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Managing Inventories in a Changing Economy
How to reduce excess inventory and free-up working capital.
Gary GossardOrange County Chapter
Session Overview• Inventory and supply chains• How 20% sales drop → 50% turns drop• Why it happens and how to avoid it• The Inventory Quality Ratio• Interactive demonstration • Case study results• Summary and Quiz
Inventory: Our LifebloodInventory has been and continues to be the lifeblood of supply chains, especially in times of economic difficulties. Properly managed, it drives revenue and efficiency for companies by reducing working capital and simultaneously increasing customer service levels.
– Aberdeen Group
33%
43%
44%
40%
44%
49%
58%
59%
62%
67%
72%
Collaboration
Manufacturing Cycle Times
Plant Utilization
Reducing Mfg. Overhead
Warehouse Operating Costs
Transportation Costs
ATP to Customers
Improved Fill Rate
Reduction in Cycle Times
Decreased Carrying Costs
Increased Inventory Turns
Importance of Business Benefits of Supply Chain Management
©AMR Research
How a 20% drop in sales can result in a 50% drop in turns
NormalCondition
Sales 100COS 60Inventory 10Turns 6.0
Typical company with 60% COS and 6 turns
How a 20% drop in sales can result in a 50% drop in turns
PreviousCondition Wishful
Sales 100 80COS 60 48Inventory 10 8Turns 6.0 6.0
20% Sales Drop
Wish that inventory would go down with sales
How a 20% drop in sales can result in a 50% drop in turns
Wishful HopefulSales 100 80 80COS 60 48 48Inventory 10 8 10Turns 6.0 6.0 4.8
20% Sales Drop
Hope we can keep inventory at the same level
PreviousCondition
How a 20% drop in sales can result in a 50% drop in turns
Wishful Hopeful LikelySales 100 80 80 80COS 60 48 48 48Inventory 10 8 10 16Turns 6.0 6.0 4.8 3.0
20% Sales Drop
Likely that half of lost COS ends up in inventory
PreviousCondition
Excess Inventory IncreasesAfter a year-long decline, U.S. inventories rose by $6.2 billion in the 4th quarter of 2008, according to figures from the Commerce Department This increase underscores the rapid fall in demand faced by both large and small manufacturers.
– Wall Street Journal
Why does this happen?• We had too much inventory to begin with• We don’t react to changes soon enough
Major Reasons• Our inventory systems and metrics are
backward looking – turns not demand driven• Our ABC classifications are out of date• Our order quantities and safety stocks are
based on past usage• We are still planning part quantities rather
than managing inventory dollars
How do you use ABC classes?2008 Conference Responses
• Not sure what an ABC analysis is 3%• Don’t do ABC inventory analysis 15%• Use ABC for cycle counting only 29%• Use ABC for managing inventory levels
(days-on-hand, order quantities,etc.) 21%• Use for both cycle counting and active
inventory management 33%• Over half use ABCs to manage inventory
What is your ABC based on?2008 Conference Responses
• Unit cost 14%• Inventory quantities 12%• Current inventory dollars 13%• Past usage dollars (last 12 months) 36%• Future demand dollars 11%• Other 10%• Not sure 5%• Only 11% are forward looking
Are we out of synch?• New orders for manufactured durable goods in
July 2009, up three of the last four months, increased $8.2 billion or 5.1 percent.
• Inventories of manufactured durable goods in July 2009, down seven consecutive months, decreased $2.9 billion or 0.9 percent.
– U.S. Census Bureau
• Important to be forward looking when the economy changes in either direction.
Introducing IQR• A demand-driven logic for managing
inventory dollars
• A more useful method of measuring inventory performance
• Developed by 35 materials managers.
• Forward looking and dollar focused.
