Inventory Stock Reduction Inventory Stock Reduction UltimatumUltimatum

Prepared by g.kabbaraPrepared by g.kabbara

25/04/200725/04/2007

ClarificationClarification We do not have 3 months Stock in our Inventory. We do not have 3 months Stock in our Inventory.

For A Ranked Items we average 2.5 stk months For A Ranked Items we average 2.5 stk months on hand and 0.5 on order.on hand and 0.5 on order.

The 3 months TSL is only used in the Suggested The 3 months TSL is only used in the Suggested Order program which uses a moving average of Order program which uses a moving average of 6 months to Order up to a stock level of 3 6 months to Order up to a stock level of 3 months. (The 3 months is quantity on hand + months. (The 3 months is quantity on hand + Quantity on Order.)Quantity on Order.)

And this will only work if the base of the And this will only work if the base of the calculation the monthly average is meaniful. calculation the monthly average is meaniful.

In this case it is only applicable for Fast moving In this case it is only applicable for Fast moving parts. The A ranked items & most of the B’s.parts. The A ranked items & most of the B’s.

And for the A Ranked Items we have as And for the A Ranked Items we have as you will see an average of 2.5 months you will see an average of 2.5 months stock.stock.

If we were to use the same calculation to If we were to use the same calculation to measure stock months for C, D, E, & X measure stock months for C, D, E, & X items we will have some very misleading items we will have some very misleading and Hyper Stock months Values.and Hyper Stock months Values.

That is why for slow moving items a TSL That is why for slow moving items a TSL based on monthly average cannot be usedbased on monthly average cannot be used

Sample of Month Stock calculated Sample of Month Stock calculated on Total Stock Qty and Valueon Total Stock Qty and Value

RANK Sale QTY NET SALES QTY Stock Val Mnth Stk on Cost Mnth Stk on Qty

A 210191 626,358.20 43811 97,819.15 3.02 2.50

B 39210 462,301.21 61863 123,341.80 5.15 18.93

C 7172 122,726.49 28883 85,123.61 13.40 48.33

D 1285 28,132.16 6510 39,556.15 27.17 60.79

E 5368 115,714.80 16804 91,991.85 15.36 37.56

F 14 374.82 1833 18,377.28 947.26 1,571.14

X 446 3,014.00 422658 1,597,024.60 10,237.05 11,371.96

  3 141.20 19 104.53 14.30 76.00

             

  263689 1,358,762.87 582381 2,053,339.00 29.42 26.50

Sample of Month Stock calculated Sample of Month Stock calculated on Total Stock Qty and Valueon Total Stock Qty and Value

RANK Sale QTY NET SALES QTY Stock Val

Mnth Stk on Cost /Calculated from Net Sales. Mnth Stk on Qty

A 210191 626,358.20 43811 97,819.15 3.02

2.50

B 39210 462,301.21 61863 123,341.80 5.15

18.93

C 7172 122,726.49 28883 85,123.61 13.40

48.33

D 1285 28,132.16 6510 39,556.15 27.17

60.79

E 5368 115,714.80 16804 91,991.85 15.36

37.56

F 14 374.82 1833 18,377.28 947.26

1,571.14

X 446 3,014.00 422658 1,597,024.60 10,237.05

11,371.96

  3 141.20 19 104.53 14.30

76.00

             

  263689 1,358,762.87 582381 2,053,339.00 29.42

26.50

Looking at Stock Months Looking at Stock Months

RAMnth Stk on

Cost Mnth Stk on Qty

A

3.02

2.50

B

5.15

18.93

C

13.40

48.33

D

27.17

60.79

E

15.36

37.56

F

947.26

1,571.14

X

10,237.05

11,371.96

 

14.30

76.00

     

 

29.42

26.50

What does all this mean. We have 19 Stk months for B, 48 for C, 61 for D and over 11,000 for X.

