inventory management
DESCRIPTION
Inventory Management. Agenda. Effective Inventory Management Strategic Considerations Supply Chain Management Purchasing and Production Sales and Customer Service Suppliers and Customers Inventory Accuracy Cycle Count Strategies. Competing Objectives…. - PowerPoint PPT PresentationTRANSCRIPT
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Inventory Management
Agenda
Effective Inventory Management
Strategic ConsiderationsSupply Chain ManagementPurchasing and ProductionSales and Customer ServiceSuppliers and Customers
Inventory AccuracyCycle Count Strategies
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Competing Objectives….
Sales/Marketing/Customer Service ObjectiveMaintain sufficient on hand inventory to satisfy every possible (or impossible) customer request
Production ObjectiveMaintain on hand inventory quantities that produces the lowest cost per unit
Inventory Management ObjectiveMaintain lowest level of on hand inventory to satisfy customer demand while minimizing cost
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….Producing Different Results
Sales/Marketing/Customer Service ObjectiveMaintain sufficient on hand inventory to satisfy every possible (or impossible) customer requestResults in on hand inventory for every SKU available in large quantities consuming a large amount of space
Production ObjectiveMaintain on hand inventory quantities that produces the lowest cost per unitResults in maintaining large quantities of low cost SKU’s on hand but not specialty/unique SKU’s that customers demand
Inventory Management ObjectiveMaintain lowest level of on hand inventory to satisfy customer demand while minimizing costResults in maintaining appropriate amounts of each SKU on hand to ensure customer demands are adequately met
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Cost of Excess Inventory
Carrying Cost$5,000,000 x 6% interest cost = $300,000 carrying cost
Hidden CostsWarehousing and RentLabor Costs (moving, counting, maintaining)Cash flow considerationsQuality
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Inventory Management
Sales Forecast
ProductionPurchasing
Warehouse Supplier Communications
Inventory Management
Customer Communications
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Inventory Management
Sales Forecast
Production
Purchasing
Warehouse Supplier Communications
Inventory ????????
Customer Communications
Traditional Inventory Tools
Economic Order Quantities (EOQ)
Vendor Managed Inventory
Slow Moving Inventory Reports
Cycle Counting
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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 programResults in more reliable production and quality
Maintain discipline in the Engineering groupBOM accuracyEngineering changes
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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
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Suppliers and Customers
SuppliersReduced lead timesQuality inspections prior to shipmentShipment accuracy
CustomersCooperative forecastingOn-line, real time order to shipment tracking
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Accounting and Finance
What can I do differently?
If your company is Lean or Six Sigma, participate in Kaizen eventsFacilitate discussions between sales, production, purchasing, etc.Lead change either through the Internal Audit function or CFO leadership
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Inventory Accuracy: How to Improve through Cycle Counting
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 MeasuresAccountants 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 inaccuracyShop floor disciplineMRP set-up is not accurateAccounting for subassemblies / kits / phantomsBOMs are not followed in productionHigh volume of facility transfersIneffective 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 accuraciesSpreads out the counting workload
Allows for the reduction of inventoryContinuously measures accuracyContinuous - Works without interrupting of operationsFacilitates process improvement through root cause analysisCan eliminate the need for an annual inventory observation
Advantages of Cycle Counting Program (continued)
Downfalls of a Physical Inventory Observation
High degree of accuracy achievedExpensiveRequires a large investment of physical resourcesNot sustainableSignificant impact on operationsCannot 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 methodologyErrors 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 levelTimeline for achieving accuracy goalsCurrent state of inventoryWarehouse organization
Cycle Counting Program – Designing Yours
Number of counts requiredNumber of personnel availableTiming of countsResource 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 ClassificationRandom countsTargeted Selection
Zero quantity or negative quantity countsDiscrepancy based countsExplicit countsMinimum on hand
Cycle Counting Program – ABC Classification and Physical Observation
Class % of SKUs Typical Tolerances Item Examples
A+ <2% 0% Highest value – Very expensive, highly regulated, (e.g., precious metals, controlled substances, hazardous materials)
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
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 placeInventory ownership – Ownership / responsibility of inventory accuracy is in the wrong handsInsufficient Resources
Trained PersonnelEquipment
Cycle Counting Program – Pitfalls (continued)
Segregation of dutiesPackaging – Paperwork and labeling in poor conditionUnit of Issue
System tracking compared to physical Boxes / Bags vs. EachesRolls / Coils vs. Feet / Yards
Non-standard packaging from suppliers
Financial Statement Audit Benefits
Depends on audit firmCan be as reliable as annual physical inventoryCould eliminate annual physical inventoryWill not eliminate auditor test countsWill not eliminate auditor need to visit multiple locationsCreates flexibility in timing of auditor counts
Inventory Resources
SourcesScribd (on-line inventory site)Strategos Guide to Inventory AccuracyEffective Inventory Management, Inc.APICS (Association for Operations Management)
