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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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
PDCA ExplainedPDCA Explained
PlanDefine the desired conditionMeasure the current conditionSet improvement targets
DoTake corrective action
CheckTrack progress to target
ActIdentify root cause & correct
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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.
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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 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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
Usage HistoryUsage History Future DemandFuture DemandToday
Valu
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lue
TimeTime
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Usage History Future Demand
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lue A B CDEFGHI
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Part no. 1-1Class D
Usage History Future Demand
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Usage History Future Demand
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Usage History Future Demand
A2A2A2A2E2E2E2E2E2E2
Part No 2Part No 2--22Class AClass A
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Usage History Future Demand
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E3E3Part No.Part No.
33--33Class AClass A
TimeTime
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
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Usage History Future Demand
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR Inventory AnalysisIQR Inventory Analysis
NMNMToday 1-6-12 -3 2 3
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Usage History Future Demand
E3E3
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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%
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR CalculationIQR CalculationA1 + A2A1 + A2
A1 + A2A1 + A2 + E1 + E2 + E3+ E1 + E2 + E3 + + SM + NMSM + NMIQRIQR = =
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TimeUsage History Future Demand
200k + 200k200k+200k+100k+300k+200k+100k+300k+200k+200k+100k200k+100kIQRIQR = =
31%IQRIQR = =
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Measuring Inventory PerformanceMeasuring Inventory Performance
Inventory Turns is the traditional measure
Cost of Goods Sold for the past 12 months Current Inventory
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Examples of IQR MetricExamples of IQR MetricQuick Look
Actionable Information
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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%
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR MethodologyIQR MethodologyPlan
Set RulesQuick LookTarget Setting
DoAction Codes
CheckPerformance
ActAction ItemsRoot Cause Analyses
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Examples of IQR MethodExamples of IQR MethodPlan
Set Rules
Quick Look
Target Setting
Do
Action Codes
Check
Performance
Act
Action Items
Root Cause Analyses
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Check Progress Check Progress
Two types of progress reports, a snapshot and trend chart
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Act to Make the Change PermanentAct to Make the Change Permanent
Identify root cause through Action Items
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Inventory Quality RatioInventory Quality Ratio
Provides A Dollar FocusProvides A Dollar Focus
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TimeUsage History Future Demand
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Inventory Quality RatioInventory Quality Ratio
Measures Inventory Performance Measures Inventory Performance Based on Future RequirementsBased on Future Requirements
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Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Today 1-6-12 -3 2 3
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80 – 15 – 5A B C
80–15–5D E F
80–15–5G H I
Inventory Quality RatioInventory Quality Ratio
Dynamically Calculates A B C Dynamically Calculates A B C ClassesClasses
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
0
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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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Results Results -- Inventory Dollars and IQRInventory Dollars and IQRPurchased Parts by Category and IQR Performance
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ActiveExcessSM+NM IQR%
Lucent Technologies & GTE
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
Inventory Analysis at Any LevelInventory Analysis at Any LevelProduct Team 1
Product Team 3
Product Team 2
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
First Year ResultsFirst Year Results Electronics CompanyElectronics Company
18% reduction in 5 months & 32% reduction in 12 monthsAll Teams Combined – 3/29/2009
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
IQR EnvironmentsIQR Environments
Manufacturing companiesmaterial plannersbuyersproduction schedulersoperations managementfinancial management
Distribution and logisticsUtilities and MRO storesManagement consultants
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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!
Copyright 2008 Doug Howardell 626-390-6935 [email protected]
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