For example for B items, it means that if we Stopped ordering today and based on the average Quantities we have sold of B in the last 12 months.If we continue to sell based on the same average we have sold in the past 12 months we will run out of B items in 19 months.

This Mnth Stock Statistic is used for stock monitoring and control. It cannot be used in the Suggested order Parameters especially for Slow movers.

Lets look at this in more detailLets look at this in more detail

         

Sum of Stk VAL PHASE OUT      

Mnth Stk Cat 0 Phased Out Grand Total % Phased Out

Less than 2 32973.808 7280.445 40254.253 18%

2 - 3 31722.629 8084.728 39807.357 20%

3 - 4 16026.175 1506.887 17533.062 9%

4 - 5 5465.594 5.016 5470.61 0%

5 - 6 5899.376 13645.297 19544.673 70%

6 - 8 4182.302 2184.447 6366.749 34%

8 - 10 3617.18 4966.616 8583.796 58%

10 - 12 2240.222 801.833 3042.055 26%

Over 12 months 85154.734 119171.554 204326.288 58%

Grand Total 187282.02 157646.823 344928.843 46%

CURRENT AFTER PHASED OUT ITEMS        

Sum of Stk VAL R        

Mnth Stk Cat A B C D Grand Total

Less than 2 20,439 10,692 1,814 30 32,974

2 - 3 21,435 9,097 1,190   31,723

3 - 4 3,004 9,764 3,178 80 16,026

4 - 5 685 4,687 93   5,466

5 - 6 1,278 3,305 1,316   5,899

6 - 8 14 2,849 1,141 178 4,182

8 - 10 12 2,712 890 4 3,617

10 - 12 802 956 482   2,240

Over 12 months 43 22,274 41,038 21,799 85,155

Grand Total 47,712 66,336 51,142 22,091 187,282

Before          

Mnth Stk Cat A B C D Grand Total

Less than 2 26,941 11,166 2,117 30 40,254

2 - 3 29,418 9,140 1,249 0 39,807

3 - 4 3,938 10,216 3,297 81 17,533

4 - 5 685 4,692 93 0 5,471

5 - 6 13,726 4,038 1,780 0 19,545

6 - 8 1,329 3,656 1,204 178 6,367

8 - 10 3,451 3,936 1,193 4 8,584

10 - 12 802 1,669 570 0 3,042

Over 12 months 17,197 74,519 73,625 38,985 204,326

Grand Total 97,488 123,033 85,130 39,278 344,929

Order SituationOrder Situation

And as a consolation And as a consolation the parts department the parts department is doing a good job in is doing a good job in ensuring that the B & ensuring that the B & C & D item order C & D item order quantities are kept to quantities are kept to a minimum. Proof as a minimum. Proof as you can see and you can see and Stock outs for these Stock outs for these items do exist.items do exist.

Rank Stk Val On Hand Val of On Order% of On Order

A 97,487.62 12,157.30 11.1%

B 123,033.36 10,175.44 7.6%

C 85,129.76 2,160.72 2.5%

D 39,278.11 169.55 0.4%

TOTAL 344,928.84 24,663.01 22%

Stock Outs since Nov 2006Stock Outs since Nov 2006

Stock Outs since Nov 2006  

R_SALES Total

A 33

B 596

C 683

D 40

E 913

F 20

X 213

   

Grand Total 2510

Current Ordering methodCurrent Ordering method

System currently Orders based on the Average System currently Orders based on the Average Demand of a part. (uses 6 months History to Demand of a part. (uses 6 months History to calculate average). calculate average).

Based on the average the system then checks Based on the average the system then checks stock on hand & On Order Quantity and stock on hand & On Order Quantity and recommends the Suggested Order Qty. recommends the Suggested Order Qty.

Suggested Qty = (Avg Month Demand * 3) – On Suggested Qty = (Avg Month Demand * 3) – On Hand – On Order. If Negative then system does Hand – On Order. If Negative then system does not order.not order.

