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Author Krings Bradley M
Title Decreasing Inventory Cost through Increasing Inventory Turnover
The accompanying research report is submitted to the University of Wisconsin-Stout Graduate School in partial
completion of the requirements for the
Graduate Degree Major MS Technology Management
Research Adviser Jim Keyes PhD
Submission TermYear Spring 2012
Number of Pages 49
Style Manual Used American Psychological Association 6th
edition
I understand that this research report must be officially approved by the Graduate School and
that an electronic copy of the approved version will be made available through the University
Library website
I attest that the research report is my original work (that any copyrightable materials have been
used with the permission of the original authors) and as such it is automatically protected by the
laws rules and regulations of the US Copyright Office
My research adviser has approved the content and quality of this paper
STUDENT
NAME Bradley M Krings DATE 4242012
ADVISER (Committee Chair if MS Plan A or EdS Thesis or Field ProjectProblem)
NAME DATE
----------------------------------------------------------------------------------------------------------------------------- ----
This section for MS Plan A Thesis or EdS ThesisField Project papers only
Committee members (other than your adviser who is listed in the section above)
1 CMTE MEMBERrsquoS NAME DATE
2 CMTE MEMBERrsquoS NAME DATE
3 CMTE MEMBERrsquoS NAME DATE
----------------------------------------------------------------------------------------------------------------------------- ----
This section to be completed by the Graduate School This final research report has been approved by the Graduate School
Director Office of Graduate Studies DATE
2
Krings Bradley M Decreasing Inventory Cost through Increasing Inventory Turnover
Abstract
Inventory turnover is often a statistic overlooked by many industries When reading and
listening to business leaders more often than not inventory turnover is forgotten This is
unfortunate due to the importance this benchmark number represents Being that inventory
levels are critical to the efficient running of a high performing business it is concerning that
businesses do not benchmark against it There is always discussion on ROI (Return of
Investment) ROA (Return on Assets) and ROS (Return on Sales) which are important and
necessary but inventory turnover should be considered right along with these measurements
Many organizations within industries have different amounts of inventory requirements
necessary to efficiently run their businesses There are several factors that must be considered
when calculating those necessary amounts In this paper is a discussion on how and why to
consider inventory turnover as a major benchmark and focus item for your organization Several
articles and literature reviews will help identify the ins and outs of inventory turnover
3
Table of Contents
Abstract 2
List of Tables 6
List of Figures 7
Chapter I Introduction 8
Statement of the Problem 9
Purpose of the Study 9
Assumptions of the Study 10
Definition of Terms10
Limitations of Study 11
Methodology 11
Summary 12
Chapter II Literature Review 13
Inventory and Inventory Turnover 13
Importance of inventory turns 13
Causes of excess inventory 15
Maximizing distribution channels16
Loss of revenue 17
Perishable Food and Inventory 18
Rules and regulations 19
Expiration and best buy dates 20
Recall implications20
Product freshness and quality for customers 21
4
Lean Initiatives22
Production planning 23
Software and ERP Systems 24
Creating value added versus non value added activities 25
Summary 26
Chapter III Methodology 28
Project Background 29
Definition Process 29
Subject Selection and Description 30
Instrumentation for Data Analysis 31
Data Collection Procedures 31
Data Analysis 32
Planning Strategy 33
Assumptions 34
Summary 34
Chapter IV Results 36
Data Tables for Business Results 37
Inventory Ratio Calculation 38
Inventory Turnover Calculation 39
Result Inventory Turnover 40
Summary 42
Chapter V Discussion 43
Limitations 43
5
Conclusions 44
Conclusions and Implications 45
Recommendations 46
References 47
6
List of Tables
Table 1 Month Ending Sales Ending Inventory Chart Template 30
Table 2 Month Ending Inventory 37
Table 3 Month Ending Sales 38
Table 4 Inventory Ratio 38
Table 5 Current Inventory Turns 39
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
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APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
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httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
2
Krings Bradley M Decreasing Inventory Cost through Increasing Inventory Turnover
Abstract
Inventory turnover is often a statistic overlooked by many industries When reading and
listening to business leaders more often than not inventory turnover is forgotten This is
unfortunate due to the importance this benchmark number represents Being that inventory
levels are critical to the efficient running of a high performing business it is concerning that
businesses do not benchmark against it There is always discussion on ROI (Return of
Investment) ROA (Return on Assets) and ROS (Return on Sales) which are important and
necessary but inventory turnover should be considered right along with these measurements
Many organizations within industries have different amounts of inventory requirements
necessary to efficiently run their businesses There are several factors that must be considered
when calculating those necessary amounts In this paper is a discussion on how and why to
consider inventory turnover as a major benchmark and focus item for your organization Several
articles and literature reviews will help identify the ins and outs of inventory turnover
3
Table of Contents
Abstract 2
List of Tables 6
List of Figures 7
Chapter I Introduction 8
Statement of the Problem 9
Purpose of the Study 9
Assumptions of the Study 10
Definition of Terms10
Limitations of Study 11
Methodology 11
Summary 12
Chapter II Literature Review 13
Inventory and Inventory Turnover 13
Importance of inventory turns 13
Causes of excess inventory 15
Maximizing distribution channels16
Loss of revenue 17
Perishable Food and Inventory 18
Rules and regulations 19
Expiration and best buy dates 20
Recall implications20
Product freshness and quality for customers 21
4
Lean Initiatives22
Production planning 23
Software and ERP Systems 24
Creating value added versus non value added activities 25
Summary 26
Chapter III Methodology 28
Project Background 29
Definition Process 29
Subject Selection and Description 30
Instrumentation for Data Analysis 31
Data Collection Procedures 31
Data Analysis 32
Planning Strategy 33
Assumptions 34
Summary 34
Chapter IV Results 36
Data Tables for Business Results 37
Inventory Ratio Calculation 38
Inventory Turnover Calculation 39
Result Inventory Turnover 40
Summary 42
Chapter V Discussion 43
Limitations 43
5
Conclusions 44
Conclusions and Implications 45
Recommendations 46
References 47
6
List of Tables
Table 1 Month Ending Sales Ending Inventory Chart Template 30
Table 2 Month Ending Inventory 37
Table 3 Month Ending Sales 38
Table 4 Inventory Ratio 38
Table 5 Current Inventory Turns 39
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
3
Table of Contents
Abstract 2
List of Tables 6
List of Figures 7
Chapter I Introduction 8
Statement of the Problem 9
Purpose of the Study 9
Assumptions of the Study 10
Definition of Terms10
Limitations of Study 11
Methodology 11
Summary 12
Chapter II Literature Review 13
Inventory and Inventory Turnover 13
Importance of inventory turns 13
Causes of excess inventory 15
Maximizing distribution channels16
Loss of revenue 17
Perishable Food and Inventory 18
Rules and regulations 19
Expiration and best buy dates 20
Recall implications20
Product freshness and quality for customers 21
4
Lean Initiatives22
Production planning 23
Software and ERP Systems 24
Creating value added versus non value added activities 25
Summary 26
Chapter III Methodology 28
Project Background 29
Definition Process 29
Subject Selection and Description 30
Instrumentation for Data Analysis 31
Data Collection Procedures 31
Data Analysis 32
Planning Strategy 33
Assumptions 34
Summary 34
Chapter IV Results 36
Data Tables for Business Results 37
Inventory Ratio Calculation 38
Inventory Turnover Calculation 39
Result Inventory Turnover 40
Summary 42
Chapter V Discussion 43
Limitations 43
5
Conclusions 44
Conclusions and Implications 45
Recommendations 46
References 47
6
List of Tables
Table 1 Month Ending Sales Ending Inventory Chart Template 30
Table 2 Month Ending Inventory 37
Table 3 Month Ending Sales 38
Table 4 Inventory Ratio 38
Table 5 Current Inventory Turns 39
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
4
Lean Initiatives22
Production planning 23
Software and ERP Systems 24
Creating value added versus non value added activities 25
Summary 26
Chapter III Methodology 28
Project Background 29
Definition Process 29
Subject Selection and Description 30
Instrumentation for Data Analysis 31
Data Collection Procedures 31
Data Analysis 32
Planning Strategy 33
Assumptions 34
Summary 34
Chapter IV Results 36
Data Tables for Business Results 37
Inventory Ratio Calculation 38
Inventory Turnover Calculation 39
Result Inventory Turnover 40
Summary 42
Chapter V Discussion 43
Limitations 43
5
Conclusions 44
Conclusions and Implications 45
Recommendations 46
References 47
6
List of Tables
Table 1 Month Ending Sales Ending Inventory Chart Template 30
Table 2 Month Ending Inventory 37
Table 3 Month Ending Sales 38
Table 4 Inventory Ratio 38
Table 5 Current Inventory Turns 39
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
5
Conclusions 44
Conclusions and Implications 45
Recommendations 46
References 47
6
List of Tables
Table 1 Month Ending Sales Ending Inventory Chart Template 30
Table 2 Month Ending Inventory 37
Table 3 Month Ending Sales 38
Table 4 Inventory Ratio 38
Table 5 Current Inventory Turns 39
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
6
List of Tables
Table 1 Month Ending Sales Ending Inventory Chart Template 30
Table 2 Month Ending Inventory 37
Table 3 Month Ending Sales 38
Table 4 Inventory Ratio 38
Table 5 Current Inventory Turns 39
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
7
List of Figures
Figure 1 Average Inventory Turns40
