the anticipated lead time.
* Line Point: The Order Point plus predicted demand during the supplier review or order cycle; the normal length of time between typical replenishment orders with the supplier.

Sporadic Usage Items

2008-08-21T03:52:00.001-07:00

In many organizations more than 50% of stocked products have sporadic usage – that is, they are not sold or used on a regular, predictable basis. In other words you have no idea when they will be sold or used. In previous articles we have suggested that you base the inventory of sporadic usage products on a multiple of the normal or typical order quantity. For example, if you normally sell or use two of the items in a transaction, you would set the "target" stock level equal to two pieces (if you wanted to maintain one transaction in stock) or four pieces (if you wanted to maintain two transactions in stock).

You might think that like recurring items, the average or ideal value of sporadic inventory items should be some average of the normal quantity on hand, perhaps the target stock level divided by two. But because sporadic usage items are not consumed or sold on a predictable basis, it is very difficult to calculate an "average" investment for these items. After all, you might have the two or four pieces of a sporadic usage item in stock for a week, a month, or for more than a year! Therefore we have to consider the "ideal" value of sporadic inventory items to be equal to the target stock level quantity times the average cost. It's true that because we will occasionally use some of the stock of some sporadic items, the value of the target inventory will overstate the average value of some items. But this is the most accurate method we know of determining the ideal value of sporadic inventory items.
Unfortunately the value of the inventory of a sporadic inventory item will often exceed the value of the target stock level. Why? Because you may have to order a vendor package quantity of a product when replenishing stock. And the vendor package quantity may not have any relationship to the normal customer order quantity. For example, say that the normal customer order quantity of a product is three pieces and we want to maintain two normal order quantities in stock. The target stock level is six pieces (2 orders x 3 pieces per order). Whenever the replenishment position of the item falls below six pieces, a replenishment order is issued. If we must order a vendor package of 10 pieces, the product's stock level after we receive the replenishment shipment will probably be greater than the target stock level of six pieces.Because sporadic inventory is not sold on a recurring basis, we must carefully monitor the value of any amount of sporadic inventory in excess of the target stock level, particularly for those items with a high unit cost. We can define "planned excess" of sporadic inventory items as a quantity equal to:

(Target Stock Level - Normal Order Quantity) + Vendor Package Quantity

One of our goals should be to minimize the value of this planned excess. If a sporadic inventory item has a high planned excess value consider:
* Ordering an amount of the product close to the normal order quantity, even if you have to pay a higher price per unit.
* Discontinuing the product from stock inventory and ordering it only as necessary to fill specific requirements.
* Sharing one vendor package quantity among several stocking locations.
* Substituting a slightly more expensive item without passing the additional cost to the customer. Saving the carrying cost of excess inventory of one sporadic inventory item may more than compensate from the reduced profit on the resulting sale.

One of the best inventory metrics involves comparing the value of your current inventory to the sum of the values of the ideal stock level for each product. If the values are not close to one another, your buyers or inventory planners are probably not following the replenishment recommendations generated by your computer system. Are the system recommendations inadequate to provide your desired level of customer service and inventory turnover? Or do your buyers need more training in using your system to help your company maximize the return you receive from your investment in inventory? Either way, comparing your actual inventory to the "ideal" will lead you to action that can lead to improved profitability.

In our next article we will explore what you can do if your calculated ideal stock level is too high and needs to be reduced in order to achieve your organization's inventory turnover and profitability goals.

Cycle counting

2008-08-21T03:47:00.001-07:00

Cycle counting is the process of verifying the on-hand quantity of a specific number of stock products every day. In previous articles, I have described how to set up and maintain an effective cycle counting program and why this process is usually better than a full physical inventory for maintaining an accurate perpetual inventory in your computer system. But verifying on-hand quantities is only one of the advantages of cycle counting. The other benefit of a cycle counting program is to improve your business processes, including:
* Making sure that all material movement is properly recorded.
* Ensuring that stock receipts are put away in the proper location.
* Verifying that the right quantity of the right item is shipped on outgoing orders or is pulled from stock for an assembly.
* Preventing shrinkage from theft and the mishandling of stocked items.
Absolute Value of (Quantity Counted – Current Stock Level)] ÷ Current Stock Level
Process improvement results from carefully analyzing significant stock discrepancies.
Including the "absolute value" of "Quantity Counted – Current Stock Level" in this equation signifies that a discrepancy should be analyzed if significantly more or less inventory is found during the cycle counting process.
It is impossible to achieve effective inventory management without accurate stock levels in your computer system. A comprehensive cycle counting program is a valuable tool for ensuring that the quantities in your computer system agree with what is physically in the warehouse. But to be certain that stock levels remain accurate over time, you must investigate significant stock discrepancies and take corrective action to prevent similar problems from reoccurring in the future – that is, you must utilize cycle counting to improve the way you run your business!

New Stock Items

2008-08-21T03:44:00.001-07:00

It is common for new stock items to have a spike in sales or usage volume soon after they are introduced. This temporary high volume may be due to:
* Promotions for the new item or salespeople featuring the new item in sales calls.
* Customers wanting to try the new product.
* Customers establishing a normal stock quantity of the product in their inventory.
As in our other examples, if we were to stock based on monthly usage (i.e., four or five pieces per day), we would not be adequately stocked for the scheduled plant shutdown weeks. Accurate forecasting for these seasonal events again requires examining weekly usage – that is, the quantity sold or used in the same week last year, adjusted for increasing or decreasing trends in business.

An accurate demand forecast allows use to meet or exceed customer expectations of product availability with the least amount of inventory. While few demand forecasts are 100% accurate, we must continue to strive to reduce the forecast error (i.e., the difference between the forecast and actual usage) to better predict future demand of products. After all, no major league baseball player has ever achieved a batting average of 1,000 – but this fact does not stop them from trying to improve and play better baseball. Shouldn't you also continually do your utmost to improve the profitability and productivity of your investment in inventory? One of the ways to do this is to apply forecasts based on weekly usage whenever it is appropriate.

Weekly forecasting

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The order point is a "minimum" quantity for the product, and is equal to anticipated demand during the lead time plus a safety stock quantity. Safety stock is insurance inventory to protect customer service from unusually large usage or shipment delays during the time it takes to replenish inventory. When the stock level falls below the order point of 150 pieces, a replenishment shipment would be issued to the vendor.

Each new order point becomes effective at a date equal to the first business day of the week minus the lead time.
So, four business days before the start of week one, if the stock level of the product was less than 497 pieces, a replenishment order would be issued. If the stock level was equal to or greater than 497 pieces, the buyer would leave the item alone because he has plenty of stock available to see him through the first week of the month. The result: The distributor will have this critical item available when their customers want it. Also notice that the order point drops during the period of the month with less usage activity. We are not ordering the material far in advance of when it will be needed. This will help improve the inventory turnover and overall profitability of the distributor.

Effective MRO inventory management

2008-08-21T03:31:00.001-07:00

Managing products that are going to be consumed internally by an organization is normally referred to as maintenance, repairs, and operations (MRO) inventory. Typical questions are:
* How do we decide what products we should stock to maintain our operations?
* What quantities of these products should be kept on hand?

Action plan for achieving effective MRO inventory management.
What Products Should be Stocked?
Many organizations have too much inventory in their maintenance and repairs inventory. Unlike inventory for resale, MRO inventory is not an investment; it is an expense of doing business. Make sure that you are not adding to this expense with unneeded items. Be sure that there is a valid need or justification for stocking every one of the products in your current MRO inventory:
* The product cannot be obtained in the time period necessary to fill a need once the need has been determined.
* The product must be purchased in a quantity greater than what is needed to fill a particular need.
* The cost of carrying a product in inventory is less than the procurement cost.

Often companies will have spare parts in stock for machinery that is no longer in service. When they retired a piece of equipment, no one bothered to check to be sure that all of the spares for the machine were removed from the parts room. That is why we recommend that once a year you examine each of the products currently in your MRO inventory that have not been used in the past 12 months. Question whether it is absolutely necessary to continue to maintain a quantity of each one of them. It is also a good idea to develop a spreadsheet listing each MRO product, the machine(s) or operation(s) it supports, and the quantity of the product normally needed for a repair or maintenance activity. That way, when you discontinue a process in the future, you can easily identify the replacement parts that can be removed from your MRO inventory.

How Much of Each Item Should be Maintained in Inventory

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You can separate your MRO inventory into three categories:
* Continual-Use Items – These are maintenance items and other products that are continually used.
* Specific-Need Inventory – Though not continually used, these items are used on a regularly scheduled basis.
* Emergency-Repair Parts – These are parts whose use sporadic usage cannot be predicted.

Every one of your MRO stocked products should be assigned to one of these categories. Continual-use items are just like the recurring stock products we address in other articles and our books. Please refer to these resources to determine how to calculate a forecast of future demand and other purchasing parameters for these items. Most organizations have too much money invested in the other two types of MRO inventory. Specific-need inventory products are required for scheduled maintenance operations. Unless these are very inexpensive items (i.e., they don't cost much to carry in stock), most companies are best off acquiring just what they need before each scheduled task. Emergency-repair parts are a different story. Since you don't know when each of them will be required, how can you determine how many of each one to stock?
For very critical parts that can completely shut down operations, we will keep one normal-use quantity of each item in inventory even though we can get a replacement part in less than a day. And if the lead time of a very critical part is greater than a week, we will probably want to keep three normal-use quantities on the shelf in our parts room. The cost of this "insurance" is the annual cost of carrying inventory (normally 20% to 25% of the inventory value of the target stock level). You must weigh this expense against the cost of shutting down operations. Notice that we are not even considering maintaining an inventory of a non-critical part unless it has an extended lead time.

The average-use quantity suggestions in this table are not "cast in stone" and should be adjusted for your organization's specific needs. However, if you must reduce the value of your spare-parts inventory, we strongly suggest you discontinue or reduce your stock of non-critical and somewhat critical parts before reducing the target stock level of any of the very critical items. After all, these products support the lifeblood of your vital operations.
With proper management of MRO inventory, an organization can maintain an outstanding level of productivity at the lowest possible overall cost. But like any other process, it cannot be accomplished without a logical, methodical action plan

Effective inventory management and inventory investment

2008-08-21T02:54:00.001-07:00

Many companies try to capture all unfulfilled customer requests and add them to the actual usage recorded for a specific inventory period. They believe that by including these lost sales in usage history, future demand forecasts will be adequate to cover the unfulfilled sales or usage experienced during the current inventory period.As part of a comprehensive customer relationship management (CRM) program, it is important to capture lost sales in order to see what customers are not being adequately served. Indeed, your sales manager probably wants to know if your most important customer requested an out-of-stock product five days in a row. But as we've seen, adding lost sale quantities to actual usage may not truly reflect the quantities of a product actually needed. The adjusted figures may distort future demand forecasts and result in either additional lost sales or excess inventory.

We've found that there is a better way to adjust actual usage for lost sales. This method does not require sales people to accurately record customer requests and protects you from capturing phantom demand. As with other aspects of our inventory management philosophy, we have different recommendations for items with recurring activity (i.e. those that are sold or used on a regular basis) and those with sporadic usage.

Recurring Items are sold on a regular basis. As these are the products customers request most often, it is important to correct for out-of-stock situations in order to ensure a high level of customer service.
1. Specify whether each of these inventory items will or will not accumulate backorders. If an item will accumulate backorders, customers will wait for you to receive the product. As a result, these items tend not to experience lost sales. If the product will not accumulate backorders, customers will go elsewhere to obtain the item. These are the items that will probably experience lost sales.
2. At the end of each inventory period (i.e. week, month, four-week period, etc.), record the number of days each product was out of stock.
3. For items that will not accumulate backorders, multiply the days out-of-stock by the forecast demand/day and adjust monthly usage by this quantity.

Sporadic Items are not sold on a regular basis and whose replenishment parameters are based on the normal quantity sold or used in one transaction as opposed to the forecast demand for an upcoming inventory period.
1. Record the number of times a product is out of stock (or its available quantity drops below the normal or average sales quantity).
2. If the product is out of stock more than one or two times in a six month period, automatically increase the minimum quantity for the product by the normal quantity sold or used in one transaction.
Note that to avoid an unrealistically large inventory investment, most organizations will tolerate a certain number of stock-outs of non-critical sporadic-usage items. That is why we normally will wait for several stock-outs to occur over a certain period before making the adjustment. However, this rule is not "cast in stone," and should be adapted to each company's specific situation and needs.A good forecast is the foundation of an effective inventory management program. The better the prediction of future demand of a product, the easier it will be to provide a superior level of customer service while minimizing your overall inventory investment. Correcting actual usage for lost sales opportunities is an essential part of the forecasting process. But to be effective, these corrections must predict, as accurately as possible, what would have been sold or used had the item continuously been in stock.

2008-08-21T02:46:00.001-07:00

When the stock level of an item falls below the minimum quantity, it is time to reorder the product, right? But there are instances where it is difficult to maintain accurate stock levels because it is impractical to record each individual material disbursement. These are usually very inexpensive products that are taken from stock as needed by the user. But most of these items do have significant usage. And in many cases, a company would suffer a hardship in the event of a stock-out. After all, a product does not have to be expensive in order to shut down production or to be deemed important by customers.
How do you maintain effective inventory management of these items without accurately recording every material disbursement?We change our focus and don't concentrate on what people are using or buying. We track the rate at which we have to replenish the "open stock" available to consumers or other users of the product. The on-hand quantity in the computer system reflects the total quantity in unopened containers (boxes, cartons, gallon bottles, etc.) in "bulk storage" that have not yet been released for sale or use. Note that bulk storage could be a locked cabinet, a high shelf, or a bin location in the back room or warehouse. It just has to be a location that is not accessible by end users of the product. This bulk storage inventory is used to replenish the "open stock" of the item (i.e., the stock available to consumers). As a container is taken from bulk storage and made available to workers or customers, the on-hand quantity is reduced by the container quantity. Therefore the on-hand quantity in the computer reflects an accurate count of the quantity in bulk storage. When the on-hand quantity drops below the minimum stock level or order point, the product should be reordered. Usage history of the product reflects the number of containers of the product that were released from bulk storage in a day, week, month, or other significant inventory period. This usage history can be utilized to forecast future demand for each bulk-storage item. Unexpected increases in replenishment from bulk storage should be reported to management as it might reflect pilferage or some other problem that should be investigated.

From an accounting point of view, we are "consuming" the entire quantity when it is released to consumers. That is, the total inventory value is being reduced by the value of the container, though the product is still in your facility in an "open" bin. Is this a "perfect" solution to maintaining an accurate inventory? Even though the on-hand quantity of open-stock items is not reduced when an individual piece is sold or consumed, customers or projects often must still be charged for the items. This can be accomplished in several ways including:

Issuing a special charge based on the average amount of open-stock material consumed on each order or in the course of a month. Most consumers are now used to their automobile dealers adding a line item on repair or maintenance invoices for "fluids and other consumable maintenance items." And many companies charge each department for a share of the total office supplies consumed in a month based on the number of people in that department.

Utilize a special type of inventory item in the computer system for open-stock products. These items can be billed out to a customer on an invoice (i.e., nails being purchased in bulk at a hardware store), but an individual sale does not reduce the on-hand quantity of the item.

Because they are usually small, inexpensive, and/or hard to count, open-stock items have proved to be a nightmare for many manufacturers, distributors, and retailers. Unfortunately they are often necessary elements in a manufacturing process or crucial in maintaining a high level of customer service. Our goal should be to maintain an adequate inventory of each of these products with the least amount of effort.

Effective Inventory Management and Demand Forecasting

2008-08-21T02:40:00.003-07:00

It is no secret that an accurate forecast of the future demand of a product is crucial in achieving the four "rights" of effective inventory management: that is, getting the right quantity of the right item to the right location at the right time. As we've discussed in previous articles, products with different patterns of usage require different forecasting methods. The forecast for items with recurring usage is usually based on four elements:
* Some sort of average of past usage.
* A trend derived from past usage.
* Future anticipated usage that is not revealed in past usage or trends.
* A forecast horizon reflecting when material ordered today can be received and the length of time for which inventory must be purchased.

If an item has recurring usage (that is, it is sold or used on a regular basis) we can test various formulas that apply different factors to each of the four elements to determine the best method of forecasting future demand of each item. But applying these elements to an item with sporadic activity (i.e. one that is not sold on a regular basis) produces strange results
It's easy to see that forecasting future usage of an item using an incorrect formula will result in stocking the wrong quantity of the wrong item in the wrong location at the wrong time. To achieve effective inventory management, it is essential to be able to differentiate between items with sporadic sales and those with recurring usage activity.

Stock counting, cycle counting

2008-08-21T02:40:00.002-07:00

Cycle counting and the process of counting some stock items or warehouse locations every day are a valuable tools in ensuring the accuracy of your perpetual inventory. We've seen numerous cases in which organizations, after implementing a comprehensive cycle counting program, have had a much more accurate perpetual inventory than they had when they performed full physical inventories. Because accurate on-hand quantities are vital to both providing outstanding customer service and maximizing inventory turnover, it is not surprising that more and more distributors and manufacturers are implementing cycle counting programs.

But cycle counting programs can be difficult to maintain over a long period of time. Many firms become frustrated with the "coordination" problems inherent in cycle counting that are usually not found in a full physical inventory. When companies conduct a full physical inventory, they temporarily halt all normal material movement – that is, they stop filling orders, putting away stock receipts, shipping material, etc. Before this is done, a special effort is made to ship as many orders as possible and put away all stock receipts. During the actual counting process the business is virtually closed down. Counters do not have to worry about someone doing something that will affect the quantity in stock during the full physical inventory process.