Problems with Current OrderingProblems with Current Ordering The Stock Target level is applicable to all the Stock, regardless The Stock Target level is applicable to all the Stock, regardless

whether Item is fast moving or not.whether Item is fast moving or not. The Avg monthly demand is only applicable to the Fast Moving The Avg monthly demand is only applicable to the Fast Moving

parts as enough demand is available to have an Average Demand parts as enough demand is available to have an Average Demand that can be used as the basis for setting a Target Level. The system that can be used as the basis for setting a Target Level. The system has been designed to work globally on all the stock and as such it has been designed to work globally on all the stock and as such it cannot recognize categories, Lead Times, Back Orders and does cannot recognize categories, Lead Times, Back Orders and does not support Fixed Min/Max quantities. To circumvent this problem not support Fixed Min/Max quantities. To circumvent this problem the parts department has been therefore making amendments to the parts department has been therefore making amendments to stock quantities. stock quantities.

Although the system uses Average Demand to decide on the Although the system uses Average Demand to decide on the Suggested Order Quantities this is not accurate for Slow movers Suggested Order Quantities this is not accurate for Slow movers such as C & D. (Manual Fixed Min / Max should be fed in by Parts such as C & D. (Manual Fixed Min / Max should be fed in by Parts Department.) to reconfirm and as a work around solution Parts Department.) to reconfirm and as a work around solution Parts Department are scrutinizing these items quantities in the weekly Department are scrutinizing these items quantities in the weekly suggested Order. suggested Order.

Other Problems with Current Other Problems with Current OrderingOrdering

Manual Orders being made to expedite Manual Orders being made to expedite shipments due to shipment delays of Normal shipments due to shipment delays of Normal Orders.Orders.

AMC limitation by HBD. Not shipping full Order AMC limitation by HBD. Not shipping full Order Quantity requested. (HBD filter the Quantities Quantity requested. (HBD filter the Quantities based on their AMC calculation.)based on their AMC calculation.)

Ranking is not used in the Ordering Parameters, Ranking is not used in the Ordering Parameters, to isolate, monitor and control stock months to isolate, monitor and control stock months levels.levels.

Super ceeding Parts is also another issue all Super ceeding Parts is also another issue all together.together.

No Facility for Seasonal Parts.No Facility for Seasonal Parts.

Immediate plansImmediate plans Do not do any thing on the current 3 months as there is already a Do not do any thing on the current 3 months as there is already a

manual amendment being made on the Order. (as you will see from manual amendment being made on the Order. (as you will see from the next couple of slides.)the next couple of slides.)

Since there is manual review on the order we will not have any Since there is manual review on the order we will not have any added benefit by changing the parameters to 2.5 as this may omit added benefit by changing the parameters to 2.5 as this may omit certain critical parts that will not be seen by Parts Department upon certain critical parts that will not be seen by Parts Department upon Order Review. Especially Seasonal parts.Order Review. Especially Seasonal parts.

And as we are manually making amendments to quantities there is And as we are manually making amendments to quantities there is no benefit in making such parameter changes. The stock reduction no benefit in making such parameter changes. The stock reduction is currently being manually achieved. is currently being manually achieved.

As extra controls we have introduced a phase out option and upon As extra controls we have introduced a phase out option and upon entering manual orders a check is also being made. The Phase Out entering manual orders a check is also being made. The Phase Out as we saw in the previous slides has filtered those items that are as we saw in the previous slides has filtered those items that are slow moving and where excess stock exists. slow moving and where excess stock exists.

