Goal of Effective Inventory Management

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

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

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

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

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.

Effective MRO inventory management

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.