Extensive preparation is necessary for a full physical inventory. It is not practical to complete this preparation before each daily cycle count. It is equally difficult to conduct cycle counts only when a business is closed and there is no material movement. After all, cycle counting should be performed every day. Even if a company counts before or after normal working hours when there is little or no material movement, paperwork involving items being counted can be "floating" somewhere in the warehouse or office. For example, a quantity of an item may have been pulled from the shelf but not yet shipped. Or a stock receipt for a product may have been put away but not yet entered into the computer system.
This simple process has the potential to dramatically cut the time necessary to perform daily cycle counting. No longer will people roam around your facility trying to determine if a particular order was picked or put away before or after a product was cycle counted. The result: More accurate inventories with less effort and frustration, a winning combination for any organization. This method could turn out to be a very valuable tool in your quest to achieve effective inventory management!

Inventory carrying costs .more

2008-08-21T02:33:00.001-07:00

Some items take up more space, and are harder to handle, than other products. Many companies feel that items that take up more space should absorb more of the total cost of carrying inventory. In order to apportion the cost of space and material movement to individual products or product groups, we must determine how much of the total space used to store products is being used by an individual item.
1. Calculate the total cost of rent and utilities for the portion of your facility used to store inventoried products as well as moving material in that area.
2. Determine the total cubic volume of space currently used to store stock material. This may not be the total cubic warehouse space. For example, if you just moved into a new warehouse and are using just 25% of the available space, the inventory stored in that area would still need to absorb 100% of the cost of rent, utilities, and moving material, not just 25% of the total cost.
3. Divide the total cost by the total cubes used to store material in order to determine the storage cost per cube.
4. Determine the total cubic volume assigned to a particular product

inventory carrying costs calculation

2008-08-21T02:30:00.001-07:00

The specific cost of carrying a specific product or group of products in inventory is calculating by totaling the five components:
* Insurance, Taxes, and Opportunity Cost: Multiply the ITO factor (calculated above) by the average inventory investment of the item or group of items.
* Shrinkage Cost: Multiply the calculated shrinkage factor by the average inventory investment. If history is any indication, this portion of the average inventory value will eventually be lost, stolen, misplaced, or broken.
* Obsolescence Cost: Multiply the calculated obsolescence factor by the average inventory investment. Again, if history is any indication, this portion of the average inventory value will eventually be classified as obsolete inventory.
* Cost of Counting: Add the annual cost of counting the item.
* Cost of Rent, Utilities, and Moving Material: Add the calculated annual cost that was based on the cubic volume of space required to store the item.

Divide the sum by the average inventory investment for the item to determine the product's specific carrying cost percentage.

Is this a lot of work? Of course. But if significantly different amounts of effort are necessary to maintain individual inventory items in your facility, the exercise may be worthwhile. Remember that the cost of carrying inventory is one of the keys to effective inventory management, and that accurate information usually leads to outstanding results!

Inventory shrinkage and obsolence

2008-08-21T02:27:00.003-07:00

Shrinkage and obsolescence includes any stock material that is purchased but not sold, used to provide a service, or is part of an assembly or finished good. This includes material that is lost, stolen, broken, scrap, or becomes obsolete in our warehouse. Some products are more susceptible to shrinkage and obsolescence than other items. We need to determine factors for these two important components of the carrying cost.

To calculate a shrinkage factor for a specific item, divide the total amount of adjustments due to shrinkage (material lost, stolen, broken, or considered scrap) recorded in the past 12 months by the total stock receipts for the product during the same time period. Why don't we use the average inventory value in this calculation? Because all inventory adjustments are already reflected in the average inventory value. We want to determine how much of the total quantity of the inventory that was received could not be sold, used in production, or used to service a customer. Many companies calculate a shrinkage factor for an entire product line, rather than for individual items. This allows a shrinkage factor to be applied to products that have not yet been inventoried for a full 12 months.

To get an accurate obsolescence factor, we usually have to use a longer time period. For example, if you normally consider inventory obsolete after it has been in your warehouse for 12 months, you might want to divide the amount of write-off adjustments made this year by the total amount of stock receipts for the item last year. Why? Because any material written off due to obsolescence this year was probably received last year. Again, it might be more meaningful if you calculate an obsolescence factor for an entire product line rather than an individual product.If you don't liquidate obsolete inventory on an ongoing basis, you may also want to vary the time periods you consider in this analysis. For example, one of our customers had a large obsolescence write-off last year that covered material that had been received anywhere from two to five years ago. To calculate their write-off factor, we divided the amount of adjustments due to obsolescence over the past two years by the total amount of stock receipts recorded in that two- to five-year period.

Physical Inventory and Cycle Counting

2008-08-21T02:27:00.002-07:00

Most companies count their fast-moving items more often than their slow-moving products. And some products are easier to count than others. As a result, the "cost of counting" can vary from one item to another.

In calculating the counting element of the carrying cost, we usually start by grouping similar stocked items that are stored in similar storage units. We then determine the average number of products in each group that can be counted in one hour as well as the labor cost of performing the count. This cost includes the time spent:

* Performing the actual count
* Entering the count information into the computer system
* Reconciling any discrepancies in the count

The total cost per hour is divided by the number of products that can be counted in that hour. The result is then multiplied by the number of times each product is scheduled to be counted in a year to arrive at the total cost of counting a specific product.

Costs

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To determine the specific carrying cost for a product, we first have to determine what factors of the carrying cost will not vary by item. These are the factors that are solely dependent on cost or value of the average on-hand quantity:

* Insurance and taxes
* Opportunity cost of the money invested in inventory

If you take the total amount of these two elements and divide it by the average inventory value, the result is the cost of these elements per dollar of your average inventory investment. We will call it the ITO (Insurance, Taxes, and Opportunity Cost) factor.

Inventory Carrying cost

2008-08-21T02:22:00.001-07:00

It is important to know your cost of carrying inventory. It is a critical factor in deciding what products to stock and when to reorder them, as well as the best quantity to order. Too often companies and organizations use an imprecise "rule of thumb" to estimate their cost of carrying inventory. The result: Bad inventory management decisions.

In a previous article, "The Mysterious Cost of Carrying Inventory," we gave you some direction for calculating an overall cost of carrying inventory for your entire company or an individual warehouse. The calculation considers these expenses and alternative opportunities for revenue:

* Moving material from the receiving dock to the proper bin location and shifting it to other warehouse locations as necessary.
* Rent and utilities for the portion of your warehouse used to store material.
* Inventory shrinkage and obsolescence.
* Physical inventory and cycle counting.
* Insurance and taxes on the inventory.
* Opportunity cost of the money invested in inventory – that is, how much could you make if the money tied up in inventory was invested in a relatively safe, income-producing investment. Or, if you finance your inventory purchases, the amount of interest that you pay the bank.

The sum of these factors is divided by the average inventory value to determine an overall carrying cost percentage – that is, what it costs to maintain a dollar's worth of inventory in your warehouse for an entire year.

But some companies find that it costs more to stock some items. Maybe they take up more space or are more susceptible to shrinkage and obsolescence. If the carrying cost percentage is used in so many critical inventory-related decisions, doesn't it make sense to calculate as accurate a carrying cost as possible for each product? If you believe that your cost of carrying inventory may vary for different segments of your inventory, consider calculating a cost of carrying inventory for each item.

Slow-moving inventory

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You want to stock the products that your customers request most often in your warehouse(s). But what about products with sporadic sales, or no sales at all?
Even though a product is infrequently taken from stock (or may have never been taken off the shelf), the item must be available for immediate delivery if it is ever needed.

Every business needs to create its list of critical repair products. But as you add each item to this list, consider:
Is the item "critical" or merely "important"? A critical part not only shuts down a machine, it shuts down an entire process or vital service. For example, one of our customers is a food processor. They have one large mixer that is used to combine the ingredients necessary to make any of 25 different products. If the mixer is out of service, none of the 25 products can be produced. The company keeps on-hand in their inventory a spare piece of every component of the mixer. On the other hand, the company has 10 identical wrapping machines. If one wrapping machine breaks down, its workload can be reassigned to the other machines. Production might be delayed for a couple of hours, but the process would not be shut down. The spare parts for the mixer are critical inventory. Those for the wrapping machine are merely important and can be ordered as needed for next-day delivery. Keep in mind that a critical item has the potential, on its own, to shut down a process. When creating your critical item list be sure to note the process that is dependent on each product.
Maintaining critical item in inventory is considerably less expensive than buying one or two pieces whenever they are needed from an alternate source of supply. Keeping several years' supply of selected inexpensive products on the shelf will not have a great effect on your company's overall profitability. And by putting a significant amount of these items in inventory, you won't waste your buyers' time forcing them to continually deal with these "nuisance" items. Concentrate on ensuring you have the optimal quantities of those items that have the most dollars flowing through your warehouse.High-profit, slow-moving items may also represent a good inventory investment. The gross profit that results from each sale may be so large that it offsets the cost of carrying the inventory for a prolonged period of time.
Most companies have to maintain slow-moving products in inventory. However, you must be sure that each of these items improves your overall customer service and/or your company's net profitability.

Inventory mangement and Sporadic Sales

2008-08-21T02:07:00.001-07:00

A lot of firms stocked big amounts of unique products in each of several warehouses. Their buyers seemed overwhelmed with the task of maintaining an adequate inventory of each of these items, most of which were not sold on a regular basis. At each company we worked to "tame the replenishment beast".
The replenishment of these popular products should be micro-managed to maximize inventory turnover (i.e., the number of opportunities to earn a profit) while retaining a high level of customer service. Indeed most books and articles on inventory management (including ours) focus on maximizing the profitability of these items that customers request most often. Most if not all of the methods described in these publications involve a prediction of future demand based, at least in part, on a calculated average of past usage. Although the specific calculation may differ from method to method, most rely on the average or weighted average of the quantity sold or used over a specific period of time.
We could apply other forecast demand formulas, but the results will probably be the same. The demand forecast will be less than the normal sales quantity of 10 pieces, and as a result there will not be enough inventory on-hand to meet the customer's needs.An item experiences sporadic sales if its normal sales quantity is greater than the average quantity sold or used per month.
The average sale quantity often reflects the normal sale quantity. However its accuracy may be influenced by one or two unusual sales. A more accurate method of determining the normal sales quantity is to search transaction history for the mode in the transaction history of the product – that is, the quantity that is most often sold or used.
Although items with sporadic sales or usage do not (or should not) usually represent a large portion of your total inventory investment, stocking these items correctly is crucial to providing a high level of customer service. It does not make sense to stock these products unless you maintain the most commonly requested quantity in your warehouse.

Inventory management and vendors

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How well your vendors are helping you achieve the goal of effective inventory management and which of these methods produces the best results.
Qualifying each vendor's inconsistency in lead times is very important. In order to maintain superior customer service, you must maintain more safety stock (i.e. reserve inventory) to compensate for greater inconsistencies in vendor lead times. This additional safety stock raises the average value of stock inventory and results in decreased corporate profitability.
Determine if the problems:
* Had a negative effect on the service you provided to your customers.
* Caused you to maintain additional inventory to maintain a satisfactory customer service level.
* Increased your operating costs.
The best way to improve your operations, reduce your operating costs, and improve customer service is to closely monitor the problems produced by your current operations. Applying the vendor satisfaction analysis to supplier shipments is a good way to identify ways to improve your replenishment process.

Collaborative forecasting

2008-08-21T01:57:00.001-07:00

There is another form of electronic commerce that promises to greatly increase the efficiency of the supply chain. It is called Collaborative Planning Forecasting & Replenishment (CPFR). CPFR involves a customer regularly notifying a supplier of his/her expected future needs of certain products.
Collaborative forecasting works to solve two of the greatest challenges faced by buyers and inventory managers:

* Stock outs of critical products
* Unneeded safety stock sitting on the shelf gathering dust

Of course there are many instances in which customers cannot predict their future product needs – but whenever they can, collaborative forecasting promises to increase productivity and profitability throughout the supply chain. Let's work to replace inventory with information.

Inventory carrying cost

2008-08-20T09:37:00.001-07:00

Company's inventory carrying cost percentage – that is, what it costs to maintain a dollar's worth of stocked inventory in your warehouse for an entire year. The carrying cost is used in many inventory analysis and planning formulas including the economic order quantity formula, the calculation that is designed to determine your "best buy" replenishment quantity.
* It is fairly easy to calculate a distributor's or manufacturer's inventory carrying cost.
* There is no single accurate default value for the inventory carrying cost.
Replenishing inventory with quantities other than this "best buy" quantity will cause your company to experience higher costs and/or excess inventory.
There is no way to determine which order quantity represents the "best buy" without accurately calculating your company's specific carrying cost percentage and cost of ordering stock. The cost of ordering stock is the cost of issuing and processing a line item on replenishment order. I have read many articles stating that, as with the inventory carrying cost, this number is also too hard to calculate. Many analysts suggest that you should just pick a value between $5.00 and $6.00. As with using rules of thumb for the inventory carrying cost, if you just guess at your company's cost of ordering stock, the resulting economic order quantity will not represent your company's best buy quantity.

manage dead inventory

2008-08-20T07:27:00.001-07:00

Dead and excess inventory – that is, your stocked products that haven't sold for a certain length of time (usually a year).
turning excess inventory into cash is good. But before you put considerable effort into a dead stock liquidation program, be sure that you are currently "buying right" – that is, be sure you are ordering the right quantities, of the right items, at the right time.To show you how "buying right" does more for your profitability than liquidating dead stock, we'll look at an example. We ranked the items for one of our distributors. The ranking process identifies those products that provide the most opportunity for your company to earn a profit. We begin the process by sorting all stocked products in a warehouse in descending order, based on cost of goods sold (COGS) during the past 12 months.
Sure, liquidating dead stock is important. But it probably won't contribute as much to your overall profitability as the process of ensuring that you are buying the right quantities of fast-moving products at the right time. This distributor has a long way to go to achieve his inventory-related goals, but he's off to a good start.

"Free" inventory

2008-08-17T08:27:00.001-07:00

The same as there is no such thing as a free lunch, there is no such thing as free inventory. Just because the vendor issues a credit for any unsold material at the end of a season doesn't mean that the distributor doesn't incur costs in carrying the stock in their warehouse for the remainder of the year. These are the costs the distributor will experience in carrying this stock:
* Moving material from the receiving dock to the proper bin location and shifting it to other warehouse locations as necessary (such as to bulk storage at the end of the season and back to the picking area at the start of the next season).
* Insurance on the inventory. If it is in your warehouse, you are probably responsible for it.
* Rent and utilities for the portion of your warehouse used to store material. The material takes up space that could be used to store other products, sublet to another business, or not rented in the first place.
* The cost of physical inventory and cycle counting. If you don't buy it, you don't have to count it.
* The cost of inventory shrinkage. If it is in your warehouse, someone may steal it or it may be broken.
* Opportunity cost of the money invested in inventory – that is, how much could you make if the money tied up in inventory was invested in a relatively safe, income-producing investment. Or, if you finance your inventory purchases, the amount of interest that you pay the bank. Note that the distributor will only experience the opportunity cost during the popular season, as they will get their money back for any unsold material when the season ends.

The one typical cost of carrying inventory that this firm won't experience is product obsolescence. They won't have to sell some of the material below cost, or throw it out, because it has exceeded its expiration date or fallen out of fashion.
Yes, because of the vendor's special credit policies, the distributor should purchase more inventory. But, they should be careful not to get carried away and fill up their warehouse with material that won't contribute to the company's bottom line. There is, after all, no such thing as free inventory. Remember this to make you inventory management effective!

How to avoid inventory shrinkage

2008-08-17T08:21:00.001-07:00

Here are several policies that will help to solve the inventory shrinkage problems faced by many distributors.

Limit access to the warehouse
Pay your employees well. We've seen great results when the accuracy of on-hand quantities affects the compensation of all employees that have access to warehouse inventory. These employees are motivated to treat your inventory as if it was their own. It's like having management constantly watching over your warehouse operations.
If someone is caught stealing, get rid of him.

Inventory accuracy is a necessary element in any effective replenishment system. If your buyers don't know how much of a product is in your warehouse and available for sale, there is no way they can accurately determine when to replenish stock and how much to order. You'll end up with a "lose-lose" inventory: shortages of products your customers expect you to have in stock, and excess quantities of slow-moving items/ Thia is a key to effective inventory management!

Inventory shrinkage

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by by Jon Schreibfeder
Many employees don't realize the value of your stock inventory and may "borrow" products or take samples
for their personal use. Unfortunately, there is another reason why material disappears: theft. Many distributors find it hard to believe that their employees or customers would steal. But unfortunately stealing, especially petty theft, is a very common reason for "inventory shrinkage." And a distributor who doesn't admit that theft is a problem, or a potential problem, is just burying his or her head in the sand.

Employee theft is not a new phenomenon. Nearly a hundred years ago, my great-grandfather owned a clothing store in Weston, West Virginia. He occasionally commented that he'd been in business for 30 years and had never sold a single handkerchief to an employee (these were the days before Kleenex).

Did the employees think they were stealing? Probably not. These were good people who never would have thought of taking money out of the cash register. But they didn't appreciate the true value of inventory. They didn't see the direct relationship between the inventory in the store, turning that inventory into cash by selling it to customers, and using that cash to pay employees and other expenses. As we stressed in the article mentioned above, employees must see all inventory shrinkage as an expense that reduces the amount of money available to pay wages and benefits. It takes money out of their pockets.