Last 7 Orders AmendmentLast 7 Orders Amendment

ORDER NO ORDER DATE UPD TO HBD SUGG AMT ACTUAL ORD % Change by Manual

07517290 07-Feb-07 11-Feb-07 78,277.12 30,822.17 39%

07517291 14-Feb-07 18-Feb-07 80,560.66 25,428.56 32%

07517292 20-Feb-07 22-Feb-07 89,438.25 24,020.22 27%

07517293 27-Feb-07 04-Mar-07 91,251.14 24,810.13 27%

07517294 06-Mar-07 11-Mar-07 77,456.76 17,902.61 23%

07517295 13-Mar-07 18-Mar-07 96,199.41 32,261.00 34%

07517296 20-Mar-07 26-Mar-07 110,226.00 29,299.00 27%

Current Replenishment Order Current Replenishment Order based on 3 monthsbased on 3 months

The initial amount is $ 131195 which will be reviewed reduced by more than 50%.

Stock Order generated on 2.5 Stock Order generated on 2.5 months for C, D, E, F & Xmonths for C, D, E, F & X

Order reduced to $ 106578 and will also be reviewed and reduced. But some Parts C E F are not included that could very well be required

Plans to Address the current issues Plans to Address the current issues of orderingof ordering

Plans to redesign the Ordering Module by 3Plans to redesign the Ordering Module by 3rdrd quarter of 2007. quarter of 2007.

Meanwhile I will in the next few slides Meanwhile I will in the next few slides introduce to you the methodology that will introduce to you the methodology that will be used and after that I will show you the be used and after that I will show you the a model created that will simulate the a model created that will simulate the Ordering Program as it will be designed.Ordering Program as it will be designed.

Designing the New Ordering Designing the New Ordering ModuleModule

The very first thing that needs to be done The very first thing that needs to be done when reviewing the Ordering Parameters when reviewing the Ordering Parameters is to first identify and confirm the following is to first identify and confirm the following facts:- Per Supplier. In our Case HBDfacts:- Per Supplier. In our Case HBDOrder FrequencyOrder FrequencyOrder Review TimeOrder Review TimeLead Time (from when Order is sent till it is Lead Time (from when Order is sent till it is

updated in computer)updated in computer)Safety DaysSafety Days

So lets begin.So lets begin.

Once we have identified these variables. (I call Once we have identified these variables. (I call them variables as they can later be amended) them variables as they can later be amended) we need to total them up and the total would be we need to total them up and the total would be the Called the Reorder Point or Best Reorder the Called the Reorder Point or Best Reorder Level or Min Stocking Level. Level or Min Stocking Level.

Only once this is established we will be in a Only once this is established we will be in a position to set the Target stock Level. As we are position to set the Target stock Level. As we are doing weekly orders a factor of 25% is added to doing weekly orders a factor of 25% is added to achieve to a BSL.achieve to a BSL.

The VariablesThe Variables

Order Frequency is Once every Week. (7 Days).Order Frequency is Once every Week. (7 Days). Order Review time (3 – 4 days)Order Review time (3 – 4 days) Lead time on all parts averages (25 Days) (This Lead time on all parts averages (25 Days) (This

includes all Orders.) There is a big fluctuation of includes all Orders.) There is a big fluctuation of Lead Time as HBD have their controls on stock Lead Time as HBD have their controls on stock allocation.allocation.

Safety Days normally is set to 50-150% of LT. Safety Days normally is set to 50-150% of LT. (so we will use 25 Days.) This can later also be (so we will use 25 Days.) This can later also be adjusted after taking measurements of Residual adjusted after taking measurements of Residual Stock and Stock Outs.Stock and Stock Outs.

The TotalThe Total

Order FrequencyOrder Frequency 77

Order ReviewOrder Review 33

Lead TimeLead Time 25 (To be reviewed 25 (To be reviewed at Rank Level)at Rank Level)

First Total (Min Base)First Total (Min Base) 3535

SafetySafety 2525

Second Total (BRP) FT Second Total (BRP) FT +Safety+Safety

60 Days60 Days

Current SituationCurrent Situation

Our Stock On Order

Not to Scale

3 months or Less but this is mainly Applicable for A Rank.