Figure 2 Inventory Turns Upon Family Planning 41
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
8
Chapter I Introduction
Business entities are created for one thing to make money Most manufacturing
industries must acquire change and distribute some type of inventory on a consistent basis As
lean manufacturing concepts and methodologies instill supply chains new opportunities are
presented One of the challenges for most organizations is to reduce inventory stocks with
disregard to whether it is in a raw or a finished state One way to reduce the high costs of
inventory is through turning inventory stock over more frequently This means increasing the
inventory turnover metric within the organization For the purposes of this study the finished
inventory of one product will be analyzed
The plant used for the study is responsible for all domestic North American (US) finished
inventory west of the Mississippi River One particular stock keeping unit (SKU) will be
examined and analyzed to understand the difference one additional inventory turn per year could
create Differences include decreased inventory costs improved product customer service and
increased line utilization The food and beverage industry will be analyzed more specifically a
canning facility This facility produces and packages highly branded products all over the world
Historic inventory levels at this business have not been analyzed to understand what
savings an increased inventory turnover would provide as a key business metric Determining
the correct inventory levels for finished products is a vital role of this business due to high
seasonality and limited plant capacity Current plant capabilities do not allow for a build-to-
order philosophy As a result carrying a significant amount of finished inventory is necessary
going into the busy seasons The business is highly predictable as far as sales are considered and
one goal is to increase inventory turnover by one turn over the next year Reducing inventory
levels will provide reduced capital requirements for inventory storage and handling cost thus
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
9
increasing bottom line revenues This research was concentrated with increasing the highest
selling product by one turn per year
Contributing factors such as leaner planning of operations and reducing high amounts of
carrying costs which could increase the turnover metric of the canning facility have been
examined One of the highest costs incurred to this particular business other than material
requirements is the cost of inventory As a canning food manufacturing company there are ldquobest
buyrdquo dates on the product to ensure the product is fresh which improves customer satisfaction
Due to expiration constraints it is important to ensure the fresh product is shipped to consumers
on a timely basis A high percentage of products produced are seasonal which means a pre-
build of inventory needs to take place throughout the year An examination into lean initiatives
will enable Company XYZ to eliminate waste and better plan production capacity
Statement of the Problem
Company XYZ had an inventory turnover rate that averaged 65 turns per year over the
past five years Due to the high costs involved with carrying inventory the company set a goal to
increase inventory turnover to 75 Since inventory was a vital piece to the success of Company
XYZrsquos business strategy focused attention on increased inventory turnover would result in less
carrying costs of inventory
Purpose of the Study
The study focused on improving inventory turnover through lean initiatives in a food
canning manufacturing environment The improvement resulted in better inventory management
and reduced inventory costs The purpose of this study was to examine those factors that needed
to be considered for a more optimal finished goods inventory management strategy The
examination of inventory and developing a leaner methodology for plant planning purposes
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
10
resulted in better customer service and decreased inventory costs The goal for the project was to
develop an inventory management strategy that increased inventory turnover rates to 75 turns
annually
Data was analyzed for one stock keeping unit (SKU) in the organization to determine
necessary planning to increase inventory turnover by one per year The following philosophies
for increasing inventory turnover were investigated an optimal finished goods inventory level
increased customer satisfaction and an adoption of lean methodologies
Increasing the inventory turnover by one turn per year will result in a reduction of overall
inventory with stable sales This will lower inventory costs which will increase the value to the
business This in turn will allow the organization to look for other opportunities to reinvest the
freed up capital into other functional areas of the business Increasing inventory turnover will
also result in less product waste
Assumptions of the Study
This study presumed the sales volume for a particular SKU will remain stable over the
next year Actual data from Company XYZ was collected and has been assumed to be a correct
representation of the business
Definition of Terms
Business Intelligence (BI) ldquoInformation collected by an organization on customers
competitors products or services and processesrdquo (APICS Dictionary nd)
Enterprise Resource Planning (ERP) ldquoA means for an organization to share exchange
or transact information with an external business partner using internet-based technologiesrdquo
(APICS Dictionary nd)
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
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Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
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utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
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Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
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Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
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McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
11
Lean Production ldquoA philosophy of production that emphasizes the minimization of the
amount of all the resources (including time) used in the various activities of the enterpriserdquo
(APICS Dictionary nd)
Inventory ldquoStandard component parts for finished goods along with finished goods and
raw materialsrdquo(Schonberger 1982 8)
Inventory Turnover The number of times that an inventory cycles during the yearrdquo
(APICS Dictionary nd)
Shelf Life ldquoCommunicating the appropita shelf-life of products to help ensure optimal
safety when consumed by the consumerrdquo (United States Department of Health and Human
Services Food and Drug Administration Center for Food Safety and Applied Nutrition 2006)
Stock Keeping Unit (SKU) ldquoA single inventory itemrdquo (APICS Dictionary nd)
Limitations of the Study
This study will be limited to the month ending sales and finished goods numbers
provided by Company XYZ of one single product SKU within the organization The study has
been limited to only historical data compiled over the past five years which apply to this study
because of the implementation of the Business Intelligence (BI) database This study will be
constrained to the two data point numbers of sales and ending inventory for use in calculations to
illustrate historical inventory turnover numbers
Methodology
Three important business concepts were analyzed to show the importance of inventory
turnover as a metric The three concepts included in the study include inventory carrying costs
perishable food as applied in the food industry and lean methodologies Historically large
amounts of inventory were key to the success of the business The first aspect will be to
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
12
determine the business value that was created with increasing inventory turnover in a given year
This has required the gathering of data from previous yearsrsquo month end inventory within
Company XYZ The data used for analysis was extracted from an in-house Business Intelligence
System
The second factor examined was the sales data from the same Business Intelligence
System Once month ending sales and inventory levels had been extracted from the system the
current inventory turnover rate was calculated During this phase an analysis of Lean tools and
methodologies were applied to better determine plant and line capacities This was done by
comparing seasonality of sales of the one particular SKU to optimize inventory levels to achieve
greater inventory turnover The third step will be to analyze food expiration and how it plays a
role in ensuring products get turned appropriately before expiration
Summary
In examining inventory and sales numbers that have been compiled monthly over the past
five years there were opportunities for Company XYZ to save money in the way of reduced
inventory costs The study uses a literature review that supports limiting factors Chapter II of
this paper will present a literature review that focuses on inventory along with benefits of
increasing inventory turnover perishable food implications and lean concepts All three of these
factors play an important role in the analysis of how the increased inventory turnover will be
presented Chapter III will review the methodology used for the study including history of
inventory turnover from past years In Chapter IV results of the study will be presented and
discussed to help determine future courses of action for Company XYZ Chapter V will then
focus on limitations found throughout the study any conclusions found and the recommendation
for future management of the inventory turnover metric in the canning facility
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
13
Chapter II Literature Review
Finding the right strategy for the many challenges involved in increasing inventory
turnover can be a dilemma for a mid-sized canning facility The goals of the organization today
entail developing a lean and continuous improvement culture The need for increased cost
saving measures and in this study focused around inventory turnover has the potential to pay
huge dividends to the business The following review will highlight reasons supporting the