There are, of course, some people who are truly thieves. And sometimes a distributor inadvertently hires one. Thieves usually don't see their long-term security tied to the success of the firm that employs them. Most often these individuals have a short-term goal: that is, getting as much material as possible out of the warehouse (without being caught).

Some distributors install security cameras and other theft-deterrent devices. While they are important tools in a retail environment, the effectiveness of these "hi-tech" solutions in a distribution warehouse is questionable. True, they may be a deterrent to some theft, but employees who are also thieves usually put considerable thought and effort into getting around these systems and continue to steal. At the same time, honest employees often feel intimidated and resentful as "big brother" continually watches their every move. These feelings often discourage good and loyal employees from giving their all for the company.

A better way to discourage theft is for management to create an atmosphere that encourages effective inventory management.

Inventory Turnover

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inventory turnover." Turnover is the number of times you sell your average investment in inventory each year. Turnover is calculated with the following formula:

Cost of Goods Sold from Stock Sales during the Past 12 Months divided by Average Inventory Investment during the Past 12 Months.
If the results of the inventory turnover equation are to accurately reflect the performance of a firm's investment in stock inventory, we must take great care in determining the values for both cost of goods sold and the average inventory value. Let's look at these two components.
Cost of Goods Sold

The value appearing in the numerator of the equation should reflect the cost of goods sold from stock over the previous 12 months. For example, if we are calculating turnover at the end of August, 1999, turnover should be based on the total cost of goods sold from September, 1998 through August, 1999. Direct and drop shipments (i.e. sales of material sent directly from a vendor to a customer) are not included because the material never passes through your warehouse, and as a result is not reflected in the average inventory value appearing in the denominator of the equation – that is, we have not made an investment in inventory in order to generate these sales.

Special order items (i.e. products ordered for a specific customer order that are not normal inventory items) are also not included in turnover calculations because they do not remain in inventory for a significant period of time. They normally are shipped to customers within several days of their receipt from the supplier. Including the cost of special order items in the cost of goods sold used in the equation tends to exaggerate turnover.

The cost of goods sold figure is not always accurately calculated. For example, some companies compute turnover by considering year-to-date cost of goods sold, and compute an annual figure based on this amount. For example, August is the eighth month of the year. At the end of this month, we're two-thirds the way through the year. If a company's cost of goods sold through the end of August is $8,000,000, that company may feel that this will be two-thirds of the annual cost of goods sold ($12,000,000). But this method assumes that sales are consistent throughout the year. If a company experiences any seasonal fluctuations (e.g. a slowdown during the Christmas season) this method will not result in an accurate cost of goods sold amount. As a result, the calculated turnover will not reflect actual inventory performance.

If you are considering turnover for the company, you should only include the cost of goods sold of items delivered to customers. This would include amounts sold to customers as well as quantities used for repairs and in assemblies. Including transfers in the calculation of overall corporate inventory turnover produces exaggerated results. After all, a company could continually transfer material from one location to another without ever selling it to a customer. If we were to include transfers in turnover, the company would have incredibly high inventory turnover, but no sales!

However, if you are calculating the inventory turnover for a central warehouse, you should include transfers in the calculation of inventory turnover. Central warehouses are facilities that serve as the normal source of supply for other company locations. These branches are customers of the central warehouse. If we don't consider transfers in the inventory turnover of a central warehouse, the results of the calculation will fall short of actual turnover for that facility.

Most companies use average cost in the calculation of the cost of goods sold. You may use another cost basis (e.g. last cost, FIFO, LIFO, etc.) as long as you are consistent from month to month. Also, be sure that the cost basis used for the cost of goods sold in the numerator is the same cost basis used for the average inventory value in the denominator of the equation.

Conventional Ways of Calculating Safety Stock

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There are two common conventional methods for calculating the safety stock quantity for a product:

* Percentage of Lead Time Demand
* Days Supply

As we discuss the various methods for calculating safety stock quantities, we'll refer to two variables, "forecast demand" and "usage." Forecast demand is a prediction of how much of a product will be sold or otherwise used in a particular month, and usage is the quantity that was actually sold or used.
Percentage of Lead Time Demand
One of the inventory consultants advocated that, for most items, 50% of lead time demand provides an adequate safety stock quantity.
Demand per day is multiplied by the projected lead time resulting in a lead time demand. Safety stock is half this amount. This quantity represents a X day reserve.
This method is easy to understand but it tends to maintain too much or too little safety stock for many items. For example:

Products with long but very reliable lead times and with fairly consistent demand. If we use this method for an imported product with a 12-week lead time, we'll keep six weeks stock in reserve as safety stock. If we usually receive the shipment on time and demand doesn't vary substantially from month to month, we'll have too much safety stock – in other words, too much money tied up in non-productive inventory.

Products with very short lead times and significant variations in demand from month to month. If a product had a one-week lead time, this method will keep a three or day supply of the item in reserve as safety stock. If usage tends to vary significantly from month to month, there probably won't be enough safety stock available to consistently fill customer demand and the company will experience stock outs.

Days Supply
The days supply method allows a buyer to manually specify a number of days supply of a product to hold in reserve as safety stock. Because a buyer usually does not have the time to review the safety stock parameters for every item each month, he or she will probably set the days supply to provide more than enough safety stock. After all, in the eyes of most buyers, excess inventory is usually preferable to stock outs. As a result, the days supply method often results in the accumulation of non-producing inventory.

Remember that the purpose of safety stock is to protect customer service from unusual customer demand during the lead time or delays in receiving a replenishment shipment. Why not base the amount of safety stock maintained for each item on the variations in demand and lead time? The greater the variation in demand and/or lead time, the more safety stock will be maintained for the item. This is referred to as the "average deviation method."
First we need to calculate average deviation. Next we have to calculate the average deviation of the product's lead time.As a final step in determining the safety stock quantity, we'll multiply the average deviation by a deviation multiple. The deviation multiple used is dependent on the customer service level we want to provide to our customers. Customer service level is defined as the percentage of line items for stocked products shipped complete by the promise date. The higher the multiple, the more safety stock we'll maintain, and the higher the customer service level. Please refer to our other articles for a complete discussion of the customer service level.Be careful! Using a higher deviation increases the amount of non-moving inventory on your shelf!

Safety stock and effective inventory management

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Theoretically, it should be easy to determine when to reorder a stocked item from a supplier. If you know that customers will order ten pieces of the product each day, and you know that it will take seven days to get the shipment from the vendor, you should reorder the product when there are seventy pieces on the shelf.
This quantity is appropriately called the "order point." But the order point formula contains one more element: safety stock. Safety stock provides protection against running out of stock during the time it takes to replenish inventory. Why is this protection necessary?
* Demand is a prediction based on past history, trend factor(s), and/or known future usage of a product. The item's actual usage will probably be more or less than this quantity. Safety stock is needed for those occasions when actual usage exceeds forecasted demand. It is "insurance" to help ensure that you can fulfill customer requests for a product during the time necessary to replenish inventory.
* The anticipated lead time is also a prediction, usually based on the lead times from the last several stock receipts. Sometimes the actual lead time will be greater than what was projected. Safety stock provides protection from stock outs when the time it takes to receive a replenishment shipment exceeds the projected lead time.
The safety stock quantity allows you to satisfy customer demand for the product until the replenishment shipment arrives from the supplier
How Much Safety Stock Do You Need?
When a replenishment shipment arrives, the available quantity is usually somewhere in the shaded area of the graph. Notice that the safety stock quantity is in the middle of the shaded area. Half the time you will use some or all of the safety stock before the replenishment shipment arrives. The other 50% of stock receipts will arrive before you use any of the safety stock. On average, the full safety stock quantity is always on the shelf when the replenishment shipment arrives. It is, on average, "non-moving" inventory.

A distributor puts inventory in her warehouse to sell it to customers. Profits from these sales are necessary to pay the distributor's expenses and provide a return on her investment. With this thought in mind, it seems as though it would not be a good idea for a distributor to intentionally have non-moving inventory in stock.

On the other hand, keep in mind the goal of effective inventory management:"Effective inventory management allows a distributor to meet or exceed his (or her) customers' expectations of product availability with the amount of each item that will maximize the distributor's net profits."
Safety stock is, in reality, an expense of doing business. But it is necessary to ensure good customer service. To maximize profits, we must carefully control all expenses, including safety stock. Therefore, we want to achieve our customer service goals with the least possible amount of safety stock.

Substantial Risk

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What type of new stock item is often at the greatest risk of becoming dead inventory? Products that your vendor suggests you carry! Your vendor's salesperson arrives at your office carrying an armload of glossy brochures. He shows you sales projections showing that a new item will take off and provide you with a wonderful opportunity to increase your profits or market share. Unfortunately, the new inventory may not be the panacea portrayed in the fancy graphs.

Recent surveys have shown that only a small fraction of customers who have said in a survey that they would buy a new item eventually purchase any of the item. This means that the vendor's survey (which was probably biased towards purchasing the product) probably does not accurately reflect the eventual actual sales of the item.
The best way to reduce the chance of vendor-recommended items becoming dead inventory is to negotiate the return, at no charge, of any unsold portion of the initial stock shipment of the product six or nine months after the date of receipt. If the vendor is unwilling to take back this unsold material, carefully reconsider stocking the product. Can you obtain a small quantity of the item from another source, even if you have to buy it at a higher cost? This "test quantity" will help you determine whether or not the new item will be a profitable addition to your inventory. Sure, the high cost will mean that you won't make a lot of money from the item during the test period. But losing money for a month or two on sales of an item is usually preferable to writing off a large unsold portion of the initial shipment.

When you add new items to inventory, you're investing part of your company's limited assets in the hope of gaining new sales and increasing profitability. Each new product addition should be made only after careful analysis, and the performance of every item should be reviewed on a regular basis.

Dead inventory - moderate risks

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There is a greater chance that these new stock items will eventually become dead inventory. Salesperson and customer "suggestions" represent the most common type of moderate risk item.
Notice that sales spike shortly after the item is introduced to inventory. This is probably due to the fact that salespeople are featuring this product in their sales calls. As time goes on, salespeople don't talk about this product as often. In fact, their attention may be centered on more recent additions to inventory! They forget to remind the customers who asked that the product be stocked why they aren't buying more of the item.

To reduce the chance of these items becoming dead inventory, you must continually remind the salespeople of the sales and current stock position of all new stock items. Print and distribute a report containing the following new product information to each salesperson each week, or at a minimum each month, until the product has been in inventory for five to six months:

* Product number and description.
* Current month sales (in units).
* Sales projection for the current month (provided by the salesperson before the item was added to inventory).
* Total sales (in units) of the item to date.
* Total sales projection to date (provided by the salesperson before the item was added to inventory).
* Current on-hand quantity.
* Manually set minimum stock level of the item.
* Manually set maximum stock level of the item.
* Name of salesperson who requested that the item be stocked.
* Reason why the item was added to stock.

Ordering process and inventory position

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Ordering policy describes how ordering takes place in response to demand.
Ideally, we would like a policy which is optimal in some sense. However, usually such policies are quite complex. Instead, we shall settle for a simple ordering policy which is "nearly optimal". To define the policy, however, we need to introduce a new concept - inventory position.
At first glance, it might seem our ordering decision should be driven by the on-hand inventory level,
alone. However, as in life, in inventory management it pays to think ahead - in this case we need to think
one lead-time ahead. The reason is that future inventory levels are affected by both the on-hand inventory
and the orders in the pipeline that are due to arrive.
Inventory position captures this idea. Inventory position is the total amount on-hand plus the total amount on-order.
Keeping a careful eye on the inventory position reduces the nasty tendency to overshoot and undershoot
the inventory that lead times typically engender. An important fact to recognize is that we can regulate
the inventory position by simply placing an order or by holding back orders. In other words, the inventory
position is controllable.

Inventory controlling policies

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There are basic categories of policies for controlling inventories: fixed order quantity policies and fixed
time period policies.
In the first, as the name implies, the order quantity is always the same but the time between orders will vary depending on demand and the current inventory levels. Specifically, inventory levels are continuously monitored and an order is placed whenever the inventory level drops below a predetermined reorder point. For this reason, this type of policy is also called a continuous review policy.
In fixed time period policies, the time between orders is constant but the quantity ordered each time
varies with demand and the current level of inventory. Because ordering follows a fixed cycle, these policies
are also called periodic-review policies. We will focus on periodic-review policies in this note, but the major
insights and analyses are very similar to those for continuous review policies.

Inventory reduction

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A more reliable approach is to use the with-without principle. That is, analyze the relevant costs under
the current system (without any change) and then analyze the same costs with the proposed change. The
difference is a more accurate gauge of cost impact than what one gets by multiplying inventory levels
by a marginal cost rate.
But even lower cost, itself, may not be the most important benefit of a reduction in inventory. Inventory
reductions can free up considerable quantities of cash, which are often critical for a rapidly expanding
business or a business on the verge of insolvency. Reductions in inventory also lower the asset base of an
operation, providing a higher return on assets (ROA).
Therefore, justifying an operating change will depend on a firm's financial objectives.
The point, quite simply, is that your own business judgment and skill must be applied to accurately capture
the right costs and benefits of inventory. Inventory models will only tell you how inventory levels
change; you bear the responsibility of translating these physical changes into changes in the relevant
financial components.

Inventory cost accounting

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In almost any business analysis involving inventory, physical inventory levels must be converted to inventory costs. The exact determination of the cost rate to apply is really a cost accounting matter, but here
are the major components:
1. Capital Cost - This is usually an internal cost of funds rate multiplied by the value of the product.
Because value (materials, labor, transportation, etc.) is added to the product as it moves along the supply chain, this cost tends to increase as product moves downstream.
2. Storage Cost - Units in inventory take up physical space, and may incur costs for heating, refrigeration,
insurance, etc. An activities based cost (ABC) analysis is usually needed to determine which components of these costs are actually driven by inventory levels and which can be considered more-or-less fixed. The answer will depend on the magnitude of the inventory change you are analyzing.
3. Obsolescence Cost - A somewhat harder cost component to pin down is obsolescence cost. A technology or fashion shift may make your current products obsolete and severely deflate their value. The more inventory you have, the higher your exposure to this sort of loss.
4. Quality Cost - High levels of inventory usually increase the chance of product damage and create
slower feed-back loops between supply chain partners. The result: lower levels of quality and a rise in the myriad costs associated with low quality. Again, these costs are di±cult to quantify precisely, but the current consensus is that they can be quite significant.
Typically, all these costs are rolled together into a single inventory cost rate, expressed as a percentage
of the value of the product or material per unit time (e.g. 20% per year). Other equivalent terms for this
same cost rate are inventory holding cost rate and inventory carrying cost rate.
The value of a product is not the sole driver of inventory costs. Other product attributes, such as size, the need for refrigeration, obsolescence risk, etc., determine major components of inventory cost. Applying a single cost rate to all products at all stages of production distribution can be a gross oversimplification.
Secondly, in relying on an inventory cost rate in an analysis, one is implicitly assuming that only marginal
changes in inventory will occur. A major structural change in the supply chain may eliminate whole
categories of expenses that were considered "fixed" in the original ABC analysis of the inventory cost
rate. For example, a major reduction in inventory may eliminate the need for an entire warehouse, the
operating cost of which may have been considered fixed when the inventory cost rate was determined.

Economies of scale

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Managers may also allow an accumulation of inventory to achieve economies of scale, either in production
or transportation. For example, set-up costs in a given stage of production can drive a manufacturer to produce in large lots. If demand does not occur in similarly large lots, supply demand imbalances and inventories are created. That is, a "clump" of supply is added to the inventory which is only slowly depleted by a more-or-less constant demand, followed by the arrival of another "clump" of supply, etc.. These "waves" of inventory, or cycle stocks, can be a major contributor to the total inventory of a supply chain.
Transportation economies of scale can also cause cycle stocks.
Because the demand process is uncertain, the demand on the inventory during the review period is also uncertain. If demand is weaker than expected, we can end the period with excess inventory; if demand runs unexpectedly high, we may end the period with a signi¯cant number of back-orders.
Note that periodic review introduces cycle stocks, since we must order, on average, enough product to satisfy average demand in a period.
Because of the demand uncertainty, we may want to start the week with more than this average amount of inventory. This excess over the average is called safety stock, since it serves as a hedge against uncertain variations in demand. The presence of a delay (lead time) in the supply process has a similar effect. To see why, suppose we continuously monitor the inventory and suddenly notice that a surge of orders has just come in. We begin increasing the supply to make up for the loss, but the new supplies take some time to arrive. Since the supply cannot exactly track demand, the inventory drops (or perhaps back-orders rise). Alternatively, if suddenly demand drops, we may stop ordering. However, past orders in the pipeline will still arrive, causing the inventory to surge.

Understanding inventory cost

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The real key to understanding inventory cost and service is to understand what causes imbalances in supply and demand in the first place.
Transportation related inventories are called pipeline stocks. Of course, transportation is not the only cause of delay between points in a supply chain. Lead times for production, communication and order fulfillment can also introduce significant delays. Anytime such delays are present, they may create inventories. If the delay is due to production, the inventory is typically called a work-in-process (WIP) inventory.
Inventory belongs to the shipper or the receiver. In some cases, ownership changes hands when the shipment
is initiated. From an accounting standpoint, the inventory then belongs to the receiver and becomes an entry in the accounts receivable ledger of the shipper. In other cases, ownership does not change hands until
the goods are delivered, in which case the inventory stays on the books of the shipper whilst in-transit.
The resulting cost differences can be significant when shipping delays are long.

