Inventory Management
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Agenda
Effective Inventory Management
Strategic Considerations
Supply Chain Management
Purchasing and Production
Sales and Customer Service
Suppliers and Customers
Inventory Accuracy
Cycle Count Strategies
2
Competing Objectives….
Sales/Marketing/Customer Service Objective
Maintain sufficient on hand inventory to satisfy every possible (or
impossible) customer request
Production Objective
Maintain on hand inventory quantities that produces the lowest cost per
unit
Inventory Management Objective
Maintain lowest level of on hand inventory to satisfy customer demand
while minimizing cost
3
….Producing Different Results
Sales/Marketing/Customer Service Objective
Maintain sufficient on hand inventory to satisfy every possible (or impossible) customer
request
Results in on hand inventory for every SKU available in large quantities consuming a large
amount of space
Production Objective
Maintain on hand inventory quantities that produces the lowest cost per unit
Results in maintaining large quantities of low cost SKU’s on hand but not specialty/unique
SKU’s that customers demand
Inventory Management Objective
Maintain lowest level of on hand inventory to satisfy customer demand while minimizing cost
Results in maintaining appropriate amounts of each SKU on hand to ensure customer
demands are adequately met
4
Cost of Excess Inventory
Carrying Cost
$5,000,000 x 6% interest cost = $300,000 carrying
cost
Hidden Costs
Warehousing and Rent
Labor Costs (moving, counting, maintaining)
Cash flow considerations
Quality
5
Inventory Management
Sales Forecast
Customer
Communications
Production
Inventory
Management
Warehouse
Purchasing
Supplier Communications
6
Inventory Management
Sales Forecast
Customer
Communications
Inventory
????????
Production
Warehouse
Purchasing
Supplier Communications
7
Traditional Inventory Tools
Economic Order Quantities (EOQ)
Vendor Managed Inventory
Slow Moving Inventory Reports
Cycle Counting
8
Purchasing and Production
Purchase and manufacture based on customer demand – NOT
BASED ON VOLUME DISCOUNTS OR UNIT COST
CONSIDERATIONS
Map the purchasing and production processes identifying non-value
added activities, bottlenecks, constraints, etc.
Strengthen your Preventive Maintenance program
Results in more reliable production and quality
Maintain discipline in the Engineering group
BOM accuracy
Engineering changes
9
Sales, Marketing, and
Customer Service
Map the sales forecasting and sales order processes identifying
non-value added activities, bottlenecks and constraints
Commit to SKU Rationalization using historical data with up-front
sales team involvement
Compensation plans should be built around selling profitable SKU’s
10
Suppliers and Customers
Suppliers
Reduced lead times
Quality inspections prior to shipment
Shipment accuracy
Customers
Cooperative forecasting
On-line, real time order to shipment tracking
11
Accounting and Finance
What can I do differently?
If your company is Lean or Six Sigma, participate in
Kaizen events
Facilitate discussions between sales, production,
purchasing, etc.
Lead change either through the Internal Audit function
or CFO leadership
12
Inventory Accuracy: How to
Improve through Cycle Counting
www.rubinbrown.com
Inventory Accuracy: How to
Improve
What is Inventory Accuracy?
Inventory record accuracy is a measure of how closely
official inventory records match the perpetual inventory
levels.
Inventory Accountability Measures
Accountants and financial personnel prefer dollar based
measurements of accuracy.
Operations and material management personnel have a
stronger interest in the accuracy of individual item or
SKU.
Inventory Facts
Inventory is often the largest consumer of capital
for an enterprise.
It is imperative that a business have accurate
inventory records to be effective and efficient.
Poor inventory accuracy may cause stock-outs of
inventory and require a business to carry higher
inventory levels than necessary, which requires
more capital.
Common Inventory Accuracy
Issues
Common causes for inventory inaccuracy
Shop floor discipline
MRP set-up is not accurate
Accounting for subassemblies / kits / phantoms
BOMs are not followed in production
High volume of facility transfers
Ineffective root cause analysis of inventory
issues
Advantages of Cycle Counting
Program
Cycle Counting discovers errors in the perpetual
inventory records much like a physical inventory.