decrease of inventory within the business a review of overall inventory and its effects food
expiration concerns and lean methodologies that will support reasons why inventory turnover
was such an important metric
Inventory and Inventory Turnover
This review will start by defining inventory and inventory turnover as the terms have
been referred to in this paper Helms and Cengage (2011) define three areas of inventory (1)
raw materials are inputs to a manufacturerrsquos process that convert materials into a desired finished
product (2) work-in-progress (WIP) are all materials parts and partially assembled products
that are waiting to be processed into the desired finished good (3) finished goods are desired
completed product ready for a consumer order or pickup Inventory primarily focused on
finished goods which are ready and able to be shipped to customers Secondly inventory
turnover is a measure of how quickly a company replenishes its entire stock of materials or
merchandise on an annual basis (Vijayan 2001) This metric was often overlooked as a key
component inside business entities where opportunity lies to save large sums of money
Importance of inventory turns Most businesses share the same goal to maximize
profits According to Vijayan (2001) increasing the inventory turnover number equals fewer
inventories tied up in storage which in turn helps to improve cash flows As an example stores
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
14
like JC Penney in the fashion industry want to be in position to react to new trends as quickly as
possible without having an excess of old trends hanging on the racks (Lloyd 2007) Large retail
stores are an example of how and why inventories need to be turned frequently Seasonality
dictates inventory turnover because consumers are generally not looking for winter jackets in the
heat of the summer months
In a perfect world the best way to buy and sell inventory items is to sell the items before
the invoice becomes due (Steinberg 2003) Dell Computer insists that inventory turnover was a
more dominating factor in doing business than any other business function including research
and development cost of goods sold and operating costs (Xuehong Rongqiu amp Zhongiun
2005) Inventory turnover as a metric was easily calculated According to APICS Dictionary
Definition (nd) inventory turnover is defined as The number of times that an inventory cycles
during the yearrdquo Based off this calculation if sales remained constant over a given time the one
way to increase inventory turnover was to reduce the total quantity of inventory As a result if
inventory was reduced this lead to greater inventory turnover and the business would have more
money to invest in other things
According to Thomas (1969) the inventory was not only producing revenues but high
inventories were hindering the organization from doing something else with the allocated money
The opportunity cost of having this money tied up could be used to purchase a new machine-
tool finance engineering development or expanding the business premises Womack amp Jones
(2003) suggest the importance of finding the value within the product being offered which is
defined by the customer needs for that particular product If consumers cannot find value in the
products being offered the lifespan of that particular item would cease to exist
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
15
Causes of excess inventory There are many different reasons for having excess
inventory on hand Many industries require different amounts of inventory to conduct business
based on plant capacities Historically the aviation industry thought manufacturing planes to
carry large masses of people (the seats on the plane are inventory) was the best and only option
(Womack amp Jones 2003) However the planes could not be filled due to lack of demand for
destinations offered One of the most common causes for excess inventory is overproduction
(Schonberger 1982) It can be assumed when production runs are long and uninterrupted plant
line efficiencies are greater than when multiple changeovers take place with short production
runs This greater efficiency within the plant creates a lower cost per business unit Schonberger
(1982) suggested when large production runs were scheduled there were not only increased
inventory at the onset but the cost associated with carrying that excess inventory increased as
well As a result overproduction occurred and products were stored until sold
Overproduction was not the only factor that contributed to higher excess inventory
Direct materials required as input to the process were also considered to be causes of excess
inventory Understanding that lowering the amounts of inventory was necessary to stay
competitive manufacturers needed to work with their suppliers to develop a process to receive
materials on an as needed basis (Northey amp Southway 1993) When organizations were able to
plan at a customer demand level a flow type plant planning and inventory management strategy
developed By moving out of building inventory to forecast methodology inventory levels
would decrease thus increasing inventory turns This happens through business models that
emphasize build-to-demand or build-to-order flow manufacturing (Vijayan 2001)
Another factor resulting in excess inventory most organizations accumulate is waste
Quality programs within companies were designed to reduce the amount of defects along with
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
16
waste throughout the entire process (Northey amp Southway 1993) As consumer expectations
changed products and services were demanded at higher standards of quality Not only were
products demanded at higher quality standards products were requiring more add-ons and
customization This represents why larger batch size production runs were less than desirable
due to producing high amounts of products that potentially could be obsolete Financially
companies cannot carry the large cost of huge inventory stocks and the focus has shifted to
economic lot size runs (Schonberger 1982) As the planning process progressed and the
flexibility of the supply chain increased the build to forecast models disappeared
Maximizing distribution channels As products were planned and manufactured there
were some types of distribution means necessary to get the product to the end user Customer
service functions were the front line to the ultimate consumer There are many philosophies
organizations can use to increase inventory turns By the year 2000 the philosophies were rooted
in improving software and inventory management tools (IIE Solutions 1999) The intention of
implementation of an inventory management system was to ensure the right goods were
delivered to the right place and the right time to ensure a desired level of customer service
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009) The software management tool allows for
better optimization of distribution lines to ensure products being delivered were at the lowest
possible cost Another inventory cost benefited by the product in transit was not having the
product taking up space in the warehouse but having the inventory go directly to the consumers
(Ismail Hashim Ghani Zulkifli amp Kamilah 2009)
Due to the sheer size of some supply chains communication across them was nearly
impossible Dell Computer would suggest this was where efforts needed to start in order to
increase turnover which resulted in carrying less inventory Peter Marks of Dell stated ldquoThe key
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
17
to the whole enterprise was seamless communication with suppliersrdquo (Marks 2000 p1) When
communication was maximized suppliers and vendors were capable of helping the manufacturer
manage and control their inventory levels Through working with vendors and cutting inventory
levels the amount of cash tied up in those inventories would ease other cash flows within the
business (Goldratt 1986)
Once the communication and inventory management strategies were in place a better
flow of materials to and from production were created Schonberger (1982) suggested cutting
carrying costs would result in ordering smaller quantities of inputs for production As a result
smaller batch size production runs would happen thus lowering overall inventory all the while
increasing inventory turn This leveling of the production planning has been shown to increase
efficiency along with quality (Liker 2004) Once production has been optimized the distribution
channels get more consistent sending smaller quantities of product more frequently Not only
does this create fewer inventories for the producing plant but the customers as well As an
example an organization producing 100 different items could not produce one item for a week
straight and send it to only one customer
Loss of revenue Products tied up in inventory as assets (stored products) do not produce
profits (Vijayan 2001) The product does not create any revenues and also hinders the
organization from doing something else with the money Another aspect often not thought of
was loss of product or damage As items are stored they need to be relocated at some point
which means the chance for handling damage increases Despite packaging items with the best
of care occasional accidents happen especially if products are fragile or stored in a crowded
area (Thomas 1969) Costs associated with damaged product have three direct costs associated
with them First is the time and resources required to produce the product in the first place
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
18
Second is the time and money it will take to dispose of the damaged product In the food
industry it usually is more complicated than disposing of product in a dumpster Lastly the
product was produced for a reason so likely a loss of sale has occurred along with the time
necessary to reproduce the discarded product
As previously stated holding inventory is expensive with the capital tied up on unsold
products and the expenses associated with storing the items (Vijayan 2001) No industry values
the inventory turn more than the computer industry Traditionally PC suppliers held about 30
days of inventory in the forms discussed above This equates to about 52000 personal
computers total throughout the supply chain (Marks 2000) One can imagine the space and cost