What is inventory

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At a very basic level, inventories are merely the by product of a universal accounting law" of material flow:
inventory = cumulative supply - cumulative demand.

In other words, if we draw a "black box" around a piece of our supply chain and measure the total amount of product that flows into the box (the supply) and then subtract the total amount that we observe leaving the box (the demand), the result (assuming no product is destroyed along the way) is the inventory in the box.
What does a negative unit of inventory look like?
Well, a lot like a back-order. If consumers of our output are willing to order without receiving product, then we can allow demand to exceed supply and inventory can become negative, in which case, it represents the total quantity on back-order. Think of a positive inventory as a pile of goods waiting for orders and a negative inventory as a pile of orders waiting for goods.

Supplu chain

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The term supply chain refers to the complex sequence of activities, information and material flows involved
in producing and distributing a firm's outputs. Supply chains consume vast amounts of capital - in the form of plant, equipment and inventories - and are responsible for most of a firm's cost-of-goods and operating expenses. Supply chains create significant value and ultimately determine a firm's ability to satisfy the demands of its customers. As a result, effective supply chain management is a major strategic challenge for most firms.
But formulating effective strategy requires a good understanding of what drives cost and service in a
supply chain.
We will introduce an inventory model that will enable you to quantifying the often subtle impact of both operational and structural changes in a supply chain.

Effective inventory management -more tips

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Following items are almost sure to sell.
New Items with a Firm Customer Commitment – that is, a signed customer purchase order to buy the entire quantity that you must bring into inventory. Yes, there is a chance that the customer will go out of business, cancel the order, or return the material for credit, but most customers who are willing to sign a purchase order are intent on using the product.

Non-Stock Products with Recurring Sales. These are non-stock products that are continually sold to one or more customers. After you've ordered them several times in one year to fill existing customer orders, you may decide that it would be more economical for you, and more convenient for your customer, to keep several pieces in stock.

To reduce the chance of these items becoming dead inventory, sales should be analyzed at least twice a year to ensure that your customers are continuing to buy these products. If you notice a drop in usage one month, immediately contact the customer to determine the reason for the decrease in demand. Perhaps they are experiencing a temporary drop in usage – or, for some reason they've determined that your service is unsatisfactory, or their needs have changed. Quickly identifying the reason for the decrease in sales allows you to fix the problem or to liquidate your remaining inventory before it becomes dead stock.
There is a greater chance that these new stock items will eventually become dead inventory. Salesperson and customer "suggestions" represent the most common type of moderate risk item.
To reduce the chance of these items becoming dead inventory, you must continually remind the salespeople of the sales and current stock position of all new stock items. Print and distribute a report containing the following new product information to each salesperson each week, or at a minimum each month, until the product has been in inventory for five to six months:

* Product number and description.
* Current month sales (in units).
* Sales projection for the current month (provided by the salesperson before the item was added to inventory).
* Total sales (in units) of the item to date.
* Total sales projection to date (provided by the salesperson before the item was added to inventory).
* Current on-hand quantity.
* Manually set minimum stock level of the item.
* Manually set maximum stock level of the item.
* Name of salesperson who requested that the item be stocked.
* Reason why the item was added to stock.Note that because we don't have enough usage history to accurately forecast future demand of new products, they are normally maintained with manually set minimum and maximum stock quantities

Inventory prediction

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by Jon Schreibfeder
The the greatest cause of dead inventory: leftover quantities of new stock products.
Any stock inventory that is not eventually sold to customers represents a loss to your company – a loss that must be paid for with net profits!

In a previous article, we explored how considering the effect a new item will have on existing inventory can help prevent the remaining stock of the existing products from becoming dead inventory. But what else can you do to prevent material from dying in your warehouse? Well, a good place to start is to follow a four-step plan whenever you're considering adding an item to stock:

1. Carefully consider each new investment in inventory.
2. Set sales goals for the new products.
3. Negotiate the return of unsold material with the vendor before the purchase order is signed.
4. Monitor progress towards achieving sales goals each month.
The Inventory Actuarial Table

Most distributors carefully consider each new purchase of capital equipment. Every truck, desk, and computer purchased must have the potential for increasing profitability of the company. After all, money doesn't grow on trees, and management knows that the limited funds available for new capital equipment must contribute to the company's profits. Unfortunately, new inventory items don't always receive the same careful consideration.

Why? Because introducing new inventory items is often an emotional decision. You have a "hunch" that something will sell, and you act on that hunch by investing in some of the product for stock. Unfortunately, often these hunches are wrong, and the result is dead inventory. Is there a better way than simply relying on hunches? We think so.

After working with many distributors, we've found there are some common characteristics of those new products that usually meet or exceed sales projections. There are also common attributes of new items that often become dead inventory. We call the result of our research the "Inventory Actuarial Table." In the insurance industry, actuarial tables assess the risk involved in insuring a car, a person's life, or something else for which an insurance policy is issued. Our actuarial table looks at the risk of a new stock item becoming dead inventory. Our inventory actuarial table is divided into three sections:

* Items presenting the least risk of becoming dead inventory.
* Items presenting a moderate risk of becoming dead inventory.
* Items presenting a substantial risk of becoming dead inventory.

Forecasting the future demand

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Simple formulas for successful inventory management:

* Many buyers could not effectively deal with mathematical formulas or computers. Ten-key calculators were considered "state-of-the-art" technology. In fact, most purchasing decisions at the time were based on "SWAG" (silly, wild-ass guessing). Any formula (including Graham's) introduced to provide consistency in ordering had to be fairly simple and easily replicated on a calculator.
* Computers did not have the power to perform comprehensive forecasting formulas for thousands of parts within a reasonable period of time. Calculating Graham's simple average for thousands of items stretched the physical capabilities of most computer systems.These conditions present some unique challenges:

* Decreased margins tend to limit the amount of money a distributor has available to invest in inventory.
* Distributors must spread the money available to invest in inventory over a greater number of products.
* Customers are less tolerant if product availability does not meet their expectations.
You're obviously in trouble if you don't have the inventory your customers expect you to have. And if you've bought too much of an item, your money is tied up and can't be invested in the other products that allow you to take advantage of new sales opportunities.
When forecasting the usage of non-seasonal products with fairly consistent usage, we want to average the usage that was recorded during the past several inventory periods. But we also want to "weight," or place more emphasis on, the most recent month. Why?

1. There are often trends in a product's usage as it becomes more or less popular over time. For non-seasonal products, demand in the upcoming inventory period will more likely be similar to the usage recorded in the past several inventory periods than what happened six, eight, or twelve months ago.
2. At the same time, there is usually a certain amount of random variation in a product's usage from one inventory period to another. Notice how the usage of the item in the first example below has fluctuated over the past five months. This "up-and-down" pattern of usage is common for inventory items with moderate-to-high sales. If we were to use just the most recently completed one or two inventory periods in our calculations, the random fluctuations in usage would probably have too great an influence on the forecasted demand. We want to include enough history to ensure that random fluctuations do not have a significant impact on a product's forecast.

Effective inventory

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Sometimes the cost of an item will be dependent on how much is purchased
Which quantity represents the best buy?But in coming up with this answer, the salespeople are ignoring the fact that it costs your company something to maintain inventory in your warehouse. We refer to this amount as the inventory carrying cost. The inventory carrying cost, also known as the "K" cost, is the accumulation of all of the expenses you incur maintaining stocked inventory in your warehouse. These costs include:

* Moving material to the proper bin location and shifting it to other warehouse locations as necessary.
* Insurance and taxes on the inventory.
* Approximately 40% of your warehouse rent and utilities. The balance of these warehouse expenses is considered as part of the cost of filling customer orders.
* Physical inventory and cycle counting.
* Inventory shrinkage and obsolescence.
* Opportunity cost of the money invested in inventory. That is, how much could you make if the money tied up in inventory was invested in a relatively safe, income-producing investment.

The total cost of carrying inventory, in dollars, grows as the investment in inventory grows. If you have more inventory, you have more money tied up in your warehouse stock. Inventory taxes and insurance increase. You probably also experience more inventory shrinkage (lost, damaged, or stolen material) and product obsolescence.

Even apparently fixed expenses such as warehouse rent and utilities can vary with the amount of inventory maintained in your warehouse. Suppose you could eliminate 40% of your current inventory. Would you still need all of the warehouse space you now occupy? Could you lease or sub-lease part of the building? Remember that even if you own your warehouse building, you still have a rent expense. But instead of the rent being the amount of money you pay to the owners of the building, it is the amount of income you give up by not being able to lease the building to another business.

Because of the direct relationship between the total value of inventory and the cost of maintaining that warehouse stock, the inventory carrying cost is expressed as a percentage of the average value of stocked inventory. As a general rule, the annual inventory carrying cost will be between 25% and 35% of the average value of stocked inventory. For example, if a distributor has an average inventory investment of $1,000,000, the annual carrying cost will be between $250,000 and $350,000. Firms with lower operating costs, such as those that own their own building, should use a number close to 25%. Distributors with higher operating costs, such as those whose warehouse space is limited and very expensive, should use a higher carrying cost percentage.

In determining the quantity that results in the lowest total cost of inventory, we need to compare the net savings received at each discount level to the cost of carrying larger quantities of the product in your warehouse.
Carefully examine discounts for buying larger quantities of an item. A lower price doesn't always result in the best value!

Inventory holding cost

2008-08-13T06:41:00.001-07:00

Many vendors offer to pay freight charges if an order exceeds a certain minimum requirement. Many buyers are "brainwashed" into thinking that they must always place an order that meets the free-freight minimum, even if it means bringing more inventory than can be used or sold in a reasonable amount of time. But is placing a free-freight order always a good idea?

In this article, we're going to examine a process that will let you determine whether or not placing a free-freight order is a good buy. As you will see, sometimes you can maximize your profitability by paying the freight.

How much is free freight worth? That's easy. It's the dollar amount on the freight bill. This amount is an additional discount offered by the vendor. Using the process described below, you can determine whether this discount exceeds the cost of carrying the additional inventory necessary to meet the freight prepaid requirement.
Calculate the inventory holding cost that would be experienced at each discount level. The holding cost is the amount of money necessary to maintain the balance of a vendor shipment in your warehouse during the time it takes to sell the entire shipment. It is calculated using the inventory carrying cost percentage, a measurement that reflects who much it costs to maintain a dollar's worth of stock inventory in your warehouse for an entire year. How to determine the inventory carrying cost percentage is discussed in some of our other articles. The company in this example has an annual inventory carrying cost of 30%. That is, it costs 30 cents to maintain a dollar's worth of inventory in the warehouse for an entire year.
Your total cost of inventory (including all of the costs you will incur) is the net investment plus the holding cost dollar.
Finally, calculate the cost per dollar of inventory. The cost per dollar of inventory relates the total cost of inventory at each purchase level to the amount of inventory you will receive.
Even considering the cost of carrying the additional inventory, the freight savings realized with a $2,500 order make the larger purchase worthwhile.
So, if you plan to take advantage of free-freight offers, perform the analysis described above. And only purchase these quantities when it's time to place a normal target with the vendor. You'll always know when your vendor is offering you a good deal!

The Three Types of Stocked Inventory

2008-08-13T06:38:00.001-07:00

by Jon Schreibfeder

Whether you are a manufacturer, distributor, or retailer, each piece of each item in your stocked inventory can fall into one of three categories:

The Good: The inventory that you stock that provides a positive return on your investment – that is, you make money when you sell the product.

The Bad: Inventory that doesn't provide a return on your investment, but contributes to other profitable sales. For example, you might have to stock a line of slow-moving repair parts to support the sales of other, hopefully very profitable, products. "Bad" inventory is a necessary evil. It is not an investment, but an expense – that is, it is an expense of doing business.

The Ugly: Inventory that doesn't provide a return on your investment, and doesn't contribute to profitable sales. If you're in business to make money, there is no reason for this stuff to be in your warehouse. Refer to some of our other articles for advice on liquidating your inventory of this material.

Your first step in analyzing the profitability of your inventory investment is to place each item you stock into one of these three categories. But to do this, we must determine when a product contributes to corporate profitability – that is, what inventory falls into the "good" category.

Effective inventory management

2008-08-13T06:33:00.001-07:00

by Jon Schreibfeder
In deciding what products to stock, remember our goal:

"Effective inventory management allows a distributor to meet or exceed his (or her) customers' expectations of product availability with the amount of each item that will maximize the distributor's net profits."

Sure, there are some items your customers expect you to have on the shelf, in every location, so they can be picked up or delivered within an hour or two. But are customers always this demanding? Are there products now stocked in every branch location that could be delivered within 24 or 48 hours without negatively affecting customer service? Let's look at an example:

Each of ABC Distributor's six branches sells an average of one Hayward 1396 pump (cost = $78.00 each) per year. There is usually one pump on the shelf at every warehouse. If you ask the branch managers, they'll say maintaining inventory of the pump in every location is necessary to provide good customer service. But in reality, customers are usually willing to wait a day or two to get the part after they place an order. As a matter of fact, several customers are shocked to learn that this item is usually available for immediate delivery. So why is the part on everyone's shelf?

*It allows each branch manager to control all phases of the order fulfillment process. They won't be "messed up" by the lack of performance on the part of another company branch.
*Like a squirrel gazing at a hollow tree full of acorns in November, many branch managers feel good looking at full shelves. They're confident that they can handle almost any emergency, except maybe a nuclear attack, if the warehouse shelves are loaded and their delivery trucks have full tanks of gas.
*It's a wonderful sales strategy to be able to say to a customer, "anything you will ever need can be delivered in 30 minutes or less."

None of these is a valid reason for stocking the product in all warehouses. If ABC Distributors stocked two of the pumps in a central location and transferred them to other branches as they were ordered, overall company inventory would be reduced by 10 pumps, or $780. If they could do this with several hundred or even several thousand products, they would enjoy a significant decrease in their cost of maintaining stock inventory.

What about your customers? Will your customer service suffer as a result of a new stocking policy? Let's look at the question from a different angle: Are your customers willing to pay premium prices to help support your bloated inventory? Wouldn't they prefer to pay lower prices and get non-critical parts in 24-48 hours?

But keep in mind that for this system to work, the warehouse that stocks the pump has to be a very, very, reliable supplier. It has to treat the receiving branches as preferred customers and provide consistent, accurate delivery of the parts ordered by the receiving warehouses.

Effective Inventory Management

2008-08-13T06:27:00.001-07:00

by Jon Schreibfeder
Today, most companies that distribute products are adding more new products to inventory than every before. Not only do these new items allow distributors to meet their customers changing needs, they also present the opportunity to penetrate new markets. Adding new products often fills management's brains with thoughts of higher sales and profits. But you must have more than stars in your eyes and thoughts of glory when you decide to expand your product offerings.
There are two strategies for introducing new products, an "immediate" replacement and a "partial" replacement. If not handled correctly, either strategy can result in dead or excess inventory of existing products. Let's examine why this happens and what you can do to prevent it.Immediate Replacement
In an immediate replacement, a new item replaces an existing product. That is, you do not plan to sell the existing product after the new product is introduced. Most distributors know enough to discontinue the old product and prevent their buyers from replenishing its stock. But they usually don't pay much attention to the remaining stock of the old item.

You face a problem if any of the old product remains in inventory after you begin selling the new item. Who wants to buy the old item once the new product is available? Most likely, your remaining stock of the old item will remain on the shelf and gather dust. How can you prevent this from happening?

Try to sell out your entire stock of the old item before introducing the new product. Yes, that means rotating your stock. This is common sense, but some distributors have problems convincing their warehouse people to pull the oldest stock first. Maybe it's because the new boxes are "prettier" than the old ones. If you continually fight this battle, consider transferring your company's entire stock of the old product to one or more specific branches. These branches will not receive the new product until their stock of the old item is depleted. Other locations will be stocked with the new product. This way, your employees have the opportunity to sell the old product or the new product, not both.

But what if your customers know that the new product is available? They may insist on receiving the new item. What do you do with your existing inventory of the old product? Follow the example of computer retailers and discount it! Offer your customers a special price for the material you're trying to clear out of stock. And make it a substantial discount! You want to convince your customers that they are getting a "deal." Don't be tempted to offer a small reduction at first, and if necessary follow it up with a more substantial discount. As time passes, the old item will probably be worth less to your customers, and will therefore be harder to sell. You may not have the opportunity to sell the old item after a few months (or even weeks). The result: you're stuck with a quantity of the old product that has become dead inventory! It's almost always in your best interest to liquidate the stock of the old product as soon as possible.

Partial Replacement
In a partial replacement, a new product will take some but not all of the sales away from an existing product. The existing item is not discontinued, but often contributes to excess inventory. Why does this happen? Let's look at an example:

ABC Distributors is introducing a new item, the model #A234 widget, that can be used in about half of the applications of an existing product, the model #A100 widget. The model #A234 is more energy efficient, and is less expensive. It's not surprising that the new product will be used wherever possible. The result: it will capture about half of the previous demand for model #A100.

Here's the potential problem: Most distributors base replenishment (at least in part) on past sales or demand history. What will happen if the buyer replenishes model #A100 based on its past sales, without considering the effect the new product will have on future sales? The distributor will order twice as much of the model #A100 as is needed. In other words, ABC Distributors will be ordering excess inventory of the model #A100 from the vendor!

It is imperative that whenever a new product is introduced that will partially replace the sales of an existing product, the sales or demand history of the existing product must be adjusted to reflect the projected sales of the new item.

More new items are being introduced to the market than ever before. Distributors must spread the money they have available to invest in inventory over a greater number of products. Carefully consider the effect new product sales will have on existing products. You cannot afford to waste money on dead and slow moving inventory!