Significant advantages of cycle counting over the
physical inventory:
Allows for the achievement and sustainability of very
high accuracies
Spreads out the counting workload
Advantages of Cycle Counting
Program (continued)
Allows for the reduction of inventory
Continuously measures accuracy
Continuous - Works without interrupting of
operations
Facilitates process improvement through
root cause analysis
Can eliminate the need for an annual
inventory observation
Downfalls of a Physical
Inventory Observation
High degree of accuracy achieved
Expensive
Requires a large investment of physical
resources
Not sustainable
Significant impact on operations
Cannot conduct ongoing root cause analysis
over inventory outages
Cycle Counting Program –
Basic Operation
Cycle counting continually finds and corrects
inventory record errors
Counters inspect a small sample of inventory
items each day
Cycle count selection is random or semi-random
based on established methodology
Errors are immediately corrected
Cycle Counting Program –
Basic Operation
Multiple variables affect the number of
daily or weekly counts that will be required
such as:
Population of inventory / number of SKUs
Desired accuracy level
Timeline for achieving accuracy goals
Current state of inventory
Warehouse organization
Cycle Counting Program –
Designing Yours
Number of counts required
Number of personnel available
Timing of counts
Resource availability (forklifts, scales,
etc.)
Counting method (counts sheets, RFID,
etc.)
Cycle Counting Program –
Designing Yours
RubinBrown will email examples of cycle
counting instructions to all webinar
participants in addition to the presentation
by the end of the week.
Cycle Counting Program –
Methodology
Several methods exist that can help estimate
the initial number of counts that will be required.
They are all approximate.
Planners and system designers should use
several or all of them to home in on the best
initial estimate.
50% - 60% of all companies use a
combination of methods to complete their
cycle counts
Source: APICS – Association for Ops Mgmt
Cycle Counting Program –
Methodology
ABC Classification
Random counts
Targeted Selection
Zero quantity or negative quantity counts
Discrepancy based counts
Explicit counts
Minimum on hand
Cycle Counting Program – ABC
Classification and Physical Observation
Class
% of SKUs
Typical Tolerances
Item Examples
A+
<2%
0%
A
2% – 10%
1% - 2%
High value – Expensive, higher turns (e.g.,
computer chips, motors, compressors,
copper pipe)
B
15% – 30%
5%
Moderate value – Less expensive,
moderate turns (e.g., connectors, valves,
unrefined product)
C
60% – 80%
10%
Low value – Inexpensive items often
purchased in bulk (e.g., hardware, shop
floor supplies)
D
<2%
n/a
Consumables
Highest value – Very expensive, highly
regulated, (e.g., precious metals,
controlled substances, hazardous
materials)
Cycle Counting Program – ABC
Classification and Cycle Counts
Class
% of SKUs
Count Frequency
A+
<2%
8 times / year
A
2% – 10%
4 times / year
B
15% – 30%
2 times / year
C
60% – 80%
1 time / year
D
<2%
n/a
Cycle Counting Program –
Pitfalls
No formal cycle count program /
methodology in place
Inventory ownership – Ownership /
responsibility of inventory accuracy is in
the wrong hands
Insufficient Resources
Trained Personnel
Equipment
Cycle Counting Program – Pitfalls (continued)
Segregation of duties
Packaging – Paperwork and labeling in
poor condition
Unit of Issue
System tracking compared to physical
Boxes / Bags vs. Eaches
Rolls / Coils vs. Feet / Yards
Non-standard packaging from suppliers
Financial Statement Audit Benefits
Depends on audit firm
Can be as reliable as annual physical
inventory
Could eliminate annual physical inventory
Will not eliminate auditor test counts
Will not eliminate auditor need to visit
multiple locations
Creates flexibility in timing of auditor counts
Inventory Resources
Sources
Scribd (on-line inventory site)
Strategos Guide to Inventory Accuracy
Effective Inventory Management, Inc.
APICS (Association for Operations
Management)
Contacts
Rick Feldt rick.feldt@rubinbrown.com
Nathan Croll
nathan.croll@rubinbrown.com