of storing 52000 computers and their components This drastically affects the computer
industry because technology in computers and components virtually change daily As a result
products can become outdated with newer and cheaper technology thus creating unnecessary
waste
Perishable Food and Inventory
Food safety and a sanitary work place is a science that all food manufactures must abide
by in order to take product to the marketplace Imholte (1999) stated that ldquoThe science behind
food technology requires knowledge of microbiology entomology toxicology pest animal
behavior and food technologyrdquo (p 2) Being that Company XYZ was part of the food canning
industry it was mandated that all rules and regulations were followed and the product was sent to
the market in time to be consumed There were expiration dates which factored into the
necessity that all inventory especially the food products were turned quickly The quicker the
product was consumed the better tasting it was for the consumers as product freshness came into
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
19
play This is another reason for the emphasis food companies should put on turning product over
as quickly as possible
Rules and regulations An examination of inventory in the food industry would not be
complete without the discussion of one important factor food is perishable Food products do
not last forever which means they need to be produced shipped and consumed in a reasonable
amount of time This makes the concept of inventory turnover very important when dealing with
a product customers require to be as fresh as possible The food industry has very strict
standards as to how long food can be stored and the ways it is to be stored
Failures to comply with food safety and food quality rules and regulations can be
problematic in some cases illegal and potentially fatal Griffith Livesey and Clayton (2010)
conclude there were three contributing organization factors which food manufacturers are
required to deliver
Food safety management- These are the activities within the manufacturing facilities that
directly control food safety to consumers The goals of food safety in all aspects of the
business include staffing planning and organizing resources required inputs for
manufacturing
Food safety management systems- There are all the documented procedures required by
governing agencies Items included in this factor are practices procedures and
documented records
Management involvement- The day-to-day operations of the facilities Managers and
operators who handle the food inputsoutputs as they pertain to food safety Included in
this realm are training quality inspections and other food related activities
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
20
Expiration and best buy dates Food products particularly in the canning industry
require a product date to be printed on the packaging According to United States Department
of Agriculture (USDA) (2011) the product is stamped on the package to help determine for
retailers how long that product can be sold in stores There are four different types of dates
found on perishable products (1) ldquoSell-Byrdquo is the date products need to be pulled off the
shelves (2) ldquoBest if Used By (or Before)rdquo is only a recommendation for best quality not
necessarily when the product is no longer safe for consumption (3) ldquoUse-Byrdquo is the latest date
the product should be used by a consumer (4) ldquoClosed or coded datesrdquo which are numbers used
by the manufacturer for internal purposes
On canned foods ldquoBest if Used By (or Before)rdquo is the code typically stamped on the
package of canned food This is only a recommendation for best quality and the utmost
freshness of the contents This means if canned food was stored longer than the date calls it is
still considered safe for human consumption Since the code is printed on the packaging
customers (namely retailers) will sell products at discounted prices upon exceeding a ldquoBest
Buy Daterdquo On the other hand according to Consumer Reports on Health (2010) an
expiration date will tell consumers the latest date the product can be consmed which means
discarding the product after that particular date is required These regulations place more
burden on planning manufacturing and distribution to get products to the customers as quickly
as possible As stated above if products expire on the shelves it becomes waste moreover a
loss of revenue
Recall implications Early in 2009 a recall of peanut better was conducted due to it
being contaminated with salmonella According to Christie (2009) the manufacturing plant in
Georgia not only supplied peanut butter but many other raw materials to other companies as
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
21
well This scenario is not all that uncommon in the food industry Depending on plant
capabilities multiple ingredients and raw materials may flow through the process which means
the possibility for cross contamination is high As a result the finished product could be worse
than just a batch of peanut butter as many other ingredients to other suppliers were affected by
this outbreak The importance of effective sanitary programs to ensure product contamination
is minimized as part of the maximum good manufacturing practice (Imholte 1999)
Another example of a recall with a little different outcome was the Castleberry situation
This recall included 10 types of canned goods that corresponded to 92 different products
(moneycnncom 2007) There are two main concerns with this type of recall First product
containing botulism is very unsafe for consumption Botulism of all forms leads to paralysis
that can spread throughout the body which worst case can cause respiratory failure
(httpwwwfdagov nd) The second concern with this product is that it involves more than
one food product As stated above 92 products were affected because of this outbreak and the
facility has now been put out of service A recall of this magnitude not only hurts the
manufacturer but also the stores that sold the product Stores such as Lowersquos Food Meijer
Morton House Piggly Wiggley and Steak nrsquo Shake were all involved due to private labeling
Castleberry was doing for them (ldquoConsumer Reportsrdquo 2007)
Product freshness and quality for customers It is apparent that the expectation of
receiving a fresh product upon purchase is vital to consumers For consumable food products
as long as the date has not expired (to their standards) and as long as the package has not been
damaged consumers will typically purchase canned goods (McClatchy-Tribune Information
Services 2008) Canned foods offer a great alternative to fresh product in certain cases Based
off this information retailers must work with their inventory on the shelves to ensure that a
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
22
steady rotation of inventory is happening As this occurs products with the later shelf life will
not be bought before the less fresh product is consumed
Another benefit to canned food as opposed to fresh products is the shelf life Canned
foods generally are placed in a pantry and are available to consumers as they wish A
consumer who is conscious of expiration dates may look to the back of the stocking shelf for a
longer freshness date Because of this retailers require longer shelf life times from their
vendors Products near their shelf life dates are often sought after by retailers because
customers appreciate the quicker sale at a discounted price (McClatchy-Tribune Information
Services 2008) The other important aspect to note is certain customers can get the added
benefit of purchasing a product just before or after the expiration date has elapsed because
there is no federal law to prohibit the sale of those items (Patel 2004)
The canning industry is not unlike most other manufacturing industries in that
repeatability is necessary to get the repeat customers In manufacturing processes where
customer expectations are to get the same product every time they purchase process control
and repeatability are of the most importance (Manufacturing Engineering 2011) This is
especially true in the food industry As families share their favorite home cooked meals they
need to be able to count on ingredients One unsatisfied customer due to variation in the
product may result in loss of sales in the future Due to social media the effects of damaging
a brand for one family can result in losing more than just one customer
Lean Initiatives
The Japanese word ldquomudardquo refers to waste In order to fully understand and discuss lean
initiatives a short reference to muda is required Womack and Jones (2003) define muda in
Lean Thinking as
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
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Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
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utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
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Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
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Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
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McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
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httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
23
ldquoSpecifically any human activity which absorbs resources but creates no value mistakes
which require rectification production of items no one wants so that inventories and
remaindered goods pile up processing steps which arenrsquot actually needed movement of
employees and transport of good from one place to another without any purpose of
people in a downstream activity standing around waiting because an upstream activity
has not delivered on time and goods and services which donrsquot meet the needs of the
customerrdquo (p 15)
Buried within a cannery there are processes that take place to create value for customers which
have the potential to create waste In continuous improvement cultures the drive to eliminate
waste and create value is a never ending battle
Production planning One way lean is defined is ldquoto maximize customer value while
minimizing wasterdquo (Jusko 2010 p 32) There are two different strategies organizations
employ to deliver their products First a push methodology is where scheduling plant