Inventory Liquidation

2008-08-13T06:24:00.001-07:00

Most firms worry about liquidating dead stock once a year – that is, after they complete their physical inventory. The owner looks at the inventory valuation report. He clutches his chest as he views the list of type "X" items (i.e. stuff that’s in your warehouse that you wish weren’t there). He makes one of several pronouncements:

"We have too much stuff in our warehouse. Stop buying inventory." Great! Most of what is in your warehouse is dead or slow moving. The boss’ new policy prevents you from replenishing the inventory of the products that do sell on a regular basis. The result is all too common: You have a warehouse full of material, but you don’t have the products necessary to meet your customers’ needs.

"We’re going to get rid of this stuff by next year." In many companies, this pronouncement is as predictable as the ball dropping on New Year’s Eve in New York City’s Times Square. Unfortunately, it is forgotten five days after the end of the fiscal year. And twelve months later, the warehouse is bulging with even more inventory.

"We need a new computer system (or new people) to straighten out this inventory mess." Without implementing the business policies necessary for effective inventory management, no person or computer system can bring a muddled inventory under control.

Inventory liquidation must be an ongoing process that must be coordinated by a specific individual in your organization. We call this person the "dead stock coordinator." After receiving the list of discontinued products and items with excess inventory, this person must determine the best method of liquidation – that is, the method which returns the most value to the company. They must go through the list, trying each method of liquidation in order of desirability, until they dispose of the material. But remember that dead inventory disposal isn’t a one-person job. Every department must participate in the effort under the coordinator’s direction. The dead stock coordinator organizes everyone’s activities and makes sure that the effort to reduce dead stock and excess inventory continues throughout the year.

Liquidating Non-Moving Inventory

2008-08-13T06:21:00.001-07:00

by Jon Schreibfeder
Inventory slated for liquidation can be compared to shares of stock you own in a company headed for bankruptcy. When you first bought the stock, you thought it was a good investment. But market conditions, or other factors, changed the situation. The longer you hold onto the security, the less it is worth. Selling the shares of stock for less money than you paid for them may be your best alternative. At least you’ll get some cash back from your investment.

While it does not produce the most desirable result, liquidating dead inventory sure beats losing all of your money. Sure it’s painful. It hurts so much that some distributors can’t bring themselves to do it. They are emotionally tied to their products. They may even believe in fairy tales, including the one about how, one day, some desperate customer will walk in and buy all of the dust-covered stuff in the warehouse. The occasional sale of a piece of dead inventory perpetuates many sales managers’ belief in this myth. But these infrequent sales cannot come close to economically justifying maintaining all of the products that should be removed.

In the movie Wall Street, Michael Douglas’ character, Gordon Gecko, said, "Don’t get emotional about stock, it clouds your judgment." He was referring to securities. The same advice applies to the material in your warehouse. Don’t get emotional about stocked inventory!!!

The goal of inventory liquidation is to dispose of unwanted inventory at the best possible price or the least possible expense. Here are some ways you can accomplish this task. They’re presented in the general order of desirability:

Transfer the excess stock to another company location where the inventory is needed. A product may be "dead" in one branch, but still active in another location. Why spend money to buy more of the product when you’ve already invested in inventory that is gathering dust at another company location? This option is particularly attractive if the cost of transporting the product between branches is a small fraction of the value of the item.

Many distributors have instituted ongoing programs to move slow-moving inventory to locations where it is in greater demand. This process is called inventory balancing. "C" and "D" ranked products in one branch are candidates to be transferred to other branches where they are ranked as "A" items. Multi-branch distributors practicing successful inventory management balance their inventory between warehouses at least four times a year.

Reduce the price to "move" the excess inventory. Department stores do it, why can’t you?

Offer your salespeople a monetary incentive to sell the product. This works especially well when a customer can choose between several products that will meet his or her needs. Sometimes it is almost miraculous how fast inventory can move when salespeople are provided with the proper incentive.

Advertise the availability of this material to other suppliers. Consider placing ads in industry publications listing the products you’re planning to liquidate. There are also Internet World Wide Web sites (such as www.industrymart.com) that maintain lists of available surplus stock.

Industry Mart’s Larry Wise gives a good example of the value the Internet in inventory reduction. "I spoke to six industrial distributors recently. They we were all gearing up for a major reduction of excess inventory, and all of them said a major component in their reduction plans was to offer their lists of excess to the traditional surplus dealers. These dealers were buying inventory for pennies on the dollar and marking the products up 1000% to 3000%! Boy were those distributors about to get ’gypped’!" These distributors didn’t realize that at least some of their surplus inventory had value in someone’s eyes. And, the traditional surplus dealers may get rich because the distributors don’t realize that there’s still a strong market for some of their surplus stock.

Internet sites that specialize in surplus material allow you to sell specific items in your excess stock at an amount close to your actual cost. And selling even part of your excess stock at cost is a lot better than selling the entire batch at 10 cents on the dollar!

Brainstorm and get creative. One distributor lost a customer contract to supply a certain, custom-made product. When the contract was canceled, there was a four-month supply of the item on the distributor’s shelf. And worse, the vendor wouldn’t accept a return of the material. The stock of this item could be accurately termed "future dead inventory." Instead of taking the typical non-action of ignoring the situation, one salesman took assertive action. He called his competitor who won the contract, and sold his entire inventory of the product at 80% of cost. As there was no other use for the material, this was truly "found" money!

Substitute the product for a less-expensive item. Suppose you sell water heaters. Your manufacturer replaced his model A345 with the model A365, which offers easier access to the heating element. You have three pieces of this discontinued 40-gallon heater in stock. Naturally, contractors ordering a 40-gallon heater want the new model. But, when a customer orders a 20-gallon heater, why not offer them one of the discontinued 40-gallon heaters at the price of a 20-gallon unit?

Donate the material to a non-profit organization. Can a school, church, or charity use some of your dead or slow-moving inventory? This alternative is especially attractive for sub-chapter "C" corporations. These companies can take a deduction of up to twice the cost of the inventory. Talk to your accountant or tax advisor for details and restrictions concerning material donations.

Throw it away. The least agreeable alternative. But, at least your freeing up some shelf space in your warehouse, getting rid of an eyesore, and getting some value by being able to write off the cost of the material. But be sure you have tried all of the other possibilities before you implement this last resort.

Dead and slow-moving inventory

2008-08-13T06:16:00.001-07:00

by Jon Schreibfeder
Dead Inventory
These items have had no sales or transfers during the previous 12 months. As we said before, there are two reasons to maintain stock of these products:
* They are critical repair parts
* They are new stock items that a customer has committed to buy, or a salesman has committed to sell

If an item does not meet one of these criteria, you should probably discontinue it and dispose of your current stock.
Slow-Moving Inventory
Slow-moving items are similar to dead stock items, but they have experienced some (but not much) customer demand during the past 12 months. These items may also be candidates for being discontinued. Carefully review each of these items and ask yourself, or your sales department, these questions:

* Do we expect customer demand for this product to continue or increase during the next 12 months?
* Do our customers expect us to always have the item on the shelf and available for immediate delivery?
* Is there another source (an alternate vendor, company branch, or even a competitor) for this item that will allow us to meet our customers' expectations without maintaining warehouse inventory?
* Is the product very inexpensive, and therefore does not require a significant investment in inventory?

You may receive the response, "Go through all of these items? You must be kidding! There are just too many of them!"

If someone says this, ask them if they were to go to Las Vegas and win $1,000 in quarters from a slot machine, would they try to collect all 4,000 coins from the floor? Many companies agonize over the purchase of a $1,000 computer, but will not spend the time necessary to analyze dead stock and slow-moving inventory. This is strange, illogical thinking. The same asset (i.e. available cash) that is used to purchase new goods is literally tied up in dust-covered stuff in your warehouse. If you stock more items than you can keep track of, you're stocking too many products... or you need more help in inventory management!
Budget for Dead Stock and Slow-Moving Inventory
It's tempting to continue maintaining all of your dead stock and slow-moving items in stock. There is a "warm and fuzzy" feeling associated with knowing you have, in stock, anything any of your customers could possibly want. But can you afford this feeling? Remember that maintaining inventory that doesn't sell is a cost of doing business. We need to set up a budget for this expense.

The first step in calculating this budget is to calculate the average value of all of the dead stock and slow-moving inventory you plan to continue to maintain in each of your company's warehouses.

Consider the value of dead and slow-moving inventory to be equal to the current available quantity of each item times its average cost. If you don't have the average cost for an item, you may substitute the product's replacement cost.

Is this a conservative measurement? Yes. After all, dead stock and slow-moving items are sold on occasion. So the available quantity of at least some of these items will decrease during the year. You may even sell an entire vendor package! If you want to calculate the actual average value of the inventory of each of these items, fine. But most distributors only have the time and resources to perform this analysis based on the current inventory value.

Let's consider an item that you feel is a "critical repair part" and should always be on the shelf, available for immediate delivery. The cost of the product is $15.00. At first glance, $15.00 does not seem to be a lot of money to maintain an item in inventory, especially an item that has been designated as a "critical repair part." But if you consider the hundreds or thousands of slow-moving or dead stock items stocked by many distributors, as the late Senator Everett Dirksen once said, "a million here, a million there, pretty soon you're talking about real money."

Most distributors should limit the total amount of money they have tied up in non-moving inventory (i.e. dead stock) to no more than 10-15% of their total inventory investment. And, slow-moving inventory usually should not exceed an additional 15% to 20% of total inventory. If your investment in dead stock and slow-moving items exceeds the budget amount, you have two choices:

* Go back and discontinue more items.
* Reduce your target inventory turns so that the value of dead stock and slow-moving inventory you plan to maintain equals 35%, or more, of your target inventory investment. But, make sure everyone involved in the decision of which products to stock is aware of the negative effect this action will have on corporate profits.

Target Inventory Investment

2008-08-13T06:04:00.001-07:00

Budgets are good management tools. Unfortunately, few distributors maintain budgets and projections for what is probably their largest asset, inventory. It is critical to the success of your inventory management system, and your business in general, to develop a budget for the value of stocked inventory maintained in each warehouse. This budget is referred to as the "target inventory investment."
Target Inventory Turnover: Most hard-goods distributors earning gross margins between 20% and 30% would like to receive five to six inventory turns in a main warehouse, and ten to twelve turns in a branch location. But these optimal goals cannot be achieved overnight. A realistic "incremental" goal is to increase your current turnover rate by 1/10th turn per month. And as we will see, it will probably take three months, after you begin an effective inventory management program, to start to see results.

So, if the inventory of stocked products in your warehouse is currently turning three times annually, and your company initiated an effective inventory management program three months ago, you should try to achieve 3.1 turns next month, 3.2 turns the month after, etc. This gradual increase in inventory turns is usually the result of an aggressive, but achievable, program to reduce the quantity of unneeded material in your warehouse.
you've developed a target inventory investment. Now you have to decide what products will comprise this investment. Let's start by dividing your inventory into three categories:

Dead Inventory: Inventory with no sales or recurring transfers during the past 12 months.

Slow-Moving Inventory: Inventory that has had some movement, but less than one and a half turns a year. That is, you've sold the normal shelf quantity less than 1-1/2 times in the past 12 months.

Other Items: Items whose stocked inventory will turn more than one and a half times per year. That is, your "good" inventory.

Please note that depending on your specific market, "good" inventory might have to turn more than 1-1/2 times a year. For some companies, "good" inventory must turn 12 times a year. If you have questions about what your particular situation, please contact us.

If you need to reduce your overall inventory investment to meet your turnover goals, a good place to start is to look at the dead stock and slow-moving items that are stocked in your warehouse. Of course, there are some valid reasons to maintain an inventory of items that don't currently sell on a regular basis. But, you must realize that if an item doesn't sell, it doesn't directly contribute to generating the profits necessary for you to remain in business. It is an expense. And, like a new truck, a computer system, new shelving, your payroll, or any other expense, non-moving inventory must indirectly contribute to the current or future profitability of your company. How can it do this?

It might be a repair part or other item that you must have on hand to handle customer emergencies. That is, it contributes to your reputation as a reliable supplier.
It may be an item that you're fairly certain will sell in the future. You've invested in the product today, to receive profits in the future.

As with any other expense, you must control the amount of dead stock and slow-moving inventory you maintain in your warehouse. You can only afford so much of it. In the following discussion, we'll guide you in establishing a budget for the amount of this inventory that you can reasonably maintain.

Just one more note before we go on. You must separately categorize dead stock and slow-moving inventory for each company warehouse or location. An item might have a lot of activity in one branch, but be as "dead as the market for eight-track tapes" in another location.

Inventory Accuracy -2

2008-08-13T06:00:00.001-07:00

by Jon Schreibfeder
Cycle counting is the process of physically counting part of your inventory every day and comparing the quantity found on the shelf to the on-hand quantity in your computer.

In one instance we implemented a program in which we changed the compensation program for all of a company’s warehouse employees. The distributor involved was loosing one-tenth of his inventory to theft every year. And, we determined that the majority of the pilferage was committed by employees. Because of the transient nature of the local workforce (the company was located in a resort area) we determined that it would be difficult, if not impossible, to convince the employees with words alone that their long-term future was tied to the profitability of the company.

The new compensation plan was radical, to say the least. Instead of paying everyone by the hour, a significant portion of every warehouse employee’s compensation was now dependent on the accuracy of the inventory counts in the warehouse. Management cycle-counted part of the inventory every day. And, employees didn’t know in advance when a particular item would be counted. The inventory accuracy goal was titled the "97-3" rule. If 97% of the counts in a two-week period were within 3% of the quantity that the computer determined should have been in inventory, every employee received an incentive bonus. If the cycle counts fell short of the goal, no employee received the bonus. When the bonus was earned, warehouse employees earned 10% more than they did before the program was implemented. When the goal wasn’t met, they earned 10% less.
The program resulted in every warehouse employee becoming an "inventory watchdog." They realized that if there was an inventory shortage, the result would be a reduction in their next paycheck. If they saw someone stealing, they viewed that person as stealing from them personally, not from the company. The result was that inventory shortages decreased substantially.
Most, if not all distributors realize that they must encourage inventory accuracy. If you can convince your employees that their long-term security is directly tied to protecting your assets, great. If not, don’t give up. You must take a different approach. Employees must personally feel the benefit of good inventory accuracy (i.e. a bonus), or the cost of missing material (i.e. a reduction in compensation). In either case, the distributor cannot maximize productivity and profitability unless inventory accuracy is achieved.

Inventory Accuracy

2008-08-13T05:56:00.001-07:00

by Jon Schreibfeder
Most distributors realize the importance of inventory accuracy – that is, having the available quantity of an item in your computer agree with what is actually on the shelf in your warehouse. Management realizes the bad things that happen when inventory accuracy doesn’t exist:

* Wasted Time: If your inside salespeople constantly have to go out to the warehouse to check stock, they’re wasting time. They can’t walk out to the warehouse and answer phone calls at the same time. And, your customers’ time is also wasted as they sit on hold while you dash out to check stock. Do they really enjoy listening to "muzak" or to a ten-minute advertisement describing your commitment to customer service?
* Wasted Money: If inventory is lost in your warehouse, whether through misplacement, theft, or breakage, it must be replaced. Buying replacement material is an expense. And, like payroll, rent, or any other expense, the replacement material must be paid for with part of the distributor’s net profits. For example, if $100 of material is lost per week ($5,200 per year), this $5,200 comes off of your bottom line. If your net profit before taxes is 4%, it takes $130,000 in new sales to make up for this loss ($130,000 x .04 = $5,200)!
* Disappointed Customers: If you promise material to a customer based on what your computer says is in stock, but the material isn’t actually available in your warehouse, the result is often a disappointed customer. You’ll lose your reputation as a reliable supplier. And not being a reliable supplier is the best way to increase your competitor’s sales.

There’s little doubt that management realizes the importance of inventory accuracy. But, how do you convince your employees that inventory accuracy is important? Well, there are two ways:

* Inventory accuracy is a crucial element for the success of your company – and that their professional futures are dependent on the success of your company.
* Provide economic incentives for maintaining accurate inventory.

Vendor Managed Inventory

2008-08-13T05:51:00.001-07:00

by Jon Schreibfeder
The disposition of a customer’s existing inventory should be one of the first topics discussed when negotiating a VMI contract. A distributor needs to know how much it will cost him (and it always costs him something), so that he can make sure that the gross profits earned under the new agreement will cover this expense and provide a return on investment. Company should have separated the "good" stock from the "dead" stock, and given the customer full credit only on the material that could be resold.
Many distributors have jumped at the chance to get these "vendor managed inventory" or VMI contracts.

Ranking method

2008-08-13T05:47:00.001-07:00

Research shows that the more often a product is received or shipped, the less accurate its computer stock balance. This makes sense. Every time someone goes to the bin is an opportunity for a mistake (or to coin the new term, an "unquality event") to occur. For example, material can be put away in the wrong bin, or the wrong product can be taken to fill an order. The Ranking Method directs you to count the items with a large number of dollars flowing through inventory (i.e. with the highest annual cost of goods sold) more often than slower-moving products. The ranking is based on "Pareto’s Law" (named for the late Italian economist Vilfredo Pareto) which basically states that, in general, 80% of the results of any process is produced by 20% of the contributing factors. Applied to inventory, this means that approximately 20% of your inventory items are responsible for 80% of your stock sales.
Though not as effective in finding lost material, the Ranking Method usually works best for maintaining accurate inventory counts. Because the primary purpose of cycle counting is to verify the quantity on-hand of each item, most distributors prefer the Ranking Method.
Greater inventory accuracy resulting from 25% fewer counts! No wonder rank based cycle counting is a popular alternative to geographic counts or an annual physical inventory.

