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 Safe Harbor Statement The following is intended to outline QAD’s general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, functional capabilities, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functional capabilities described for QAD’s products remains at the sole discretion of QAD. 2 Three Techniques to Reduce Your Inventory Agenda • • • • • Why is reducing inventory so hard? Eliminating obsolete inventory Using ABC analysis Implementing cycle counting Questions 3 Three Techniques to Reduce Your Inventory Why Is Reducing Inventory So Hard? 4 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) 5 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% 6 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 7 Three Techniques to Reduce Your Inventory Finding & Eliminating Obsolete Inventory 8 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 9 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 10 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 11 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 12 Three Techniques to Reduce Your Inventory Using ABC Inventory Management 13 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 14 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 15 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! 16 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 17 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 18 Three Techniques to Reduce Your Inventory Implementing Cycle Counting 19 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 20 Three Techniques to Reduce Your Inventory 4 Phases of Implementing Cycle Counting • • • • Flowcharting Control group counting Establishment of initial balances Determining count frequency 21 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 22 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 23 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 24 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 25 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 26 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 27 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 28 Three Techniques to Reduce Your Inventory Summary 29 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 30 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 31 Three Techniques to Reduce Your Inventory Questions & Answers Mark K. Williams, CFPIM, CSCP QAD Supply Chain Solutions Center m3w@qad.com 32 Three Techniques to Reduce Your Inventory www.qad.com © QAD Inc 2012 33