operations are not driven by actual demand and where demand uncertainty is unknown
(Northey amp Southway 1993) This transpires from base line utilization of forecasting and
quite possibly historical demand Companies use this philosophy when trying to create
demand for their products A traditional thought as to why the push strategy was popular is
because the thought of plants not producing could be inefficient and would lose cost
advantages (Goldratt 1986) The big drawback to this type of scheduling was the potential for
overproducing because demand for the product had not been created yet
Secondly a pull type methodology is where product being scheduled has demand and
where the uncertainty of sales is known (Northey amp Southway 1993) A pull strategy
encourages customers to pull products through supply chains thus eliminating the
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
24
overproduction scenario As a result instead of a forecasted production plan the schedules in a
pull system address actual customer needs (Savitz amp Weber 2006) Since products being
produced were essentially sold inventory numbers were lowered which increased inventory
turnover
In both the push and pull strategies the flow of the shop floor remains unchanged The
same inputs were required in either method and only the information a planner used to
schedule the plant differed (Northey amp Southway 1993) Plant operations can focus in on
productivity to ensure the products are made on time Since there were virtually no
interruptions to the production lines focus could be placed on reducing waste and other
resources required for the finished product
Software and ERP Systems A tool used by many organizations is an Enterprise
Resource Planning (ERP) system According to Jusko (2010 p 33) the journey for lean
changes the focus of management from optimizing separate technologies assets and vertical
departments to optimizing the flow of products and services through entire value streams that
flow horizontally across technologies assets and departments to customers ERP systems help
with this flow of data to better optimize what the plant is running By streamlining business
steps through an ERP system one is embracing the lean movement Seen this way an ERP
system is only a tool towards making a business leaner A clear distinction needs to be made
that an ERP system does not make a business lean it only helps along the never ending journey
to become lean Alexander (2009) puts it this way ldquoThese nonproductive aspects are the focus
of change in the system and the central point where Enterprise Resource Planning ndashERP-meets
Lean objectivesrdquo (p 46)
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
25
Creating value added versus non value added activities As organizations work
toward becoming lean elimination of waste becomes one of their top initiatives Finding out
which aspects within a process actually create value to the consumers is the most important
objective According to Savitz amp Weber (2006) companies must identify the sources of value
created for customers Once the sources have been identified working towards eliminating all
other activities is necessary to remain competitive in the marketplace Lean operations
continuously search their processes for better ways to do things while focusing on creating
value to loyal customers Organizations which were successful at lean initiatives find
opportunities where none existed and from there identify means to solve those exposed issues
(Mann 2009)
Another aspect worth noting when it comes to inventory turnover is the price consumers
pay for goods and services More often than not inventory is the largest investment made over
the course of the business By increasing inventory turns a lower purchasing price for a
product could possibly be obtained Customers are not willing to pay the extra cost for non-
value added activities to cover inefficiency costs associated with the product (Steinberg 2003)
Therefore this can be a win-win for both consumers and organizations when non-value added
activities are swept from processes
An additional major source of non-value added activity is rework As producers pursue
perfection out of the manufacturing process it eliminates rework Rework and scrap from
accumulated inefficiencies is a major cost to organizations According to Savitz amp Weber
(2006) it is important for processes within the plant be re-examined to deliver the utmost
quality at all stages A common goal throughout the manufacturing industry is to be as
productive as possible while not having to forgo quality at any expense Goldratt (1992)
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
26
suggests that anything being done in the process that does not strive to that goal is
unproductive
Lastly plant operations want to maximize flow with the minimal amount of interruptions
(Savitz amp Weber 2006) The best way to calculate this measure is through an Overall
Equipment Effectiveness (OEE) metric According to Mann (2006) this is calculated by
multiplying three different numbers (1) the amount of time a machine within the process was
supposed to be running as opposed to the time it was actually running (2) the planned speed
the machine was supposed to be running as opposed to the actual speed of the machine during
production and (3) the quality and is figured by taking the amount of parts the machine ran by
the total amount of parts that met the specific spec per quality standards In short form itrsquos the
percentages of availability speed and quality all multiplied together to give an OEE
percentage This percentage can then be compared to what the planning department plans for
that specific line to ensure the line is being properly utilized
Summary
Managing inventory effectively and efficiently is crucial to reducing inventory costs and
improving customer satisfaction More lean operations producing products desired by
customers will assist in reducing inventories Through all these processes the most important
aspect is to keep the needs of the customer as the top priority Implementation of an inventory
management structure that focuses on increasing inventory turnover will result in compliance
to rules and regulations of the food industry as well as meeting the needs of the plant in
reducing inventory costs All of the literature discussed above could be used to help Company
XYZ become more productive while providing value to customers
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
27
These factors play an important role in increasing profitability Implementing a strategy
to increase turns will be in compliance with the laws and regulations discussed The factors
discussed above will help Company XYZ become more productive and develop a significant
new cost saving measure for the business In Chapter III the methodology will discuss where
the data was mined for the comprehensive study for Company XYZ to increase inventory
turns It will also display how the data was compiled along with the calculations to determine
current state of inventory
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
28
Chapter III Methodology
The study focused on the opportunity to increase inventory turnover by one additional
turn per year from 65 to 75 Chapter II discussed three implications Company XYZ deals with
when considering strategy on inventory which included high inventory carrying costs
understanding expiration limitations of inventory and lean methodologies These three factors
were examined to help Company XYZ develop an inventory strategy for increasing the inventory
turnover of one product SKU Inventory data was collected from the past five years to better
understand where opportunities existed to decrease the amount of inventory throughout the
distribution network The high level of inventory was the root cause of lower than desired
inventory turns Due to the low number of turns the company was forgoing business
profitability The objective of the methodology was to understand and develop a lean planning
process that helped increase inventory turnover Improvements in inventory turns through a lean
planning approach helped eliminate other waste in the supply chain as sales remain constant over
the next year Through calculations to determine current inventory turnover problem solving
began to focus on reducing inventory to achieve more turns in years to come
The purpose of the study was to address one SKU and determine a process that would
increase inventory turns from 65 to 75 per year The increase of inventory turns was a direct
result of decreasing finished inventory Decreasing inventory carrying costs resulted in the
business saving large sums of money The analysis only covered one SKU one manufacturing
facility and the finished goods warehouses The study and implementation of it directly affected
the planning process of the production lines In order to make the goal of increasing inventory
turns a new philosophy of utilizing plant capacities was adopted
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
29
Project Background
Company XYZ was a midsized canning facility that produced edible beans to supply
primarily a domestic market There was a distribution network for which the production location
was responsible for managing inventory At the production plant there was a warehouse for
customer pick up along with three other forward warehouses which the production plant was
responsible for keeping inventory stock Customers were able to pick up products at these four
different locations within the network When referring to the network it includes all four pick-
up locations through the western half of the United States
The decision was made to use numbers only from the last five years of business (2008-
2012) The numbers gathered would be on a month end basis which meant a snapshot of
inventory levels and sales data were taken at the same specified time (at month end) in all
months for the past five years The data was taken and month end inventory levels were divided
by month end sale numbers thus giving the inventory ratio metric Once the inventory ratio
metric was calculated the number was divided by the number of days in the period thus giving
inventory turnover for the period
Definition Process
The tool being used to solve the problem statement was a spreadsheet application to
expose where inventory turns were high A spreadsheet would allow for a snapshot view to
