inventory management using plan, do, check, act

Inventory Management UsingInventory Management UsingPlan, Do, Check, ActPlan, Do, Check, Act

Doug HowardellSan Gabriel Valley Chapter

Copyright 2008 Doug Howardell 626-390-6935 [email protected]

Session OverviewSession Overview

PDCA ExplainedDefinition and Importance of Inventory ManagementThe Plan, Do, Check, Act Cycle Applied to Inventory ManagementInventory Management Using the Inventory Quality RatioCase study resultsSummary


PDCA ExplainedPDCA Explained

PlanDefine the desired conditionMeasure the current conditionSet improvement targets

DoTake corrective action

CheckTrack progress to target

ActIdentify root cause & correct


Defining Inventory ManagementDefining Inventory Management

management : The organizational process that includes strategic planningplanning, setting objectives, directingdirecting resources, deployingdeploying the human and financial assets needed to achieve objectives, and measuringmeasuring results

inventory management : The branch of business management concerned with planning and controlling inventories.

aggregate inventory management : Establishing the overall level (dollar value) of inventory desired and implementing controls to achieve this goal.


Why is Inventory Management Why is Inventory Management Important?Important?

It takes cash – capital – to produce or acquire inventoryThat cash tied up in that inventory is not usable for other parts of the business– It is called “working capital”

Many companies barrow to support their working capital needs – A very real “cost” to the business

Every dollar in inventory reduction leads to a dollar reduction in working capital – Saves cost of capital


33%

43%

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58%

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67%

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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 CostsDecreased Carrying Costs

Increased Inventory TurnsIncreased Inventory Turns

©AMR Research

Importance of Business Benefits of Importance of Business Benefits of Supply Chain ManagementSupply Chain Management


Why is Getting the Right Level of Why is Getting the Right Level of Inventory Hard?Inventory Hard?

Major ReasonsMajor ReasonsWe have too much inventory to begin withWe don’t react to changes in demand soon enoughOur inventory systems and metrics are backward looking –turns not demand drivenOur ABC classifications are out of dateOur order quantities and safety stocks are based on past usageWe are still planning part quantities, rather than managing inventory dollars


How do you use ABC classes?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%21%

Use for both cycle counting and active inventory management 33%33%

Over half use ABCs to manage inventory


What is your ABC based on?What is your ABC based on?

2008 Conference ResponsesUnit cost 14%Inventory quantities 12%Current inventory dollars 13%Past usage dollars (last 12 months) 36%Future demand dollars 11%11%Other 10%Not sure 5%

Only 11% are forward lookingOnly 11% are forward looking


Inventory Management Using PDCAInventory Management Using PDCA

PlanDefine the desired amount of inventoryMeasure the current amount of inventorySet inventory improvement targets

DoTake steps to reduce inventory

CheckTrack progress to target

ActIdentify root cause of high inventory levels & correct


Inv Mgt thru InventoryInv Mgt thru Inventory Quality RatioQuality Ratioaggregate inventory management : Establishing the overall level (dollar value) of inventory

desired and implementing controls to achieve this goal

IQR is a metric– A more useful method of measuring inventory

quality– Measures overall inventory performance– Measures performance by segment

IQR is a methodology– A comprehensive approach to improving

inventory performance– Follows PDCA

IQR is a tool– Software to automate the metric & methodology


Inventory Quality RatioInventory Quality Ratio

Metric, Methodology & ToolTop-down focus on inventory dollarsWorks with your current systemsEnhances any MRP/ERP/SCM systemNo additional data entry requiredGives planners and buyers the information they need to free-up working capital


IQR Inventory AnalysisIQR Inventory Analysis

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Inventory Quality Ratio Metric Inventory Quality Ratio Metric

Active Inventory DollarsActive Inventory Dollars

Total Inventory DollarsTotal Inventory DollarsIQRIQR ==

Active inventoryActive inventory = Material you need now

Total inventoryTotal inventory = Active inventory plus all the other stuff you have on hand

Perfect Perfect IQRIQR = 100%= 100%


IQR CalculationIQR CalculationA1 + A2A1 + A2

A1 + A2A1 + A2 + E1 + E2 + E3+ E1 + E2 + E3 + + SM + NMSM + NMIQRIQR = =

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200k + 200k200k+200k+100k+300k+200k+100k+300k+200k+200k+100k200k+100kIQRIQR = =

31%IQRIQR = =


Measuring Inventory PerformanceMeasuring Inventory Performance

Inventory Turns is the traditional measure

Cost of Goods Sold for the past 12 months Current Inventory


Problems with Traditional MeasuresProblems with Traditional Measures

Inventory turnover ratios produce information that is:– Too little, too late, and too distorted

Turnover calculation is a trailing indicator– Based on past sales

Inventory turns data is aggregate– Does little to help track problems to their root

causesInventory data is provided on a monthly basis– Planners are always reactive