Inventory Quality Ratio• Inventory management technique• Works with your current systems• Top-down focus on inventory dollars• Identifies opportunities by segment• Gives planners and buyers the information
they need to free-up working capital• Enhances any MRP/ERP/SCM system• No additional data entry required
A B C
MRP / ERP
ExtractData
IQR Logic
R H
A B C
MRP / ERP
ExtractData
IQR Logic
E3
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A B C
MRP / ERP
ExtractData
IQR Logic
E3
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A B C
MRP / ERP
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A B C
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IQR Logic
E3
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A B C
MRP / ERP
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A B C
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AWWRV
IQR Logic
E3
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A B C
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A B C
Data
80 - 15 - 5 %AWWRV
IQR Logic
E3
R H
A B C
MRP / ERP
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A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWRV
IQR Logic
E3
B
R H
A B C
MRP / ERP
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A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWRV
IQR Logic
A2
E3
B
R H
A B C
MRP / ERP
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A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWRV
IQR Logic
A2
E3
B
R H
A B C
E2
MRP / ERP
Extract
A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWRV
IQR Logic
6
A2
E3
B
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A2
E3
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
E3
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
E1
E3
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
Data
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
E1
E3
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
GHK
Data
BOHV
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
E1
E3
12
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
GHK
Data
BOHV
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
SM
E1
E3
12
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
GHK
Data
BOHV
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
NM
SM
E1
E3
12
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
GHK
Data
BOHV
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
6
A1 A2
NM
SM
E1
E3
12
BB
R H
D E F A B C
E2
MRP / ERP
Extract
A B C
GHK
Data
BOHV
80 - 15 - 5 %4 - 12 - 24
AWWUV AWWRV
IQR Logic
Inventory Quality Ratio
IQR =Active Inventory Dollars
Total Inventory Dollars
Inventory Quality Ratio
IQR =A1 + A2
IQR =Active Inventory Dollars
Total Inventory Dollars
A1 + A2 + E1 + E2 + E3 + SM + NM
Inventory Quality Ratio
IQR =A1 + A2
IQR =Active Inventory Dollars
Total Inventory Dollars
Perfect IQR = 100%
A1 + A2 + E1 + E2 + E3 + SM + NM
Inventory Quality Ratio
IQR =A1 + A2
IQR =Active Inventory Dollars
Total Inventory Dollars
Average IQR = 30-45%
A1 + A2 + E1 + E2 + E3 + SM + NM
Inventory Quality Ratio
IQR =A1 + A2
IQR =Active Inventory Dollars
Total Inventory Dollars
Average IQR = 30-45%
10%
A1 + A2 + E1 + E2 + E3 + SM + NM
Inventory Quality Ratio
IQR =A1 + A2
IQR =Active Inventory Dollars
Total Inventory Dollars
Average IQR = 30-45%
10%
A1 + A2 + E1 + E2 + E3 + SM + NM
Inventory Quality Ratio
IQR =A1 + A2
IQR =Active Inventory Dollars
Total Inventory Dollars
Average IQR = 30-45%
10%30-50%
A1 + A2 + E1 + E2 + E3 + SM + NM
The IQR Logic• Analyzes inventory using:
Balance on hand and unit costPast usage and future requirementsDynamic ABC classes and user-defined rules
• Develops inventory quality categories:Active: reqmt/use, balance within user’s rulesExcess: reqmt/use, balance over user’s rulesSlow Moving: no reqmt, no use in 6 monthsNo Moving: no reqmt, no use in 12 months
• Measures overall inventory performance• Identifies opportunities by segment
Interactive Demonstration
• Quick Look
• Action Items
• Custom Analyses
• Target Setting
• Movement Matrix
• Performance
Tools for the Company• Functional Areas
– Materials Planning– Purchasing– Master Scheduling– S&OP Support– Supply Chain– Accounting & Finance– Information Services– Manufacturing– Engineering– Sales & Marketing– Senior Management
• Productivity Tools– Inventory segmentation– Action items– Inventory movement– Product family analysis– Location rebalancing– Inventory reserves– Custom reports– What-ifs & potential– Change effectivity– Special promotions– Profit improvement
First Year Results Pharmaceutical Company22% Overall Inventory Reduction & 46% Excess Reduction
0
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0
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Active 1Active 2Excess 1Excess 2Excess 3Slow MovingNo Moving
Total Inventory by CategoryCombined.IQR (Run Date 30/04/2004)Total Inventory by IQR Category
Inventory Dollars and IQRPurchased Parts by Category and IQR Performance
0
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4,000
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8,000
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0 1 2 3 4 5 6 7 8 9
Months After Implementation
Inve
ntor
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rs ($
1000
)
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Inve
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ualit
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atio
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ActiveExcessSM+NM IQR%
Lucent Technologies & GTE
Inventory at Factory SiteFocused on Improving to 28 Turns
UTC/Carrier CorporationMar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06
ABC Rule 1-4-7 1-4-7 1-4-7 1-4-7 1-4-7 1-4-7DEF Rule 1-4-7 1-4-7 1-4-7 1-4-7 1-4-7 1-4-7
Active 1 81 129 141 121 51 79Active 2 6,148 4,930 6,803 4,690 5,877 6,297
6229 5059 6944 4811 5928 6376
Excess 1 1,052 889 878 869 455 320Excess 2 6,230 4,505 4,828 5,408 3,006 3,524Excess 3 150 86 131 191 241 165
7,432 5,480 5,837 6,468 3,702 4,009
Slow Moving 274 298 189 215 204 208No Moving 84 211 191 125 191 176
358 509 380 340 395 384
Total 14,018 11,047 13,162 11,619 10,025 10,769
IQR Ratio 44% 46% 53% 41% 59% 59%Notes: Location & currency unspecified, rules set to target 28 turns/yr. Target turns reflect site history, material types and supplier lead times.