record business performance that would highlight the importance of solving the overall goal of
the study Inventory of finished goods and sales data were examined to show importance of
inventory turnover while displaying the importance of the metric to drive business decisions
With the desired inventory turnover goal of 75 actions were needed to determine how to
efficiently align the company with their goals Table 1 highlights the categories of data that were
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
30
calculated to help determine where opportunity existed within the business The month labeling
for the columns represent in order the fiscal year of Company XYZ The numbers made up in
the middle of the chart were data points taken at month end and were the framework as to how
inventory turnover had been calculated
The data was represented in month end numbers retrieved from data warehousing
software with the organization The two sources of data gathered represent month ending sales
and ending inventory results Note that the number of days in the period was taken right from
the fiscal calendar of Company XYZ The number of days in the period represented days the
organization was scheduled to be open for business Tables for each set of data were entered into
two separate spreadsheets that would appear similar to the table below and the results were
displayed in Chapter IV
Table 1
Month Ending Sales Ending Inventory Chart Template 2012
FY08 FY09 FY10 FY11 FY12
April 0000 0000 0000 0000 0000
May 0000 0000 0000 0000 0000
June 0000 0000 0000 0000 0000
July 0000 0000 0000 0000 0000
August 0000 0000 0000 0000 0000
September 0000 0000 0000 0000 0000
October 0000 0000 0000 0000 0000
November 0000 0000 0000 0000 0000
December 0000 0000 0000 0000 0000
January 0000 0000 0000 0000 0000
February 0000 0000 0000 0000 0000
March 0000 0000 0000 0000 0000
Subject Selection and Description
At the onset of the study Company XYZ was turning its inventory 65 times per year
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
31
Due to the high inventory costs perishable food and working on the lean journey it was
necessary to work towards reducing inventory levels The goal for 2013 and the years to come
need to focus on lean initiatives and continuous improvement measures
Instrumentation for Data Analysis
The study required the use of actual data compiled from Company XYZ The data
provided was generated through the Business Intelligence database within the organization to
help understand historical data points of the inventory turnover metric As stated a thorough
investigation of performance over the past five years was conducted Company XYZ calculated
inventory turnover by using month ending sales and finished goods inventory numbers
In order to compute inventory turnover inventory ratio must first be calculated The
inventory ratio was computed by dividing the sales cost for a month (over a course of five years)
by the month ending inventory cost Then to calculate the inventory turnover divide the total
from the inventory ratio by the number days in the period An example of the calculations that
were used to determine inventory turnover for Company XYZ is explained below
Inventory Ratio = ($) Sales Cost
($) Inventory Cost
Inventory Turnover = Inventory Ratio
of days in period
Data Collection Procedures
Company XYZ had a Business Intelligence (BI) interface to access inventory levels sales
volumes and sales forecasting Through the access portal information on month ending sales
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
32
and inventory was acquired Access to the portal was granted also for the purpose of the study
The measurements assessed the inventory turnover ratio and the inventory turns on a monthly
and yearly basis
Data Analysis
The data analysis step of the process identified where and when data points needed to be
calculated using mathematical equations Once calculations were made the study moved to
finding improvement opportunities for Company XYZrsquos inventory turns The improvement
areas that have been focused on were high carrying costs of finished goods inventory perishable
foods that have a strict shelf life and lean methodologies As this phase was completed the
focus pointed out priorities that best dealt with the goal of increased inventory turnover
In Chapter II of this study three common factors that historically face the canning
industry were high inventory costs perishable limit of food consumption and lean
methodologies As inventory cost numbers were generated for the study it estimated each case
cost the organization $400 per month for storage As inventory reduction begins distribution
channels and transportation means had to equally be adjusted to ensure product delivery to the
right location at the right time for customer satisfaction As a result the fewer products in the
supply chain did create more revenues to allow for Company XYZ to focus on other value added
activities
The second reason for Company XYZ to focus on increasing inventory turns was
because of the product having shelf life concerns Food products in this study had a shelf life
expectancy of three years or less Being that the sales data was very consistent in the way
customers behave with their purchases of this particular product it was important for planning
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
33
purposes to produce product as close to the consumption point as possible This meant product
did not sit in warehouses for large amounts of time before being consumed
As inventory levels were analyzed one common factor was apparent There appeared to
be waste in the form of overproduction of this particular SKU in certain times of the calendar
year Since demand for the products historically have been moderately consistent Company
XYZrsquos attempts for obtaining one more inventory turn per year were straight forward Reducing
the amount of time between when the product was produced would be important in obtaining the
objective to increase inventory turnover
The final factor that supported lean initiatives was developing a production planning
strategy that focused on creating value for customers As a result the business would see
increased inventory turns as a direct benefit As discussed earlier a lean planning process where
a pull methodology was employed to better react to customer demand Since Company XYZ did
have capacity constraints it could not employ a fully supported pull strategy The focus changed
to getting higher selling products to a pull mentality As a result of producing product to actual
demand the inventory levels necessary to cover highs and lows of demand could quickly
disappear thus increasing inventory turns Also through increasing turns a lower purchasing
price for a product could be obtained This would all be the result of lean initiatives and
methodologies that strive to increase value to the product during the production process
Planning Strategy
For this study a different production planning strategy was instituted The plan would be
first to categorize each production SKU into two separate families thus creating family run
block strategy The differences in the families were directly correlated to the amount of sales
volume the products created The first family called ldquoArdquo were the high volume sales production
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
34
SKUrsquos which the product being analyzed for the study lies These products were highly
demanded from customers and were produced on a regular basis By scheduling the ldquoArdquo family
on a weekly basis a production planner would have had access to sales data from the previous
week which provided a method of pull strategy Inventory standards were created for each
production SKU and when product was pulled from the system by customers it would signal the
planner to produce that item the following week This was the first attempt to employ a pull
strategy
The second classification of production SKUrsquos were the slower moving less demanded
products In the strategy these products did not need to occupy production line time necessary
for the ldquoArdquo products The second family called ldquoCrdquo could be produced in buckets and stored in
the warehouse until sold The same philosophy would be adopted in that the family would be
scheduled and the products with the lowest inventory standard would be scheduled for
production An inventory standard methodology works the same whether itrsquos an ldquoArdquo or ldquoCrdquo
product
Assumptions
The data used for the study was provided by Company XYZrsquos BI database As the tables
and charts were erected for the study it is important to note the numbers reported represent actual
counts The only assumption was that the organizationrsquos sales data remains flat over the next
year This was assumed only because of the uncertainty with forecasting sales volumes
Summary
Chapter III examined the existing month ending sales and inventory and explained the
process of converting the data into inventory turns As inventory costs continued to rise turning
inventory more frequently would be a valuable strategy and more profitable to the business
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
35
When considering lean methodologies product freshness and inventory carrying costs in the
examination of inventory turnover Company XYZ had significant opportunity to make huge
efforts in cost saving measures The relationships between the cost of doing business and
inventory turnover as metrics present hidden loss of profits Chapter IV enclosed results for
Company XYZrsquos strategy to increase inventory turnover
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
36
Chapter IV Results
The purpose of this study was to develop an approach for an increased inventory turnover
by one turn per year This project was developed to be incorporated into Company XYZrsquos
inventory management strategy to align it for better business performance in inventory turnover
all the while saving money in the form of reduced inventory costs The goal of this project was
to develop a comprehensive study of current inventory turnover to provide specific information
and analytical data to create a practical solution to high inventory costs An examination of
business results converted into inventory turnover presented a strategy for production capacities