Best practice for Inventory Management:Data must be provided frequently & at the

part number level


Examples of IQR MetricExamples of IQR MetricQuick Look

Actionable Information


Example of IQR MetricExample of IQR MetricNote that inventory is displayed in the IQR categories in terms of dollars, not piecesThe IQR metric is 39.2%


Example of IQR Actionable InformationExample of IQR Actionable Information

You want to be able to see IQR in segments that allow you to take action


Actionable Info at the Part LevelActionable Info at the Part Level

From any IQR category summary you can drill down to the list of parts in the category


IQR MethodologyIQR MethodologyPlan

Set RulesQuick LookTarget Setting

DoAction Codes

CheckPerformance

ActAction ItemsRoot Cause Analyses


Examples of IQR MethodExamples of IQR MethodPlan

Set Rules

Quick Look

Target Setting

Do

Action Codes

Check

Performance

Act

Action Items

Root Cause Analyses


Plan Plan –– Set the Rules & TargetsSet the Rules & TargetsSet a rule in weeks of inventory for each IQR class

Plan how much inventory reduction you will make

Calculate the impact on the bottom line


Do Take Action to Reduce InventoryDo Take Action to Reduce Inventory

Work the parts with the highest excess firstDrill down to see all the detailed data you need about a part


Do Take Action to Reduce InventoryDo Take Action to Reduce Inventory

Determine the action you want to take and apply an action codeMake appropriate comments


Check Progress Check Progress

Two types of progress reports, a snapshot and trend chart


Act to Make the Change PermanentAct to Make the Change Permanent

Identify root cause through Action Items


Act to Make the Change PermanentAct to Make the Change Permanent

Identify root cause through adjusting planning factors

Safety Stock Greater than 3 months requirements

Minimum order quantity Greater than 3 months requirements

Lot size Greater than 3 months requirements



Provides A Dollar FocusProvides A Dollar Focus

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Measures Inventory Performance Measures Inventory Performance Based on Future RequirementsBased on Future Requirements

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80–15–5D E F

80–15–5G H I


Dynamically Calculates A B C Dynamically Calculates A B C ClassesClasses


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Active 1Active 2Excess 1Excess 2Excess 3Slow MovingNo Moving

Total Inventory by CategoryCombined.IQR (Run Date 30/04/2004)

First Year ResultsFirst Year Results Pharmaceutical Company

22% Overall Inventory Reduction & 46% Excess ReductionTotal Inventory by IQR Category


Results Results -- Inventory Dollars and IQRInventory Dollars and IQRPurchased Parts by Category and IQR Performance

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Lucent Technologies & GTE


Inventory Analysis at Any LevelInventory 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


Inventory Analysis at Any LevelInventory Analysis at Any LevelProduct Team 1

Product Team 3

Product Team 2


First Year ResultsFirst Year Results Electronics CompanyElectronics Company

18% reduction in 5 months & 32% reduction in 12 monthsAll Teams Combined – 3/29/2009


Typical Results of Using IQRTypical 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 EnvironmentsIQR Environments

Manufacturing companiesmaterial plannersbuyersproduction schedulersoperations managementfinancial management

Distribution and logisticsUtilities and MRO storesManagement consultants


Use of IQR is SpreadingUse of IQR is SpreadingAirtechnicsAlcatelAllergan Medical American CapitalAndrew CorporationArmstrong ArvinMeritorAvery DennisonBanner PharmacapsBeckman CoulterBinney & SmithBlack & DeckerBosch CorporationBoston ScientificBunn-O-Matic CorpCarrier CorporationCummins Inc.Dana CorporationDialogic - Intel Corp.

Dow ChemicalDr Pepper SnappleEastman ChemicalEngenio - LSI LogicERICO IncorporatedEsterline CorporationHendrickson Int’lHope GlobalHunterDouglasHyundaiJohnson & JohnsonKinetic ConceptsKorry ElectronicsKohler CompaniesKrebs EngineersLuK Automotive MotorolaNature’s WayNewell-Rubbermaid

OakleyOcean CuisinePfizer - PharmaciaRheem ManufacturingSanford CorporationSchering-PloughSchlumbergerSikorsky AircraftSP Richards CompanyTelex CommunicationsTighe IndustriesTyco ElectronicsUnilever BestfoodsValmont IndustriesVita-Tech InternationalWellman ProductsWenger CorporationWoodward GovernorYamaha Corporation


SummarySummaryInventory systems are backward lookingFuture demand is better than past usageIQR is a metric, a method and a toolIQR logic is demand-driven & dollar-focusedKeys to improving inventory & working capital– Plan: Identify excess by segment– Plan: Focus on the dollars– Do: Prioritize reduction opportunities– Check: Monitor and track performance– Act: Update MRP inventory settings

Makes the planner & buyer jobs easierImproves turns, cash flow and profits!


Thanks for attending!Thanks for attending!

Questions?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]– 626-836-6935

inventory management using plan, do, check, act

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