Break Down of Stock By Sales Qty Break Down of Stock By Sales Qty RankRank

A RankedStk Avg

2.5 mnths

B Ranked

CD

DEAD

Not to Scale

Our Current would be situation from Our Current would be situation from a Re-Order Point of Viewa Re-Order Point of View

Time

Safety Stock

Re Order Point

25

60

90Target Stock Level

System now orders when Current Stock LevelFalls below this point. Orders up to TSL

Stk Arrives

Lead T

Order triggered

Stk has fallen belowSafety and order not arrived

In Theory we never really reach the 3 months Stock LevelAs the Demand for parts is an ongoing process. (this is mainlyApplicable to fast movers such as A Ranked Items)

Proposed Ordering schemeProposed Ordering scheme To Provide facility to Set Lead Times, Safety To Provide facility to Set Lead Times, Safety

Days by Rank. Days by Rank. To set the Target Stocking level ONLY 25% over To set the Target Stocking level ONLY 25% over

the BRP.the BRP. To utilize a BSL at Cost Break of the Items at To utilize a BSL at Cost Break of the Items at

Weighted cost. (Cheap Items we can Store Weighted cost. (Cheap Items we can Store more, hence improving the reduction in Manual more, hence improving the reduction in Manual Orders.) This is called EOQ.Orders.) This is called EOQ.

To provide facility for Parts to input Fixed Min / To provide facility for Parts to input Fixed Min / Max Quantities. (for items that have no sufficient Max Quantities. (for items that have no sufficient Demand)Demand)

Balance of Inventory Using EOQBalance of Inventory Using EOQ

Parts with unit costKD 15 Adjusted Down. 80% of parts cost less thanKD 15

Parts with unit cost< KD15 adjustedUp.

With EOQ and After 120 – 180 Days A = B

A

BBSL

How EOQ WorksHow EOQ Works

The immediate result will be an increase in the The immediate result will be an increase in the inventory. The compensating decrease which inventory. The compensating decrease which will be effected by future sales over the next 120 will be effected by future sales over the next 120 days for parts costing over KD 15, will then days for parts costing over KD 15, will then balance the inventory.balance the inventory.

In effect, the cost break EOQ is used to assure In effect, the cost break EOQ is used to assure higher stocking levels for active fast moving higher stocking levels for active fast moving inexpensive parts with a compensating decrease inexpensive parts with a compensating decrease in inventory in more expensive slow moving in inventory in more expensive slow moving parts. parts.

E.O.Q E.O.Q Effect On InventoryEffect On Inventory

Unit Cost Inventory % Inc Inventory

0 0.299   4,076 17.1% 697

0.3 0.749   6,200 41.8% 2,592

0.75 1.49   19,050 21.4% 4,074

1.5 4.99   23,089 -11.0% - 2,547

5 7.49   11,635 -40.7% - 4,733

7.5 14.99   38,634 -26.4% - 10,213

15 24.99   15,912 -23.9% - 3,808

25 74.99   32,485 2.8% 896

75 9999   7,199 -18.1% - 1,305

158,278.93 - 9.1%

Net Change -14,348.14

Benefits of EOQBenefits of EOQ

Guaranteed to improve level of service for Guaranteed to improve level of service for inexpensive items.inexpensive items.

Guaranteed to reduce emergency Guaranteed to reduce emergency purchases inexpensive items hence purchases inexpensive items hence reduce Cost of such items due to reduce Cost of such items due to reduction of emergency purchases having reduction of emergency purchases having to pay air freight.to pay air freight.

Model PreparedModel Prepared

The data used in the model is live data for The data used in the model is live data for parts that have been sold since Jan 2007 parts that have been sold since Jan 2007 till 15.04.2007. approx 4500 parts.till 15.04.2007. approx 4500 parts.

All the LP parts and Phased Out parts All the LP parts and Phased Out parts have been removed for easy of have been removed for easy of clarification.clarification.

Model Model SimulationSimulationSupercessionSupercession