Inventory Analysis at Any Level
Plant 1 -- Oracle
Business Units
Planner A
Products Contracts
Planner B Planner C
Planning MgrMake Parts
Buyer D
Suppliers Commodity
Buyer E Buyer F
Purchasing MgrBuy Parts
Materials Director Finance
Plant 2 -- SAP VP Supply Chain
Division A
Corporate
Product Team 1
Product Team 3
Product Team 2
First Year Results Electronics Company18% reduction in 5 months & 32% reduction in 12 months
All Teams Combined – 3/29/2009
Typical Results of Using IQR• Improve cash flow & capital immediately
• Reduce inventory 20% to 40%
• Increase turns with fewer shortages
• Maximize planner & buyer productivity
• Continuously improve overall inventory performance
IQR Environments• Manufacturing companies
material plannersbuyersproduction schedulersoperations managementfinancial management
• Distribution and logistics• Utilities and MRO stores• Management consultants
Use of IQR is Spreading• Airtechnics• Alcatel• Allergan Medical • American Capital• Andrew Corporation• Armstrong • ArvinMeritor• Avery Dennison• Banner Pharmacaps• Beckman Coulter• Binney & Smith• Black & Decker• Bosch Corporation• Boston Scientific• Bunn-O-Matic Corp• Carrier Corporation• Cummins Inc.• Dana Corporation• Dialogic - Intel Corp.
• Dow Chemical• Dr Pepper Snapple• Eastman Chemical• Engenio - LSI Logic• ERICO Incorporated• Esterline Corporation• Hendrickson Int’l• Hope Global• HunterDouglas• Hyundai• Johnson & Johnson• Kinetic Concepts• Korry Electronics• Kohler Companies• Krebs Engineers• LuK Automotive • Motorola• Nature’s Way• Newell-Rubbermaid
• Oakley• Ocean Cuisine• Pfizer - Pharmacia• Rheem Manufacturing• Sanford Corporation• Schlumberger• Sherwin-Williams• Sikorsky Aircraft• SP Richards Company• Telex Communications• Tighe Industries• Tyco Electronics• Unilever Bestfoods• Valmont Industries• Vita-Tech International• Wellman Products• Wenger Corporation• Woodward Governor• Yamaha Corporation
• Inventory systems are backward looking• Future demand is better than past usage• IQR logic is demand-driven & dollar-focused• Keys to improving inventory & working capital
– Identify excess by segment– Focus on the dollars– Prioritize reduction opportunities– Update MRP inventory settings– Monitor and track performance.
Summary
Summary• Inventory systems are backward looking• Future demand is better than past usage• IQR logic is demand-driven & dollar-focused• Keys to improving inventory & working capital
– Identify excess by segment– Focus on the dollars– Prioritize reduction opportunities– Update MRP inventory settings– Monitor and track performance.
• Makes the planner & buyer jobs easier
• Inventory systems are backward looking• Future demand is better than past usage• IQR logic is demand-driven & dollar-focused• Keys to improving inventory & working capital
– Identify excess by segment– Focus on the dollars– Prioritize reduction opportunities– Update MRP inventory settings– Monitor and track performance.
• Makes the planner & buyer jobs easier• Improves turns, cash flow and profits!
Summary
Seven Quiz Questions1. Do you measure performance by segment?2. Are your improvement opportunities prioritized?3. Are your ABC classes future-demand driven?4. Are your inventory rules revised often enough?5. Are your rules forward or backward looking?6. Do your inventory systems have a dollar focus?7. Do you know your inventory reduction potential?Your score: 7-6 Excellent. 5-4 Very Good
Seven Quiz Questions1. Do you measure performance by segment?2. Are your improvement opportunities prioritized?3. Are your ABC classes future-demand driven?4. Are your inventory rules revised often enough?5. Are your rules forward or backward looking?6. Do your inventory systems have a dollar focus?7. Do you know your inventory reduction potential?Your score: 7-6 Excellent. 5-4 Very Good
Could more “yes” answers help you to reduce excess inventory and free up working capital?
Thanks for attending!
Questions?• Things to think about in any economy
• Are we being proactive in managing inventory?• What are my specific reduction opportunities?• How can a dollar focus help me?
• For future questions or information:• [email protected]• Phone 949-487-5400