Cycle Counting -1

2008-08-13T05:42:00.001-07:00

by Jon Schreibfeder
Without accurate stock level information in your computer, effective inventory management is impossible. No matter what sophisticated tools you have in your inventory management system, if the computer thinks you have 100 pieces of an item, and there are really only three on the shelf, the system won’t replenish your inventory when it should or order the right quantity.

Unfortunately, most distributors only verify the stock balances in their computer once a year, when they perform a physical inventory. During the physical count, every item is counted and, if necessary, the balance in the computer is adjusted to reflect the actual quantity on the shelf. Even if you assume that the physical inventory results in an accurate count of each stocked product (a big assumption for many distributors), how long do the counts remain accurate? One month? Two months? Six months? Eleven months after the physical count, what percentage of stocked products still have an accurate available quantity in the computer?

In order to receive all of the benefits from a good inventory management system, stock balances must be at least 97% accurate, every day of the year. This means that the actual available quantity of every item in the warehouse is no more than 3% greater or less than the available quantity displayed on your computer inquiry screens. If the computer says there are 100 pieces of an item on the shelf, there should be no less than 97, nor more than 103. Note that 97% is the minimum acceptable standard. One hundred per cent accuracy is the optimal goal that you should strive to attain.

The best way to ensure that a minimum of 97% accuracy is maintained is to continually count your products. That is, count part of your inventory every day, and count each item several times per year. This process is called "cycle counting."

If the answer is so simple, why doesn’t every distributor abandon their annual physical inventory and cycle count? Do distributors enjoy the annual wall-to-wall count so much that they refuse to give it up? I don’t think so. In fact, many distributors have implemented cycle counting programs only to abandon them when they see that their inventory accuracy hasn’t improved, it may even have gotten worse!

For all of its benefits, there is one logistical problem which makes cycle counting more difficult than a complete inventory. That problem is material movement. Think of the environment that exists (if you follow the guidelines in the previous two articles) when you conduct an annual physical inventory:
* All stock receipts have been placed in their proper bin location.
* All printed sales orders and transfers for stock material have been filled.
* Computer records for these receipts, sales orders, and transfers have been updated.
* All customer returns have been processed and the material returned to stock.
* No customer orders are filled nor material moved until the counting of all products in the warehouse is completed

All material movement has stopped. You are counting a fixed target.

Another 15 ways to lower Inventory Costs

2008-08-13T05:38:00.001-07:00

Purchase minimums. Compare the total cost of ownership for purchased products as quoted prices with no minimums to reduced prices with minimums to determine if the reduced prices really provide savings.
Implement SKU-specific purchase transaction costs. Purchase transaction costs aren't normally SKU-specific. But reflecting any extraordinarily low receiving costs associated with specific SKUs will serve to reduce inventory for them. The opposite, of course, is also true.
Get demand plans from downstream. Hard information on upcoming needs from customers reduces demand variability, thus reducing the safety stock required for a given customer service level.
Send demand plans upstream. Sharing demand forecasts with suppliers is more indirect, but in the long run it will serve to reduce the suppliers' finished goods inventory and associated costs and, with effective negotiation, perhaps yield lower prices.
Don't stock it. Manufacturing or purchasing to order when the acquisition and customer lead time and order quantity relationships allow it is a very direct way to reduce inventory, providing that the acquisition capacity exceeds the potential short-term demand rate.
Cross-dock customer shipments. With effective use of joint replenishment, the potential increases in inbound transportation costs associated with purchasing to order can be mitigated. Cross-docking customer shipments can facilitate purchasing to order even when the order quantity relationship would have otherwise dictated purchasing to inventory. In a similar manner, aggregating purchase requirements for multiple DCs into a single order and cross-docking to multiple DCs effectively reduces purchase transaction costs and reduces cycle stock inventory.
Keep in stock, but not everywhere. In multiple-DC tier environments, stocking certain SKUs in fewer/upstream facilities as opposed to more/downstream facilities yields obvious benefits. Likewise, within a single tier of DCs, not every SKU deserves to be stocked in every DC.
Extend payment terms. When negotiating long-term purchase agreements, getting the best payment terms at a given unit price is the most direct way to increase the portion of inventory funded by the vendor.
Take advantage of price/quantity breaks. Taking price/quantity breaks into account when purchasing for replenishment seems an obvious way to reduce the inventory investment, but it’s frequently overlooked. Often this is a result of not quantifying breaks at the time of sourcing or negotiation, not having an effortless way to take them into account, or a lack of understanding of the impact of purchasing larger quantities at reduced unit cost.
Transfer instead of purchase. When inventory of an overstock SKU in one location needs to be purchased to replenish inventory in another location, transfers are a smart way to reduce inventory. Be careful that additional warehousing and transportation expenses aren't unnecessarily incurred, though, so that the reduction in holding cost does not exceed the cost to transfer.
Consider liquidation. Although there will always be a short-term price to pay on the P&L and the balance sheet, when it is absolutely clear that the value to be gained through liquidation—whether through sale at reduced price, sale as distressed product, salvage, or charitable donation—is greater than the most optimistic estimate of future gross margin from conventional product sales, then liquidation is the best decision.
Try merge-in-transit. The concept of in-transit product merging—where, for example, two things are shipped from different locations and then married in transit so that they reach the customer as a single shipment—can be seen as a technique for reducing inventory if the need for the customer to simultaneously receive multiple SKUs is a given. To some extent, merge-in-transit represents an extension of postponement beyond the distribution center walls.
Get help from friends. Collaborative planning, forecasting, and replenishment (CPFR) is an open set of predefined business processes and IT/communications standards created to facilitate collaboration between supply chain partners. CPFR can reduce inventories through inventory balance, forecast, demand, and other data visibility and associated collaboration in the planning area.
Use vendor-managed Inventory (VMI). With the appropriate incentives, allowing suppliers to assume the responsibility for replenishment of your inventory, because of their visibility into both their own inventory and production schedule and your demand data, can almost always reduce your inventory.
Implement vendor stocking programs (VSP). Used primarily for maintenance inventories but applicable to all, VSPs require a supplier to commit to an extremely high service level for delivery of specific SKUs within a fixed time at a predefined markup. VSPs can reduce or eliminate inventories for slow-moving products. There are numerous ways to take better control of inventory and decrease its associated costs. The key to managing inventory successfully is to continuously measure your performance and look for new ways to improve. These 25 strategies should get your organization thinking about what it can do to lower inventory costs. Many of these strategies may seem challenging to implement. This is when it is wise to seek outside help for insight on how to put these strategies to work for you.

10 ways to lower inventory costs

2008-08-13T05:27:00.001-07:00

By Ralph Cox
Inventory policies drive two types of costs: operating expenses and working capital requirements. The latest "Logistics Cost and Service Report" by Establish/Herbert W. Davis and Co. indicates that while total logistics costs as a percent of sales are falling, and most individual companies have succeeded in reducing inventory levels; total logistics costs per hundredweight are increasing, as are inventory costs as a percent of total logistics cost.

Many organizations, however, fail to address opportunities to reduce inventory costs. If your company needs help taking money out of inventory, there are a number of strategies you can implement today that will provide payoff:

Base cycle stock on economics. For purchased products, getting a handle on your acquisition transaction costs will either reduce average inventory or allow for reducing purchasing and receiving labor. For manufactured products, if production equipment changeover costs are in a similar state, getting them in place will either reduce average inventory through shorter runs or allow for reducing changeover and receiving labor through longer runs.
Control order transaction costs. In the office, use the computer to generate purchase orders (POs), electronic data interchange (EDI) for PO transmission, advance shipping notices (ASNs) to reduce expediting, and historical vendor performance to prioritize expediting to lower purchasing costs. In the manufacturing plant, preplanning; prestaging of needed parts or materials; use of special tools or equipment; changeover initiation prior to completion of the previous run; teamwork and work division; maintaining equipment temperatures; and minimizing quality assurance/quality control work all reduce cycle stock inventory. In the distribution center, statistics-based inspection and checking; barcode scanning for data entry; certifying key vendors to eliminate receiving functions; and stocking forward storage locations first and reserve locations second can all reduce purchase transaction costs and cycle stock accordingly.
Lower inventory holding costs. Improve space utilization in the DC through narrow aisle handling equipment, mezzanines, layout modifications, or more appropriate storage modes.
Base safety stock on customer service. Using the appropriate number of product classes, setting the dividing lines between each class in the best manner, updating safety stock levels dynamically, and basing the service levels for each class on the financial goals of the business all serve to reduce safety stock inventory or out-of-stock situations and increase revenue.
Use routine demand forecasting. Using manually edited arithmetic forecasting models to reduce forecast error will reduce overstocking, backorders, and DC returns from stores, holding inventory levels closer to only what is required to support the desired customer service level.
Forecast events. If one-time demand clutters the sales history, or if one-time demand events are part of the future, then they need to be taken into account in any forecasting, both in terms of editing them from history and in terms of incorporating future events into the routine demand forecast.
Think postponement. For parent products from which multiple SKUs can be manufactured, only partially completing manufacturing, placing semi-finished product in inventory, and then completing manufacturing of the final SKUs to order reduces total inventory. In a similar manner, component products from which final SKUs may be assembled can be purchased to inventory and then the final SKUs assembled to order, providing that the time for assembly doesn't exceed the customer lead time.
Rationalize SKUs. Removal of inappropriate product from the product line can be a controversy-ridden process, but it may reduce inventory significantly if handled in a constructive manner:

Develop consensus on the objective of maximizing profit.
Develop activity-based costs for each SKU and separate them into three groups:

o those with selling prices that create positive gross margin
o those with selling prices that cover their variable cost but do not completely cover their fixed cost o those with selling prices that do not cover their variable cost.

Quantify the sales volume correlations among SKUs, based on the analysis of both individual orders and aggregate order patterns by customer.
* Identify the combination of SKUs that maximizes profit on a fully absorbed basis.

9. Reduce lead times for product acquisition. For both manufactured and purchased product, any reduction in lead time, whether supplier lead time, transportation time, or receiving cycle time, provides a one-time, permanent reduction in cycle stock inventory proportional to the throughput level of the SKU and the degree of lead-time reduction. In a similar manner, reducing lead-time variability and increasing inbound unit, SKU, or order fill rates increases supply reliability and reduces safety stock inventory for a given customer service level.

10. Implement common supplier joint procurement for purchased products. Joint procurement of multiple SKUs from a common supplier serves to effectively reduce unit purchase transaction costs and thereby reduces cycle stock inventory as well as annual purchase transaction expenses. In a similar manner, joint procurement of multiple SKUs from different suppliers located in close physical proximity and consolidation of inbound less-than-truckload (LTL) volume to form full truckloads serves to reduce the incremental transportation cost portion of purchase transaction costs and reduce cycle stock inventory.

Inventory Adjustments

2008-08-13T05:14:00.001-07:00

by Jon Schreibfeder
One company has begun a program to achieve effective inventory management. As part of the program, they are cycle counting products and entering inventory adjustments when they find discrepancies between the quantity of a product in their warehouse and the perpetual inventory maintained by their computer system.

Though the company has implemented a system that corrects current inaccurate inventory balances, it still needs to adopt a system that will improve future inventory accuracy. That is, they need to improve their methods of handling stock to prevent additional stock discrepancies.

How will they do this? By carefully analyzing the reasons for inventory adjustments. Why? Because most inventory adjustments are the result of problems encountered in the normal handling of material. Here are some common reasons for inventory adjustments:

* Material is missing from inventory.
* More of a product is in inventory (or in a bin location) than is recorded in the computer system.
* Some of the product in inventory is damaged and cannot be sold.
* Part of the quantity in inventory is outdated or cannot be sold because it has been in inventory for too long a period of time.
* The product is obsolete.
* The remaining inventory in stock is less than the quantity a customer would normally purchase.

Along with the quantity and item, this company will accurately record the reason for each adjustment. Every month, a summary of adjustments (by item and reason) will be reviewed to see if changes to policies and procedures can help prevent future discrepancies. Let's take a quick look at some of the underlying reasons for adjustments:

Material Missing from Inventory:

* Does a particular warehouse person have problems pulling the right quantity of this product for outgoing orders? Are they filling orders from the wrong bin location? Can this problem be solved with additional training or re-assignment?
* Are pickers confusing this item with similar products? Can this problem be solved with additional training or by separating the stocking locations of the two items?
* Are employees substituting one product for another without recording what product is actually shipped? Can the procedure for noting substitutions be improved?
* Are sample quantities of the item being removed from inventory without being recorded? Is it feasible to establish sample accounts for each salesperson?
* Do you suspect that the product is being stolen? Can the inventory of the item be caged or secured by some other means?

More Material on the Shelf Than Expected:

* Are stock receipts being processed in a timely manner? Can you streamline paperwork to expedite the receiving process?
* Are pickers confusing this item with similar products? Can this problem be solved with additional training or by separating the stocking locations of the two items?
* Are employees substituting one product for another without recording what product is actually shipped?
Some of the Product in Inventory Is Damaged:

* Are the receiving people failing to identify damaged material as it is received? Can retraining and specific corporate policies for receiving damaged material solve this problem?
* Is material being damaged in your warehouse? For example, are employees climbing on boxes (and crushing them) to retrieve material stored on a high shelf? Can more training or additional material-handling equipment help to protect inventory from damage?
* Is material broken in the process of being delivered to your customers? Should you consider using better packaging materials for outgoing shipments?
Some of the Product Is Outdated:

* Do warehouse employees have a problem properly rotating stock? Can more training or gravity racks ensure that the oldest stock is always shipped first?
* Should you buy smaller quantities of these items, more often?
* Would it be effective to offer material that is about to be outdated and offer it at a substantially reduced price?

The Product Is Obsolete:

* As most dead inventory is the result of leftover quantities of new stock items, do you carefully monitor the accuracy of the projections of new product sales?
* Do you regularly identify obsolete products and try to liquidate this material as soon as possible?

Remaining (Remnant) Inventory:
* Can you limit sales of the item to the vendor package or to some other minimum quantity?
* Can remnant inventory be used as samples or consolidated and repackaged for sale?

Every inventory adjustment should be viewed as an opportunity for improvement that can lead to greater corporate profitability. If you use inventory adjustments merely to correct the on-hand balances in your computer, you will probably continue to correct the same items until the end of time. Things will only get better if your company decides to learn from its mistakes!

Inventory management- if inventory will need to be buried

2008-08-13T05:06:00.001-07:00

by Jon Schreibfeder
Liquidating unwanted stock using the Internet (or any other method) is not always successful.

Can't everything be sold at some price? Unfortunately, no. Last week, a distributor gave me an example of material that cannot be sold, at any reasonable price. He has an assortment of repair parts for obsolete equipment. This equipment is not in service anywhere! No one could use any of these items except maybe as a rather ugly door stop. Because the parts are made of a combination of glass, plastic, and steel, they cannot even be sold as scrap. The only practical thing he can do with this stuff is to throw it out in order to free up the warehouse space for other items. That is, bury it! His company will be out what they paid for this inventory as well as the expense incurred in buying, receiving, and maintaining the material in stock.

Please avoid having to throw out inventory. Whenever you buy a new product, consider its "burial risk."
Always consider a new item's burial risk factor when setting customer prices. Fortunately, most products whose remnant stock will need to be thrown out tend to be less competitive and price-sensitive. Why? Because they are sold to a limited number of customers and have few uses. There isn't much of a market for them.

You are much better off planning for the inevitable burial of inventory that cannot be sold than letting it take you by surprise. If competition does not allow you to include a burial risk factor in your pricing:

* Consider whether or not you need to really stock the product. After all, you are taking a significant chance on absorbing a loss.
* If you must stock the product, be sure that other profitable sales will compensate you for your probable losses.

Carrying Inventory

2008-08-13T01:11:00.001-07:00

by Jon Schreibfeder
The carrying cost of inventory is the cost of maintaining your average inventory investment of inventory in your warehouse, storeroom, stockroom, or other location where you stock raw materials or finished goods. What costs do you incur in carrying inventory?

* Cost of putting away stock receipts and moving material within the warehouse. How much of your employees' time is spent in these activities?
* Rent and utilities for the portion of your warehouse used to store stock inventory.
* Insurance and taxes on inventory. If it's in your warehouse, you have to insure it, and it may be subject to tax.
* Physical inventory and cycle counting. The more material in your warehouse, the longer it takes to count.
* Inventory shrinkage and obsolescence. The more material in your warehouse, the higher the possibility of shrinkage and obsolescence. After all, it's hard to steal something that isn't there!
* Opportunity cost of the money invested in inventory. How much could you make if you were to take the money you're investing in inventory and invest it in a more traditional investment (such as treasury bills)? Or if you are financing your inventory, how much interest are you currently paying the bank?

The carrying cost percentage is calculated by dividing the sum of these expenses (along with the opportunity cost) by the average inventory value. It is the amount of money it takes to maintain one dollar's worth of inventory for an entire year.

For years many industry consultants have maintained that determining your company's actual carrying cost is too difficult to calculate in a reasonable amount of time, and that you should use a rule of thumb such as "current prime rate plus 20%." One inventory "guru" recently suggested that you should adjust your carrying cost percentage so that the economic order quantity formula suggests "reasonable" reorder quantities.

