QAD Explore 2012
Three Techniques to Reduce Your Inventory
Mark K. Williams, CFPIM, CSCP
QAD Supply Chain Solutions Center
Three Techniques to Reduce Your Inventory
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Three Techniques to Reduce Your Inventory
Agenda
•
•
•
•
•
Why is reducing inventory so hard?
Eliminating obsolete inventory
Using ABC analysis
Implementing cycle counting
Questions
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Three Techniques to Reduce Your Inventory
Why Is Reducing Inventory So Hard?
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Three Techniques to Reduce Your Inventory
The Conflicts
• Improve productivity
• Improve customer service
• Reduce inventory investment
Productivity
(Long Runs--Few Parts)
Finance
(Low Capital Usage)
Customer Service
(Many Parts--Always Available)
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Three Techniques to Reduce Your Inventory
Inventory Costs Add Up!
Cost of Capital
10 - 15%
Warehouse space
2 - 5%
Obsolescence and shrinkage
4 - 6%
Insurance
1 - 5%
Material Handling
1 - 2%
Taxes
2 - 3%
Total Annual Costs
20 - 36%
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Three Techniques to Reduce Your Inventory
For Every Million Dollars of Inventory
Cost of Capital
$100,000 – 150,000
Warehouse space
$20,000 – 50,000
Obsolescence and shrinkage
$40,000 – 60,000
Insurance
$10,000 – 50,000
Material Handling
$10,000 – 20,000
Taxes
$20,000 – 30,000
Total Annual Costs
$200,000 – 360,000
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Three Techniques to Reduce Your Inventory
Finding & Eliminating Obsolete Inventory
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Three Techniques to Reduce Your Inventory
Aged Inventory
•
•
•
•
Not purchased or used in 6 – 24 months?
Not in sales catalog?
Not in any bill of material?
Spare part for a machine sold last year?
Cost of carrying aged inventory
$3,000,000 x 10% = $300,000
$300,000 x 33% = $100,000
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Three Techniques to Reduce Your Inventory
Finding Aged Inventory
Part #
69543
82689
54987
65715
94587
48359
28698
96876
On Hand
Last Used
65
12/5/2007
986
3/18/2009
28,965
5/03/2009
1,899
8/29/2009
38 11/15/2009
653
2/27/2010
201
3/03/2010
15,411
5/19/2010
Cost
$650
$5,763,907
$132,976
$72,436
$8,385
$730,503
$875
$62,311
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Three Techniques to Reduce Your Inventory
How Long Will the Inventory Last?
Part # On Hand
96815
75,642
56879
3,615
14863
42,937
63258
987
75935
54,856
56478
35,483
25186
15,637
Monthly
Usage
1,285
85
1,124
28
1,642
1,153
515
# of
Months
On Hand
58.9
42.5
38.2
35.3
33.4
30.8
30.4
$
$
$
$
$
$
$
Cost
242,054
1,392,137
558,181
5,527
301,708
780,626
140,733
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Three Techniques to Reduce Your Inventory
7 Steps to Dispose of Aged Inventory
1.
2.
3.
4.
5.
6.
Verify inventory is truly aged and/or excess
Discount it to a “special” customer
Sell it on promotion
Sell it to a sister company
Return to supplier – pay restocking fee
Sell to company that handles distressed
merchandise
7. Throw away & take the tax break
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Three Techniques to Reduce Your Inventory
Using ABC Inventory Management
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Three Techniques to Reduce Your Inventory
ABC Inventory Management
First noted by Pareto
• A items
- 20% of items = 80% of usage
• B items
- 30% of items = 15% of usage
• C items
- 50% of items = 5% of usage
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Three Techniques to Reduce Your Inventory
What a Difference ABC Makes
Company
XYZ
Monthly
Cost of
Sales
% of
Total
8 Weeks of
Inventory
A
$800,000
80%
$1,600,000
B
$150,000
15%
$300,000
C
$50,000
5%
$100,000
Total
$1,000,000
100%
$2,000,000
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Three Techniques to Reduce Your Inventory
What a Difference ABC Makes
Company
XYZ
Monthly
Cost of
Sales
8 Weeks of
Inventory
A=4 B=8
C=16
Percent
Difference
A
$800,000
$1,600,000
$800,000
-50%
B
$150,000
$300,000
$300,000
0%
C
$50,000
$100,000
$200,000
100%
$1,000,000
$2,000,000
$1,300,000
-35%
Total
ABC method yields a 35% decrease in inventory!