and finished goods inventory management Company XYZ requested the project be completed
by the end of their fiscal year in 2012 which was part of a two year project scope to reduce
inventory thus resulting in increased inventory turns in years to come
To obtain the data required of this study Company XYZ allowed access to the Business
Intelligence (BI) data warehouse for extraction of historical results The BI database also
utilized functions in Excel spreadsheets to compute inventory turnover In addition the
organization has offered the assumption that sales forecasts for the upcoming year will be flat
Under that assumption an analysis was focused on decreasing the finished goods inventory
Chapter IV reviews the historical inventory turns experienced by Company XYZ The
historical results have been discussed detailing the number of inventory turns averaged over the
past five years The data analysis detailed the specifications that were used to determine the way
Company XYZ calculates inventory turns which were consistent to the methodology in Chapter
III Lastly the goal to increase inventory turnover would be assessed which detailed and
focused on lean methodologies to achieve an increased inventory turn of one in the future
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
37
Data Tables for Business Results
The first step in the project was to gather the appropriate data which represents month
ending sales and month ending finished goods inventory The data mining conducted for the
purposes of this study was obtained from the organization Below are two tables that represent
actual results of the data from Company XYZrsquos performance in month ending numbers
Table 2
Month Ending Inventory
FY08 FY09 FY10 FY11 FY12
April 627209 667027 744100 914721 969680
May 540094 494978 541074 714216 782363
June 435494 388459 448413 616194 744142
July 450907 465356 510962 653611 763818
August 467244 437280 537371 614760 765038
September 466429 463754 593465 596616 701121
October 501079 495299 637426 580038 713356
November 557686 511873 666389 587953 733351
December 569836 474600 684963 676032 730252
January 599787 459591 713111 661984 669628
February 649093 614269 857788 864551 715345
March 726922 667970 952140 970580 772957
(Business Intelligence Database 2012)
Upon collection of the data the next step was to calculate the inventory turnover ratio
based off the division of sales and ending inventory Tables 2 and 3 only represent the data
necessary to calculate inventory turns for the past five years
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
38
Table 3
Month Ending Sales
FY08 FY09 FY10 FY11 FY12
April 1865600 1971600 2162400 2268400 2204800
May 2798400 2957400 3243600 3402600 3307200
June 2332000 2464500 2703000 2835500 2756000
July 1865600 1971600 2162400 2268400 2204800
August 1632400 1725150 1892100 1984850 1929200
September 2332000 2464500 2703000 2835500 2756000
October 1399200 1478700 1621800 1701300 1653600
November 1865600 1971600 2162400 2268400 2204800
December 1632400 1725150 1892100 1984850 1929200
January 1865600 1971600 2162400 2268400 2204800
February 1865600 1971600 2162400 2268400 2204800
March 1865600 1971600 2162400 2268400 2204800
(Business Intelligence Database 2012)
Inventory Ratio Calculation
After gathering the data and then entering into an Excel based application the inventory
ratio was calculated The table below outlines the conversion from data into a usable inventory
turnover ratio which appears similar to the data tables above The conversion takes month
ending sales divided by month ending finished goods inventory and was displayed as follows
Table 4
Inventory Ratio
FY08 FY09 FY10 FY11 FY12
April 2974 2956 2906 2480 2274
May 5181 5975 5995 4764 4227
June 5355 6344 6028 4602 3704
July 4137 4237 4232 3471 2887
August 3494 3945 3521 3229 2522
September 5000 5314 4555 4753 3931
October 2792 2985 2544 2933 2318
November 3345 3852 3245 3858 3006
December 2865 3635 2762 2936 2642
January 3110 4290 3032 3427 3293
February 2874 3210 2521 2624 3082
March 2566 2952 2271 2337 2852
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
39
In total the past five years of inventory turnover performance was addressed The
inventory ratio as calculated above provided the necessary second step in the calculation of
inventory turnover The data was then calculated into inventory turns based on the number of
days for the period which in most cases was the number of days within the month
Inventory Turnover Calculation
The calculation for inventory turnover which was discussed in Chapter III is displayed
in the chart below The last piece of division needed to calculate inventory turnover was the
inventory ratio divided by the number of days in the period The days in the period only
represented days Company XYZ was open for distribution The result for performance for
Company XYZ in the form of inventory turnover was represented in the Table 5
Table 5
Current Inventory Turns
FY08 FY09 FY10 FY11 FY12
April 672 677 688 806 880
May 483 418 417 525 591
June 373 315 332 435 540
July 483 472 473 576 693
August 716 634 710 774 991
September 400 376 439 421 509
October 716 670 786 682 863
November 747 649 770 648 832
December 698 550 724 681 757
January 643 466 660 584 607
February 870 779 992 953 811
March 779 678 881 856 701
The results of inventory turns in Table 5 represent the amount in inventory turns
Company XYZ accumulated in the past five years based on month ending numbers In order to
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
40
obtain totals for each year the last phase in the process was to average out the inventory turns
per year over the course of the last five years The results of the average number of inventory
turns per year have been displayed in the chart below
Figure 1 Average Inventory Turns
Result Inventory Turnover
Historically throughout the past five years Company XYZ turned inventory on the
particular SKU in question averaged 648 times per year The analysis and performance obtained
quickly became a key focus for supply chain managers The key to increasing the inventory
turnover metric had to be addressed through decreasing large amounts of finished inventories
Also consideration was given to production planning as to when products were consumed to
ensure freshness and lean metholodogies to pull inventory
The strategy to increase inventory turnover was started by breaking production SKUrsquos
into two families This process for determing which SKUrsquos were assigned to which family was
discussed in detail in Chapter III The implementation of the family planning run strategy was
started in October of FY12 The initial months of the new production planning philosophy
granted positive results Under the prevous scheduling of the plant the months of April through
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
42
Summary
This study gathered the most useful data pertinent to determine most effectively the
actual amount of inventory turns Company XYZ has acquired Costs associated with the amount
of money to be saved through increased inventory turns was not calculated but at $400 per case
all options for increased turns needed to be considered The current method used for calculating
inventory turnover within Company XYZ appeared to be a thorough investigative process for
examining inventory turnover Companies XYZ in the past six months had generated enough
turns to meet the business goals set up by the management team The lean strategy to pull
demand through the supply network was proven to be a great starting point for increasing
inventory turnover
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
43
Chapter V Discussion
The purpose of this study was to increase inventory turnover from 65 to 75 annually
This study analyzed the existing state of inventory turnover of one particular stock keeping unit
within Company XYZ An alignment of business goals was established through lean measures
to deliver an increased turnover of inventory The implementation plan was put into place and
will be monitored in the future to access business results
Chapter I of the study highlighted the reasons for the implementation of an increased
inventory turnover strategy Chapter II surveyed the literature pertaining to factors that were
considered and applied in order for Company XYZ to increase turns The factors considered in
Chapter II included implications of high inventory costs perishable food constraints and lean
methodologies Chapter III explained the methodology used to collect and analyze the data The
analysis presented in Chapter III resulted in a proposal for a family planning philosophy which
entailed a more lean production planning process The family structure was based from
established inventory standards that allowed the product SKUrsquos to be pulled through the
manufacturing operations as the product was consumed The results of the implementation of
the lean strategy were presented in Chapter IV
This chapter will first restate the limitations of the study It will then discuss results
along with restating the findings created from the paper The conclusion will emphasize the
major achievements of the study Lastly any recommendations for improving the current state
will be highlighted
Limitations
The primary limitation on this project was that retail sales were going to remain constant
over the course of the study to allow for internal focus on increased turns It was important not
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
44
to fall under the assumption that sales would increase which naturally would drive an increase of
turns The purpose of this study was to examine factors which needed to be addressed for a more
optimal finished goods inventory management strategy The analysis of production planning
aided in developing leaner methodology for plant planning purposes As a result better
customer service and decreased inventory costs were obtained during the change from individual
DKU planning to family planning
This study was limited to month ending sales and finished goods numbers provided by
Company XYZ Only historical data compiled over the past five years was used to complete
data analysis The research paid no reference to industry standards for similar manufacturers
Furthermore the data warehouse for where the information was obtained still applies
today There were no changes to process of extracting the data from the system in years FY08 to