This is backwards thinking. The economic order quantity formula is designed to calculate the lowest total cost reorder quantity (i.e. your "best buy quantity") based, in part, on the cost of carrying inventory. If it costs you less to maintain inventory in your warehouse, you will tend to stock more. If your carrying costs are high, you will probably want to keep just enough inventory in your warehouse to protect customer service. Guessing at your carrying cost will not ensure that you are buying the quantity that will minimize your firm's total cost of inventory.

Just as important, using an approximate carrying cost does not help you identify areas for potential improvement in your warehouse operations. In these days of increased competition, lower margins, and greater customer demand of product availability, it is important to lower operating costs and increase productivity wherever possible. By closely examining the specific components of the inventory carrying cost and comparing the numbers to other firms in your industry and region, you can identify areas that are candidates for improvement.

With all of this in mind, EIM would like to help you calculate your cost of carrying inventory. If you will print and fill out the attached questionnaire and send it to us by email, mail, or fax, we will calculate your carrying cost and send you a comparison of your answers to each question to others in your region and industry. There is no charge for this service as long as you agree to let us add your information to our database. Please note that all responses are confidential. Data we present to other companies will not identify your company name or location.

Even if you don't fill out the questionnaire, please review it, as it includes most (if not all) of the factors you must consider as you calculate your own inventory carrying cost.

Inventory in Terms of Time

2008-08-12T08:52:00.001-07:00

by Ted Hurlbut

“What’s the value of your inventory on hand?” This is one of the first questions that I ask a prospective client during our first conversation. And they can almost always give me a straight-forward answer.

For many small retailers thinking of inventory in terms weeks of supply is a new concept. They are regular to inventory in terms of quantity, in terms of units, cases or casepacks, as well as how much inventory they need to build an effective display. They may have heard of terms like ‘inventory turnover’ or ‘open-to-buy’ without fully understanding what they mean. They understand return on investment, but in managing the day to day urgencies of their business they are much more focused on sales, believing that maximizing sales will lead to positive cash flow.
Thinking about inventory in terms of time is the essential starting point in effectively managing inventory. Stated in simple terms, the goal of effective inventory management is to have on hand at any given time only enough inventory to support planned sales until the next delivery arrives, plus a safety stock to cover any short term sales spike and the possibility of a late vendor delivery. This quantity can be stated at any point in time as forward weeks of supply; that is, the number of weeks of planned sales going forward that the current inventory represents. When thinking in terms of weeks of supply the focus is on maximizing the return on the inventory investment by linking inventory levels directly to planned sales.

However, many small retailers instinctively focus on how much they might be able to sell if they had the stock on hand, rather than the amount of cash they are committing to inventory. Their focus is on having the stock to be able to capture the ‘last sale’. The problem with trying to capture that ‘last sale’, however, is that it’s not possible to know exactly which sale is the ‘last sale’, resulting in inflated inventory levels. And unless they can quantify the number of weeks of supply they have on hand, and the number of additional weeks of supply they are purchasing, they have no way of projecting when they can expect to sell that inventory and convert it into cash.
To become a truly powerful inventory management tool forward weeks of supply needs to be calculated continually by category or item. For categories of fashion merchandise, for instance, where specific items are constantly changing as assortments, forward weeks of supply should be calculated by category. For staple replenishment items, forward weeks of supply should be calculated by item. And just as on hand inventories should be thought of in terms of forward weeks of supply, purchase quantities should also be evaluated for the number of additional weeks of supply that they represent. Every purchase order should be accompanied by the following question; “How many weeks am I buying?”
he point is not necessarily to identify what the optimal weeks of supply is, but to continually challenge the current forward weeks of supply to identify opportunities for eliminating unnecessary inventory, and free up cash for other urgent needs. For as every retailer understands, there’s no such thing as standing still; if you’re not going forward, you can be almost certain that you’re going backwards.

Small retailers who think of their inventory in terms of weeks of supply almost always experience fewer markdowns and fewer build-ups of dead inventory, faster inventory turnover, and healthier cash flows. With healthier cash flows, and a keen eye on weeks of supply, a small retailer will always have the ability to be a true merchant, to make that advantageous purchase, chase a key item or capitalize on the latest emerging trend. And those are the true keys to generating consistent sales increase and profitability.

Inventory problems slving -2

2008-08-12T08:38:00.001-07:00

If the problem happens to deal with inventory, you may have people from Shipping, Manufacturing, Inventory Management, Purchasing, and Accounting since they each deal with the inventory in one way or the other. What you do not want is the team entirely made up of the responsible department, in this case Inventory Management. Team members should be made up from a variety of levels--not just management. During team activities, all team members should be considered as on the same level, rather than their level in the company outside the team. There is no rank on the team.

Inventory turns -2

2008-08-12T08:32:00.001-07:00

by George Matyjewicz
Turns refer to the number of times your inventory is replaced per year OR per month. The turns can be calculated for the whole inventory or part of the inventory such as a department or product grouping and gives you a picture of the business compared to the last month, quarter, season or year, and how you compare to others in your industry. The higher the number of turns, the better you are doing and the more productivity you are getting from your inventory investment, Return On Investment (ROI). If two companies are the same in every way but one is turning over its inventories more often, the one with better inventory management is the one that is going to be able to grow faster. Inventory management actually is a bottleneck for growth if it is not efficient enough, tying up a lot of working capital that could be better used elsewhere.

There is a fine line between a high number of turns and running out of product because your inventory is too close to what you are selling AND having too much inventory compared to your sales- When you get your inventory to the correct levels then you have achieved Just-in-Time Inventory. There is a critical mass point where the amount of inventory on hand will earn the best return. For example, if you had $1 million in inventory, and you only had sales of $100,000 in a month, you would have too much inventory and not make the turns. On the other hand, if you had $10,000 in inventory and $100,000 in sales, you would be buying too often and losing out on inventory turns. The ideal point is to turn inventory 5-6 times, and it is possible to turn it 10-12 times as many companies do. There are many factors which influence inventory turns, including how quickly you can replenish.

Your goal is to keep your inventory investment at target levels with as wide a selection as possible.
Financial advisors Motley Fool believes inventory is a liability masquerading as an asset, especially with retailers. Inventory represents the merchandise the company has available for sale. For most retailers, this is finished goods sitting in warehouses or on store shelves.

The reason they consider this a liability is because of inventory risk. Essentially, inventory risk is the risk that the value of the inventory will decline before it's sold. The problem that many retailers face is that their goods are perishable, either literally in the sense of food spoiling, or theoretically in the sense that items could go out of fashion.

How big is this risk? It depends on the type of retailer. For retailers that sell fashionable items, this risk is significant. If they cannot sell products when they are "hot," it will be hard if not impossible to sell them at full price in the future. The result is lower prices or "markdowns" on the inventory to entice customers to buy the merchandise. Because of the lower prices, the company will make less money, thus profits fall.

Furthermore, when it comes time to buy merchandise for the next season, the retailer finds itself a bit short of cash. In fact, the retailer could decide to buy fewer items next time to hedge against inventory risk. The point here is that high levels of inventory are often a leading indicator of problems for a retailer.

Many industries and companies use GMROI (Gross Margin Return on Investment) which is a merchandise planning and decision making tool that assists buyers in identifying and evaluating whether an adequate gross margin is being earned by the products purchased, compared to the investment in inventory required to generate those gross margin dollars. This is very common in the fashion industry, where merchandise is replaced every season.

For every dollar of inventory investment GMROI will help you calculate your return. The industry may average $2.00 return for every inventory dollar, however, some retailers, however are getting $4, $5 or more.

GMROI reveals where actual dollar profits (versus paper profits) are attained in the merchandise plan. It focuses the buyers' attention on return-on-investment rather than sales as a basis for merchandising decisions.

To calculate GMROI, follow these steps:

1. Calculate your gross margin or realized gross margin as a percentage.
2. Calculate the value of your average inventory at cost.
3. Divide your total sales by your average inventory at cost. This will give you your ratio of sales to inventory investment.
4. Multiply the result of #3 by your gross margin percentage (#1) to get GMROI.

GMROI works for any size store, department or merchandise classification. It will work for each category in each department, each class in each category, each color, each size in each class and so on.

Managing your GMROI results will enable your inventory to work for you and generate increased profits.

Inventory turns

2008-08-12T08:21:00.001-07:00

by George Matyjewicz

With any distribution business, the less money you have tied up in inventory in order to fill your distribution channels, the more money you will have to do all the other things a company needs done -- marketing, advertising, research and development, acquisitions, expansions, and so on. You need to turn your inventories as often as possible during the year in order to free up that working capital to do other things.

The “official” calculation to figure out how you are turning inventory, is to first find out the Cost of Goods Sold (COGS) for the past 12 months. Then take the current inventory and divide it by the Cost of Goods Sold and you get the number of times you have turned inventory.

Retailers, who used to work on the "Retail Method of Accounting", traditionally calculated the number of turns of inventory by adding beginning RETAIL value of your inventory to the RETAIL value of your purchases then subtracting the RETAIL value of the ending inventory, then divided that value by your total sales. This method has been used in the past because the retailers, on the advice of their accountants, used retail values as it was too difficult to calculate costs manually. But that assumes that everything you sell will be at the retail value. Now, with a good Inventory Control system you will obtain a true Cost of Sales. Hence, you should use the COST instead of Retail to produce a more accurate picture of your inventory turns:
((Beg.Inv.at Cost) + (Purchases at Cost) - (Ending Inv. at Cost)) / (Cost of Sales)

If your Inventory system also has a method of tracking adjustments for shrink or scrapped items, then the more accurate formula would be: ((Beg.Inv) + (Purchases) - (Ending Inv.) - (Cost of Scrapped and Lost items)) / (Cost of Sales)

Inventory problems - avoiding

2008-08-12T08:12:00.001-07:00

by Ted Hurlbut
For many small retailers, the largest asset on the balance sheet is inventory. But without careful planning, inventory can easily get out of whack, resulting in heavy markdowns due to overstocks and ultimately, serious cash flow problems.

Often the heavy inventory levels they represented, and resulting cash flow issues, were the result of mistakes made months earlier, when preseason planning was being done.
In fact, the planning that does take place is frequently confined to financial planning or cash flow projections.
Here are a few tips:
1. Plan sales. In order to effectively manage your inventory, you need to know what you expect to sell. For larger retailers that are stocking many SKU’s, sophisticated sales forecasting software may make sense. For many small retailers, however, developing a simple spreadsheet from your POS sales history, by month by key category, is most cost effective. Start with last years sales histories, and make adjustments for unusual events, such as weather, out of stocks, one-time promotions, etc. Then factor in the appropriate sales increase or decrease percentage, based on a reading of the sales potential for the category for the upcoming season. Finally, for larger categories, it may make sense to break the sales plan down by sub-categories, styles or vendors.

2. Plan inventories. It makes little sense to bring in more inventory at any given time than you need to set your displays, support your planned sales until the next delivery, and provide a safety stock in the event of an unexpected sales spike or a late vendor delivery. Buying inventory too far in advance is one of the surest ways to find yourself over-stocked down the road. For many small retailers, the best way to plan inventories is to plan to have enough on hand at month end to support the next two or three months sales.

3. Plan inventory receipts. If you’ve planned sales by month, and ending inventories by month, it’s easy to calculate how much inventory to bring in each month. You need to bring in enough to cover that month’s sales plan and ending inventory, less the prior months ending inventory. In this way, a buyer can know in March, when preparing for the fall season, for example, how much inventory to plan on bringing in each month of the season.

4. Plan markdowns. Planning markdowns goes hand in hand with planning inventories. If you plan the date of the first seasonal markdown before the season even begins, you can plan the inventory you want to have on hand at that point in time, and thus your markdown percentage, as well as your markdown sales before your second markdown, as well as all subsequent markdowns.

5. Plan dynamically. Once you’ve completed your preseason planning, don’t put it in a drawer never to be seen again. Use that plan as a dynamic tool to track the progress of the season. As each week goes by, and sales trends begin to develop, adjust future sales plans accordingly, and adjust inventory plans for those updated sales plans. If sales are exceeding plan, you want to be sure you have the inventory to keep the momentum going. Conversely, if sales are coming up short of plan, the sooner you adjust your inventory plans, and thus your scheduled receipts, the less likely you are to end up with excess inventory that needs to be marked down at season’s end.

The root cause of many inventory problems faced by small retailers is the lack of adequate preseason sales and inventory planning. It may seem that there’s never enough time for such planning, as if it’s a luxury that just can’t be afforded, but in reality, it’s a critical necessity, a vital investment in the future health of any small retailer.

Inventory control

2008-08-12T07:43:00.001-07:00

Inventory control is among the most important topics in management science. Since the development of the classical Economic Order Quantity formula in 1913 , a lot of celebrated results, such as the base stock
policy, have been obtained. One of the critical assumptions in this vast inventory literature has been that
the inventory level at any given time is fully observed. However, in reality, it is often not the case, and the
inventory level is only partially observed. In such cases, most of the well-known inventory policies such as the base stock policy are not even admissible, let alone optimal.
There are a number of reasons for partial observability of inventory levels. Demand may be incorrectly observed or observed with some delays. Inventory may be misplaced or stolen.
Even though partial observations in inventory systems are very common and serious, there has not been
much research activity in this area.

Stock-outs lead to loss of a sale or damage the company's goodwill. Most companies pay utmost attention
to an item when its inventory is non-positive. One way is for the employees to walk around the shelves to
see if the item is stocked out.

Inventory -more about

2008-08-12T07:40:00.001-07:00

Inventory levels are only incompletely observed. This may be due to non-observation
of demand, spoilage, misplacement, or theft of inventory. The non-observation of demand may be caused,
e.g., by transaction errors or by discrepancies/delays in transmitting/processing sales data. We study a
periodic review inventory system where the demand is not observed and the unmet demand is backordered.
As a result, the inventory manager cannot tell the exact quantities of inventories or backorders. However, by
looking at the shelf, he knows whether the inventory is positive or non-positive. Only with this information,
the inventory manager must determine the order quantity in each period that would minimize the expected
total discounted cost over an in¯nite-horizon.

Inventory system

2008-08-12T07:18:00.001-07:00

Information delays exist in an inventory system when it takes time to collect, process, validate, and transmit inventory/demand data. A general framework is developed in this paper to describe information flows in an inventory system with information delays. We characterize the sufficient statistics for making optimal decisions. When the ordering cost is linear, the optimality of a state-dependent base-stock policy is established even when information flows are allowed to cross over time. Additional insights into the problem are obtained via a comparison between regular models and the models with stochastic order lead times. Inventory can substitute for information and vice versa.

Inventory problems solving

2008-08-12T06:15:00.001-07:00

by Dave Morgan
What is the most pressing problem. You'll invariably hear the same answer over and over: inventory.

The problem isn't sales. It's not advertiser acceptance, nor a lack of industry standards.
The inventory problem is behind all these oft-heard publisher laments:
* We over- or under-deliver every campaign we run. We can never accurately predict our audience.
* We don't know what numbers to believe. Our systems never agree with each other.
* The best parts of our site are sold out. The worst parts are hard to even give away.
* Our salespeople are always selling things we can't deliver.
* The whole inventory thing is too complicated. Why can't this be like other media where inventory is fixed?
* Audience-based targeting only makes things worse. Inventory was difficult enough when we only sold page placements.
* We must generate more money per page. Page growth and audience growth are slowing. We reduced the number of ads per page, but revenue budgets continue to rise. How do we close the gap?
Many online publishers can easily point to the symptoms; few can get at the root of the problem, much less solve it. Many hope it's nothing more than a temporary growing pain on the industry's path to maturity.

It won't just disappear; not without help. The inventory problem is real and requires a solution.

Today, some specific strategic and basic policy issues to address the problem. In part two the core of the tactical and operational issues in designing and implementing inventory yield management processes and systems will be covered.

The Strategic Front

* Forget simplicity in the online media business, at least for the next few years. Too many media executives hope selling and delivering online advertising will be as simple as selling other media, such as magazine pages or TV spots. They forget not only that online media are dynamic, fully addressable, and fully measurable but also these very complicated characteristics are what make online attractive to advertisers. Online media provide marketers with a robust platform that supports classic brand advertising, complex direct marketing, and powerful hybrids of both. Making it work is hard.

* Recognize there's a publisher/advertiser mismatch, and create product accordingly. There's currently a buyers' market for online media. Things may remain this way for a long time. Advertisers can and will buy only what they need and pay for it according to how well it performs. Optimizing audience inventory for the publisher is hardly at the top of advertisers' minds.

Few publishers achieve an optimal balance between their audience, their content, and must-have advertiser needs. Fewer still have figured out how to package inventory to maximize audience yield. Those who do will win. Those who don't will lose.

* Don't wait for silver-bullet technology solutions. There are no simple, silver-bullet solutions to the inventory problem. And they aren't likely to appear any time soon. This isn't a technology problem. It's a business problem. The issues surround packaging and product, not silicon science.

* Invest in business intelligence. Understanding your audience is essential. Who are they? Where do they go on your site? What audience do your advertisers want to reach? Where do they want to reach them? You cannot create proper inventory or the right products without this information.

* Don't force compromised products on advertisers. Many publishers sell bad inventory (undifferentiated, run-of-site impressions) in combination with sponsorships or inventory in their best content sections (technology shopping or personal finance). On the surface this may help move the bad inventory. But then the publisher never gets full value for the good inventory. The advertiser discounted it to make up for the bad stuff. The advertiser isn't happy. He's compromised the buy and will look for alternatives rather than renew.

Long term, the publisher loses even more. He doesn't confront the fact bad inventory is not worth investing editorial budget into.