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Three Techniques to Reduce Your Inventory
ABC Customer Segmentation
• “A” Customers
- Top 15% - 25% that generate 60% - 85% of revenue
- Try to obtain future purchase requirements
- Work closely on promotional planning
• “B” Customers
- Next 20%-40%, 10%-20% of revenue
- Standard service
• “C” Customers
- Bottom 50% of customers, 5%-10% of revenue
- During times of a shortage, they bear the brunt
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Three Techniques to Reduce Your Inventory
ABC Supplier Segmentation
• “A” Suppliers
- Top 15% - 25% of suppliers, 60% - 85% of spend
- Share future purchase requirements
- Work to reduce lead times
• “B” Suppliers
- Next 20%-40% of suppliers, 10%-20% of spend
- Standard treatment
• “C” Suppliers
- Bottom 50% of suppliers, 5%-10% of spend
- Try to consolidate
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Three Techniques to Reduce Your Inventory
Implementing Cycle Counting
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Three Techniques to Reduce Your Inventory
Advantages of Cycle Counting
• The efficient use of a few experienced
people continuously throughout the year
results in:
• Timely detection and correction of causes
of errors
• Fewer mistakes in item identification
• Minimum loss of productive time
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Three Techniques to Reduce Your Inventory
4 Phases of Implementing Cycle Counting
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•
•
•
Flowcharting
Control group counting
Establishment of initial balances
Determining count frequency
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Three Techniques to Reduce Your Inventory
Flowchart Your Process
Unload Truck
Count
Incoming
Product
Compare to
Packing Slip
Does Count
Match?
Yes
Sign
Packing Slip
No
Contact
Purchasing
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Three Techniques to Reduce Your Inventory
Flowchart Your Process
Unload Truck
Count
Incoming
Product
Compare to
Packing Slip
Does Count
Match?
Yes
Sign
Packing Slip
No
Contact
Purchasing
Enter Within
30 Minutes
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Three Techniques to Reduce Your Inventory
Control Group
• Select 10-20 of your highest velocity items
• Assure complete synchronization between
shelf count and perpetual inventory
• Count items each day
• Investigate every inconsistency
• Change procedures to eliminate problems
• Train individuals to execute new procedures
• Continue until consistently at 90 percent
compliance
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Three Techniques to Reduce Your Inventory
Establishment of Initial Balances
• Ready to “graduate” to cycle counting
• Thorough – and accurate – physical
inventory
• Double-blind count preferred
• When complete, ready for cycle counting
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Three Techniques to Reduce Your Inventory
Steps for Cycle Counting
•
•
•
•
•
•
Prepare for cycle count
Enter all transactions
Count items
Compare counts with system inventory
Determine reasons for variances
Correct causes of variances
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Three Techniques to Reduce Your Inventory
Typical ABC Cycle Count Frequency
“A” Items
“B” Items
“C” Items
Once a month
Once a quarter
Annually
High frequency
of order/usage
Intermediate
frequency of
order/Usage
Low frequency of
order/usage
High cost of error Moderate cost of Low cost of error
error
Inventory Record Accuracy
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Three Techniques to Reduce Your Inventory
A
B
C
Total
200
300
500
1,000
ou
nt
s
C
N
um
be
r
of
SK
U
's
Pe
To
rY
ta
ea
lN
A
r
nn um
ua be
lC r
25
of
o
0
un
C
ts
ou
nt
D
ai
in
ly
g
Da
C
ou
ys
nt
s
Determining Daily Cycle Counts
12
4
1
2,400
1,200
500
4,100
250
250
250
10
5
2
17
Inventory Record Accuracy
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Three Techniques to Reduce Your Inventory
Summary
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Three Techniques to Reduce Your Inventory
In Summation
• Using the three techniques
- Eliminating obsolete inventory
- Using ABC inventory management
- Implementing a cycle counting program
• You can reduce your inventory without
sacrificing customer service
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Three Techniques to Reduce Your Inventory
When You Get Back Home
• Find out what your inventory level is
• Investigate your obsolete inventory
• See how you are using ABC inventory
management
• Determine your inventory accuracy
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Three Techniques to Reduce Your Inventory
Questions & Answers
Mark K. Williams, CFPIM, CSCP
QAD Supply Chain Solutions Center
m3w@qad.com
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Three Techniques to Reduce Your Inventory
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© QAD Inc 2012
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