FY13 Only one of about sixty SKU was examined for the study In order for the products to be
assigned to families all were placed but for this study only one SKUrsquos inventory turnover was
analyzed
Conclusions
Business results of the study were a success based off the implementation of the family
planning structure Family planning was certainly the highlight of the study due to meeting the
goal of increased inventory turnover by one per year was completed in six months The
inventory turns for the first six months of fiscal year FY12 averaged 700 In the remaining six
months of FY12 inventory turns rose to 761 Through a pull focused demand management
strategy Company XYZ was able to exceed the goal of 75 turns
Customer service overall increased throughout the period The organization went from
about 992 order fill rate to 998 in that same six month time period of FY12 The family
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
45
planning structure allowed for increased flexibility in the planning process because it delayed the
SKU selection until demand could be examined
Line availability rose for the latter six month period of FY12 The first six months of
FY12 line availability which takes into account all scheduled activities that prevent the line from
running product averaged 684 Upon the implementation of family production planning the
number of changeovers decrease The line availability rose to 726 in the last six months of the
year This presented another benefit for the plant to reduce scheduled time away from the line
thus increasing plant throughput
Overall the conclusion and results of the paper match predictions made in the literature
review Increased inventory turns resulted in lowering finished goods inventory costs which
increased value to the business The family planning strategy appeared to be a solid first step in
Company XYZrsquos lean journey The additional gains of better customer service and increase line
available were also directly related to the change in production planning philosophies
Conclusions and Implications
This study found that inventory turnover within a food industry had a set of unique
challenges when it came to meeting a goal of increased turns In terms of plant efficiencies and
long-term planning reducing the amount of inventory created less cost for the business Cost
reductions in the form of lower carrying costs of inventory and a leaner scheduling of plant
operations created less changeovers From the customerrsquos perspective if all these factors were
taken into consideration additional costs may not be carried on through to the consumer This
would lead to increased profitability to the business The research showed tangible data which
allowed for recommendations and suggestions to Company XYZ to support its overall inventory
strategy
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
46
Supply chain managers need to be educated to understand the ratio in order to make
better business decisions when it comes to an inventory management situation This will take
continuous improvement of production planning and inventory accuracy which would result in
increased inventory turnover Investments made in education and strategy for implementation
would be of little monetary contributions
Referencing Dell to sum up the value to increasing inventory turnover ldquoWe find that the
inventory turnover is a more dominating factor than the cost of sales and investment in RampD for
the Dell miraclerdquo (Xuehong Rongqiu amp Zhongiun 2005) Stated in this manner the potential
effect inventory turnover could have on a business was increased revenues Since most
industries have inventory a continuous improvement program for inventory turnover is
imperative
Recommendations
The recommended changes to increase inventory turnover could lead to further planning
and research Any changes with the product SKUrsquos within the family blocks would need to be
analyzed for potential impact to the business Also changes inventory standards that were
implemented for pulling product through the production and distribution process will need to be
examined for cost reduction Upon an implementation of any changes to the planning process
future inventory turnover testing could be done and compared for a contrast assessment
Additional research could be conducted as to the industry standard for inventory turnover in the
food industry Another planning method could also be considered other than the family
planning The findings show that by just changing one way production is planned the potential
to yield continuous improvement initiatives in many areas of the business
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
47
References
APICS Dictionary Definition (nd) Retreived from httpwwwapicsorggsa-main-
searchinventory20turnover|allResults
Alexander D (2009) Go lean or go gone Enterprise Resource Planning ERP is part of the Lean
Strategy to boost bottom-line profits MAN Modern Applications News 43(5)46
Botulism (nd) Retrieved from
httpwwwfdagovNewsEventsNewsroomPressAnnouncements2007ucm109047htm
utm_source=fdaSearchamputm_medium=websiteamputm_term=botulismamputm_content=3
Canned meant and pet food may cause botulism (2007) Consumer Reports 72(10) 11
Casstleberry expands food recall (2007 July 23) Retrieved from httpmoneycnncom
Christie S (2009 MarchApril) Food Safety and the Feds Food Production Management132-
2 3
Expired products The dos and donrsquots (2010) Consumer Reports on Health10
Goldratt E M (1986) The Goal (Revised Edition) Great Barrington MA The Northern River
Press Publishing Corporation
Griffith CJ Livesey K M Clayton D (2010) The assessment of food safety culture Journal
of British Food Journal 122 439-456
Helms M amp Cengage G (2011 April 24) Inventory Types Retrieved April 24 2011 from
Encyclopedia of Management lthttpwwwenotescommanagement-encyclopedia
Imholte T I (1999) Engineering for Food Safety and Sanitation A Guide to the Sanitary
Design of Food Plants and Food Plant Equipment Medfield MA Technical Institute of
Food Safety
Inventory turnover on the rise (1999) IIE Solutions 31(12) 8
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
48
Ismail A R Hashim E E Ghani J A Zulkifli R R Kamilah N N amp Rahman M A
(2009) Implementation of EIS A Study at Malaysian SMES European Journal of
Scientific Research 30(2) 215-223
Jusko J (2010) Lean Confusion Industry Week 32-34
Liker JK (2004) The Toyota Way 14Management Principles from the Worldrsquos Greatest
Manufacturer Madison WI CWL Publishing Enterprises Inc
Lasers enable medical manufacturing innovation (2011) Manufacturing Engineering 146(5)
109-110 112 114-116 118-119 Retrieved from
httpsearchproquestcomdocview870059463accountid=9255
Lloyd B (2007) Hustle and Inventory Flow DNR Daily News Record 37(22) 52
Mann D (2009) Lean Measures Donrsquot Always Mean Lean Thinking Target Innovation at
Work 25(2) 7-13
Marks P (2000) Turn Turn Turn Computer-Aided Engineering 19(12) 8
Northey P Southway N (1993) Cycle Time Management The Fast Track to Time-Based
Productivity Improvement Portland OR Productivity Inc
Patel P (2004) Expiration dates arenrsquot necessarily guidelines for safety United States
Washington McClathchy ndash Tribune Information Services Retrieved from
httpsearchproquestcomdocview463708782accountid=9255
Retailers arenrsquot required to pull most expired items from their shelves Expiration dates mainly
are a guideline to indicate a productrsquos freshness (2008) United States Washington
McClatchy-Tribune Information Services Retrieved from
httpsearchproquestcomdocview464722388accountid=9255
Savitz A W amp Weber K (2006) The Triple Bottom Linesan Francisco CA Jossey- Bass
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
49
Schonberger R J (1982) Japanese Manufacturing Techniques Nine Hidden Lessons in
Simplicity New York NY The Free Press
Steinberg J (2003) Inventory Turns Can Make All The Difference To Retailers TWICE This
Week in Consumer Electronics 18(18) 24
Thomas A B (1969) Inventory Control in Productionn amp Manufacturing Boston Gower Press
Limited
United States Department of Agriculture (nd) Fact Sheets Food Labeling Food Product
Dating Retrieved from
httpwwwfsisusdagovFact_SheetsFood_Product_Datingindexasp
United States Department of Health and Human Services Food and Drug Administration Center
for Food Safety and Applied Nutrition (CFSAN) (2006) Guide to Minimize Microbial
Food Safety Hazards of Fresh-cut Fruits and Vegetables Retrieved from
httpwwwfdagovohrmsdockets98fr06d-0079-
gdl0001pdfutm_source=fdaSearchamputm_medium=websiteamputm_term=shelf life for
canning industryamputm_content=1
Vijayan J (2001) Inventory Turns Computerworld 35(19) 50
Womack J Jones D (2003) Lean Thinking Banish Waste and Create Wealth in your
Corporation New York NY Free Press
Xuehong J Rongqiu C amp Zhongjun T (2005) Grey Relational Analyzing the Sales Growth
on Dell IBM HP and Compaq Journal of Grey System 17(2) 129-132
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns
41
September resulted in inventory turns to be 700 Upon implementation of the family run
scheduling the inventory turns increased to 761 In the months of October through March of
FY12 Company XYZ expierenced 61 increased turns from the previous six months Figure 2
highlights the results from the six month testing of family planning
Figure 2 Inventory Turns upon Family Planning
The family block production scheduling provided for better utilization of the plant
capacity Along with increasing overall inventory turns Company XYZ noticed a reduction in
the amount of time down for changeovers as well An increased uptime for the plant allowed for
production of products as close to the consumption point as possible This lean metholodogy to
pull inventory through the production process to the distribution warehouses was set on
inventory standards The inventory standard for the SKU examined in the study was actually
decreased because of the plant scheduling more time for producing it The decrease of inventory
led to lower inventory costs which fit the purpose of the study Over the past six months
through the implementation of the family production planning Company XYZ met its goal of
761 turns For future reference it will become imparitive that inventory standards and run
frequencies be re-evaluated to determine the best course of action for delivering the increase in
inventory turns