* Is the inventory valuable? Prove it. If you believe a run-of-site inventory package adds real reach or frequency value to contextual targeting, prove it. Measure the audience. Match it to the advertiser's target and objectives. You may be able to get premium value for it instead of making it a worthless value-add.

* Don't sell what you don't have. Understand the inventory you have. Put systems in place to communicate to the sales and marketing teams. Create rules, and stick to them. More inventory problems occur because of internal breakdowns than for any other reason.

* Sell people and places, not just places. Advertisers want to reach people. Publishers want to sell places. That's the core of the inventory problem. Online media's power (and what differentiates it from direct marketing) is the ability to deliver people in a valuable context. It delivers people who are in places. Publishers too often try to sell only the places, not the people.

The challenge this creates is the future inventory of online places (pages) is very unpredictable. But future visits of people, although not perfectly knowable, are much easier to predict, particularly when historic loyalty patterns are taken into account. Simply put, people are more predictable than pages. Managing audience instead of pages creates significantly greater long-term strategic value. Page content can generate revenue as long as it has traffic, usually days or weeks. A loyal audience can generate revenue for years, if properly managed.

* Clean up your inventory. If certain content areas are neither valuable to advertisers nor attractive to audiences, cut them. Building roads that don't expect traffic made sense during the dot-com era when online media companies were valued by their quantity of pages. Those days are over. Online media companies are now valued for the quality of people they deliver to advertisers.
Solving the inventory problem won't be easy. Making tough inventory policy decisions is only half the battle.

Procurement Management Process:

2008-08-11T07:20:00.001-07:00

A company's use of best practice purchasing methods in order to optimize price savings, to insure quality products and to develop strong vendor relationships cannot be overstated. Unfortunately, many purchasing decisions in small businesses are not based on best practices. Wise purchasing decisions should not be made solely on volume discounts which generally produce lower unit prices. Under certain circumstances, this volume discount approach has its benefits. However, one should not be lured by the myth that this approach works optimally all of the time! In fact, this volume discount approach can be a major contributor to elevated inventory levels. A more pertinent approach to purchasing is the Economic Order Quantity (EOQ) method. The EOQ is an inventory model that indicates the quantity to be ordered which reflects customer demand and minimizes total ordering and holding costs. EOQ inventory model employs the use of sales forecasts, historical customer sales volume reports, and the ongoing monitoring of current customers' sales activity. The Procurement Management Process involves the following steps:
1) Review Open Sales Report and Inventory Min/Max Report: Periodic analysis of these reports is mandatory in order to determine the quantity that should be ordered to replenish standard in-stock product inventory levels or non-stock items.
2) Issue Purchase Orders: A formal purchase order (PO) must be issued to each supplier. The PO should include pertinent information: product description, quantity, quoted price, and time frame for delivery.
3) Purchase Order Procedures: Procedures that are recommended:

Receive/Review Items: Once the items have been received, inspect them to determine whether or not they meet the description and quantity as stated in the Purchase Order and to determine any existing damages.
Resolve Issues: Any discrepancies between "what was ordered" and "what was received" or any product damages must be noted on the shipping documents and the supplier must be immediately notified.
Accept Items: After resolving any delivery, damages, or discrepancy issues, the Shipping/Receiving Supervisor accepts the items on behalf of the company.
Approve Payment: After the supplier issues an invoice for payment, the invoice must be approved before scheduling and issuing payment.

Following above three steps ensures better supplier relationships which, in turn, create greater customer satisfaction.

Inventory and sales forecasting

2008-08-11T07:16:00.001-07:00

Most small businesses do not invest the time in forecasting future sales- even though cash flow projections demand it! Accurate forecasting of future sales not only impacts your cash flow projections, but it also becomes the foundation for establishing adequate and realistic inventory levels. Without a solid projection of future sales, managing your company's inventory and cash flow would be difficult at best. Sales forecasting is a critical activity for reducing risk and avoiding the high costs of either under-stocking or over-stocking of material. Sales forecast are not without its set of problems. If sales forecasts are projected too optimistically, then cash is often tied up in slow-moving inventory and profit margins are reduced due to wasted overhead. On the other hand, if sales forecasts are projected too pessimistically, then the result is poor delivery performance, dissatisfied customers and revenue shortfalls due to limited product availability. The benefits of sales forecasting far out way any of its pitfalls: increased revenue, increased customer retention, increased operational efficiency, and overall decreased costs.

Inventory Control System

2008-08-11T07:14:00.001-07:00

Inventory control is difficult to embrace. Inventory control is a system of maintaining inventories in order to prevent stock outage, to control overage and shortage, to reduce carrying charges (interest, storage, and insurance), and fend off theft. Documenting policies and procedures that provide the guidelines for effective and efficient inventory control is a must. Examples of Inventory Control requirements are:

Inventory accuracy: Inventory records must be consistently accurate in order to control costs and to fulfill sales order requirements.
Reduce internal lead times: Overall lead time of raw material, sub-assemblies, and finished goods must be reviewed in order to discover if any inefficiency exists.
Speed up the time to replenish raw material: Replenishing raw materials in a timely manner, so that adequate inventory levels can meet customer demand, is critical. Knowing suppliers' lead times is the key to accurately replenishing raw materials.
Review order quantities: As mention earlier, ordering large quantities, in order to get a "volume discount," is not always the best method for reducing cost. The Economic Order Quantity (EOQ) method of purchasing works well in lowering overall cost.

Inventory management- evaluation ratios

2008-08-11T07:09:00.001-07:00

The periodic use of ratio analysis to monitor the performance of your inventory is a highly recommended practice. The two main ratios for evaluating how well you manage your inventory are the Inventory Turnover Ratio and the Average Number of Days of Inventory:

Inventory Turnover Ratio (ITR): The ITA measures the number of times your business "turns over" its inventory in a year. It is a measure of the operating efficiency of your business. The more frequent the inventory turnover, the greater the ratio. A higher ratio is preferable. To calculate inventory turnover, divide Cost of Goods Sold (COGS) by Average Inventory. Use only finished inventory to simplify the calculation. A low turnover rate may point to overstocking, obsolescence, or deficiencies in the product line or marketing effort. However, in some instances, a low rate may be appropriate; that is, when higher inventory levels have occurred in anticipation of rapidly rising prices or shortages. A high turnover rate may indicate inadequate inventory levels, which may lead to a loss in business.
Average Number of Days of Inventory (ANDI): ANDI measures the number of days it takes, on average, to sell your finished goods inventory. This ratio is simply the inverse of the Inventory Turnover Ratio. To calculate the ANDI, divide the number of days in a year (365) by the ITR. The fewer the number of days that finished goods sit on the shelves, the better.

Monitoring your Inventory Turnover Ratio and Average Number of Days of Inventory helps you to improve inventory management and to avert write-offs associated with stale inventory.

Inventory cycle

2008-08-11T07:08:00.001-07:00

The inventory cycle, from order to delivery, involves the flow of both information and material. Information is initially generated from your sales forecast. As the inventory cycle advances, information is generated from the receipt of sales orders and the placement of purchase orders to your suppliers. Material flow is the movement of raw materials into your company that are processed into finished goods. The material flow cycle ends with the movement of finished goods to your end-user. If you are a manufacturer, your inventory consists of three basic types of inventories: raw materials, work in progress, and finished inventory. Each of these types represents the various stages of completion of your product as it works its way through the manufacturing and assembly processes. If you are a retailer or wholesaler, you deal only with finished goods inventory.

How to Convert Inventory into Cash effectively

2008-08-11T00:58:00.001-07:00

Converting your inventory into cash is as critical a process for the health of your company's cash flow, as the process of converting Accounts Receivable into cash. The effective conversion of inventory into cash requires a methodical system that efficiently moves products from order to delivery. Without a well-defined inventory management system in place, inventory stock levels may become too low or too high, resulting in lost sales and increased costs. The longer an item(s) remains as inventory, the greater the chance for the item(s) to become either damaged or obsolete and this eventually results in an inventory write-down. Slow-moving inventory adds to a slower cash flow and consequently creates greater carrying costs that must finance the inventory. The degree of success, in converting inventory into cash, is directly related to the how well the inventory cycle is monitored and controlled.

Inventory costs

2008-08-06T08:45:00.001-07:00

Inventory costs consist of:
• Cost of money - The cost of capital to the company or, in some cases the "opportunity cost" or return that might be earned on the money by applying it productively elsewhere.
• Obsolescence - The risk of inventory never being used, or needing rework to make it usable, needs to be factored into the cost of owning INVENTORY. In theory (and practice), the larger the inventory is, and the longer it is held, the more likely engineering changes, customer preferences and technological changes will render that inventory unusable. In the clothing industry, it is not uncommon to see inventories depreciate as much as 90% when styles change. Certain portions of the electronics industry have problems with inventory becoming obsolete very quickly, due to technological changes.
• Shrinkage - A portion of inventory becomes unavailable to the owner due to loss, damage, theft or spoilage. The longer inventory is there and the more there is, the more likely this is to happen. Steps to prevent it only raise carrying costs in other areas, such as security, climate control, better control systems, recruiting policies, etc.
• Quality Factors - Allowances for yield, attrition, scrap and rework. This is really more of a function of the process than the amount of inventory invested and is more related to throughput, but is sometimes included as part of the aggregate inventory carrying cost.
• Technological or Price Obsolescence - Prices don't always go up. In fact, in industries such as electronics, prices often plummet due to constantly improving designs, product and process technology improvements. Therefore, it is desirable to minimize inventories in high-risk areas.
• Taxes - There are two dimensions to this: 1) in some areas, a tax is levied on inventories, so the more inventory, the more tax is paid. 2) inventory is regarded as an asset by most accounting and tax rules. Therefore, increasing inventories shows "profits" and profits are usually taxed, usually by multiple government entities.
• Insurance - The cost of carrying insurance on inventory needs to be considered, as well as insuring the space, equipment, people and other resources needed to control it.
• Space - Costly storage space sometimes occupies 25-30% of the total facility, when one considers raw material warehouses, stockrooms, work-in-process storage, receiving, shipping, outside warehouses, MRB and residual storage areas. Inventory reduction campaigns can help companies avoid the need to move to large facilities, or permit them to shut down or cut back existing facilities.
• Manpower - All of this inventory needs people to order, receive inspect, record, move, count, store, retrieve, post it to the ledger, etc. People are the largest or second largest expense (behind material) for most manufacturers.
• Record Keeping Systems - Software, procedures, equipment and paper must be used to track and control inventory.
• Material Handling/Storage Equipment - Conveyors, fork lifts, bar code readers, scales, automated storage and retrieval systems, trucks, carts, bins, racks, shelves must all be purchased, leased, maintained and cared for.
• Physical Inventories, Reconciliations - Must be conducted to ensure that inventories are properly accounted for and maintained.
• Transportation - Must be provided to move inventory in and out of the facility, to vendors, within the facility, to different workstations and storage areas.
• Energy - Heat, light, humidity control, air conditioning, refrigeration and fuel must be consumed to make all this happen.
• Inappropriate Lot Sizing - In inventory formulae, the carrying cost of inventory is often expressed as a flat percentage of the inventory value, for convenience of computations, but that is an oversimplification of reality. For instance, consider material handling/storage costs. Just because a dollar of inventory is added, doesn't mean that carrying costs go up, say, $.02. In reality the costs would not usually go up in a direct proportion at all, but only when we had to pay for an additional expense, or make the next capital investment in equipment or space to accommodate the inventory. So actually, most of these costs are step functions, rather than continuous curves.
We urge caution in the use of so-called EOQ (Economic Order Quantity) formulae in planning. While these can be useful guidelines in some cases, they can easily go awry and are hypersensitive to changes in carrying costs and order costs, which are usually no more than guesstimates, at best. We smile in amusement at PhD's made or lost on the study of such arcane calculations, often failing to consider basic realities such as; how much space and money do we have, anyway? You can refer to Paul's book, Production & Inventory Management in the Technological Age, pages 137 to 139 for a detailed explanation of why this lot sizing method is weak and should be used with caution.

• Supply variation—refers to the reliability of the supplier to deliver the desired units in the needed quantity, at the right time, at an acceptable quality level. If this can't be done reliably, then companies tend to carry a buffer (safety) stock to make up for the deficiencies in the supply system.

• Demand variation - refers to the ability to reliably forecast what the customer will require (whether that is an internal or an external customer). Lower reliability tends to encourage buffer (safety) stocks.

• Defects —Extra inventory is often carried to allow for probable rejections. This is just a specialized form of safety stock for supply and demand buffering.

• Logistics constraints/transportation costs - This also sometimes falls under the heading of supply and demand variation and it certainly can affect it. For example, one of our clients transports parts by ocean freight to a plant in Portugal, or at least they do that if they don't have to ship by air to get them there faster. Because ships traveling between economical ports only leave every few weeks, a 20 or 40 foot long container is the most practical shipping size. A certain amount of time is required for packing, transportation to the terminal, Loading, transport, unloading, customs and transport to the consignee. These are very real logistics constraints that must be built into the "pipeline" portion of the inventory model.

Control your inventory

2008-08-06T03:57:00.001-07:00

Inventory drivers are things that tend to make inventory go up or down. Understanding them is the beginning of gaining control over your inventory.
The more items you have, the more inventory you will need.
The more SKU's in a product, the harder it is to bring matched sets of parts together at the same time. Because there are multiple items, with multiple vendors, kept and routed through multiple places or paths, with more opportunity for delays, defects, etc, more inventory will be needed.
The more operations there are and the longer that they take, the more inventory you will tend to have. More operations mean a longer supply chain. It may also mean differing lot sizes per operation and more places for delays and defects to occur. Process simplification helps reduce inventory.
The more facilities that inventory passes in and out of, the further apart those are and the harder they are to reach and pass material in and out of, the more inventory you will tend to have.
The more times inventory passes from the control of one system or organization to another and the less efficient the transfer is, the more inventory you will tend to have.

Inventory Buildup Chart

2008-08-06T03:53:00.001-07:00

Another inventory analysis tool is the inventory buildup chart.Allow for safety stocks, lot size inventory, transit stock, defects/rework/scrap, and normal finished goods and distribution pipeline stocking. Show the affect of consignment arrangements. Some people also treat accounts receivable as sort of a de facto inventory, until it is paid for. Once this chart is completed, show it around for shock value. Presented correctly, it will really make people think about the effect of constraints and decisions (just another form of constraint) on inventory. Then, work on changing the rules of your inventory management!

ABC analysis - inventory mangement tool

2008-08-06T03:13:00.001-07:00

A simple, common and powerful tool for inventory management is ABC analysis. It is based on Pareto's law of "80-20."Typically, the top 10 to 15% of items account for 75-85% of value ("A" items), the next 20-30% account for 10-20% of value ("B" items) and everything else accounts for the rest, about 60-70% of the items, usually about 5% of the total value ("C" items). Your inventory should be less than these percentages for the "A" items, because they are much more tightly controlled and a little higher for B's and significantly higher for C's.
Then compare the list to actual values in inventory, plus actual and planned commitments.An ABC list suggests what to concentrate on to control most of the inventory investment.Err on the side of caution for the cheaper items, allowing a safety stock coverage or "two bin" approach to avoid stock outs, but keep inventory from getting out of control.

Inventory Investment Requirements

2008-08-06T02:57:00.001-07:00

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

Aggregate Inventory Management p-1

2008-08-06T02:46:00.001-07:00

Inventory investment management continues to be a major issue for many organizations.Installing the latest software and mouthing the most popular buzzwords is no guarantee of good inventory management.
How to set up and maintain Aggregate Inventory Management for improved investment and operations management?
Aggregate Inventory Management is "establishing the overall levels of inventory desired and implementing controls to ensure that individual replenishment decisions achieve this goal."
It includes:
• How to assess overall investment levels and set targets.
• How to identify inventory investment level "drivers" and help control them
• How to link aggregate inventory management "macro" strategy to "micro" controls and develop accountability
• Performance measurements
• Specific techniques, such as ABC analysis, control parameters, inventory buildup charts, and input-output control.
• Goal—Helps manage assets and make money.
• Objective—Optimize inventory levels within the parameters of service, cost, logistics, process and investment objectives/constraints. Inventory management should be exercised to keep the lowest level of inventory consistent with achieving the objectives. Too much inventory reduces Return on Investment and Return on Assets (lower profits). It also tends to increase expenses, in the form of interest payments, handling and storage, management, damage, loss, obsolescence, tracking, taxes, insurance, etc.

Inventory management system

2008-08-06T02:40:00.001-07:00

Inventory management systems help a firm in managing the flow of raw materials, semi-finished, finished products, and provide the staff to co-ordinate various activities for effective inventory management.
Inventory management systems help a firm in managing the flow of raw materials, semi-finished, finished products, and provide the staff to co-ordinate various activities for effective inventory management.
Inventory management systems do not make decisions directly, but help employees to make decisions. A good inventory management system would also provide help in forecasting the demand and supply apart from ensuring that the confusing paper work is done away with.
The basic constituents of an inventory management system are sales forecast, production planning, advanced planning for procuring raw materials and semi-finished products required for manufacturing and keeping the inventory at a desirable level.
The proper management of inventory is a delicate maintenance of the balance of supply and demand, by maintaining the appropriate level of stock in a warehouse. Inventory management is important for keeping costs down, while meeting regulations. Supply and demand is a delicate balance, and inventory management hopes to ensure that the balance is undisturbed. Highly trained inventory managers and high-quality software will help make inventory management a success. Click on the picture to learn about one of inventory management systems.