Sage User Network

Managing your stock for profit

Steve Tattum

Product Manager Sage (UK) Ltd

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Managing your stock for profit

• Are stockouts affecting your delivery service levels?

• Do you keep running out of the

same items?

• Why are there never any A4 pads in the stationery cupboard?

Profile your stock for better service levelsand improve your cash flow forecasting.

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Horror stories …

We pay for 3rd party secure warehouse storage for some promotional packaging materials and labels. The stock is never issued and increases each year - currently valued at £1.5m

Our sales staff will not confirm despatch until they have walked across the site and seen the stock for themselves.

Production has stopped for lack of a critical part. We have ‘ring fenced spares stock’ which cannot be released.

“I’ve triple checked the stock count – which number would you like?”

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Alphabet soupHow many of these do you know?

ATO

CTO

ETOMTS

ATS

MTO

ROL

ROI

EOQ

FIXED PERIOD DAYS

FIRM PLANNEDMRP DRP

JITJT(F)L

2-BIN

KANBAN

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Same problem – different perspectives

Sales – all items, all variants, in-stock, all the time

Production – ‘you should have planned / forecasted earlier’, ‘why can’t you sell what we have in stock?’

Finance – ‘pay me now’, ‘pay you much later’, order the bare minimum but buy cheap

Product support – we need all the parts for products we have sold in the last 5 years, on the shelf

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Inventories / Stock

• All organisations have stocks– Raw materials – Bought in or made-in-house components– Work in progress - partly finished goods– Finished goods in warehouse– Inventory in transit– Goods for sale and on display– Spare parts for machinery

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Reasons for Having Inventories

• Goods made / packed / delivered in batches• Demand is seasonal, supply is constant and / or limited • Demand cannot be predicted exactly• So that work centres do not have to wait for components / work

from previous centres• To supply materials quickly (e.g. from a warehouse)• To take advantage of favourable prices (discounts)• To protect against price rises or shortages

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Stock Profile over TimeS

tock

Lev

el

Time

ROL

Place Order Now

Lead time

MIN

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Reorder Level Decision

• Decision rule: – when the stock level reaches a certain point - the re-order level (ROL) -

order some more. What should the ROL be?

ROL

Stock-out

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Maintaining inventory levels

• Task - order a number of ‘parts’ which are in regular use– e.g. dog food, photocopier paper, product labels

• Two problems– When to order?, how much to order?

• Issues– Cost of holding inventory– Cost of placing orders– Uncertainty of demand, time to replenish stock– Obsolescence– Space, money constraints

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Economic Order (Batch) QuantityEOQ / EBQ

• Key Assumptions– Demand is constant and known

– Replenishment is instantaneous (zero lead time) or at least fixed

– Cost of holding stock is known

– Cost of placing an order for an item known and independent of order size and other orders (often called the setup cost)

– No limitations on space, cash

– No discounts (price is fixed)

• Is this the real world ?

Orders are placed immediately for a fixed quantityOrders are placed immediately for a fixed quantity

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EOQ model

The optimum solution is given by

(D=demand 1000 p.a. S= setup/order cost £15 H= holding cost /unit p.a. £3 )

H

2DSEOQ

Order quantity

Ordering costs

Stock-holdingcosts

Total costs

EOQ

Co

sts

EOQ = 100

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ROQ and ROL Method

• ROL is determined to give a 95% (or other) service level.– 5% of stock cycles will lead to a stock out

• ROQ = EOQ.• Example of simple rule:

– when the stock level falls below 50 (ROL) or 200 (ROQ) order more.

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Keeping the information up to date

• Re-order levels are constantly reviewed as our product lines evolve and sales patterns change

• Supplier lead times are continuously monitored and updated

• Life is full of good intentions !

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So how many of you use this ?

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Creating the update formulae

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Testing the formulae

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Setting the inventory policy

Q

A

M

R

D

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Inventory policy

Q Exact quantityA Minimum of EOQM Multiples of EOQR Minimum of EOQ + multiples of ROID Discrete batches of EOQ (works orders only)

QAMRD

Demand = 23 EOQ = 15 ROI = 10

232330252 x 15

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And changing the numbers ….

QAMRD

Demand = 27 EOQ = 25 ROI = 10

272750302 x 25

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Problems with the EOQ Model

• Demand may not be (approximately) constant– seasonal, fashion goods– rapidly changing ‘technology’ products

• The stock holding costs may be a simple linear model– small increase in stock may need new warehouse

• Setup / ordering costs are very difficult to identify– are labour costs fixed or variable?– depend on other items being ordered

• EOQ forces us into a way of thinking – let’s do things differently

• We need to be agile, innovative and still employ simple systemsWe need to be agile, innovative and still employ simple systems

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It could be as easy as ABC ….

• ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls

Wikipedia

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Pareto Curve for ABC Classifications

Cumulative % of total value

% of total number of items

100

0 10020 50

Class A items

Class B items

Class C items

80

Based on usage value = Usage(items/year) x Cost(£/year)

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ABC Analysis

• Typically– A: 20% of items (fast moving, valuable) account for 80% of the stock turnover

– C: 50% of items (slow moving, low value) account for 10% of the stock turnover

– B: the middle 30% of items (middle value or turnover) account for the remaining 10%

• Policies:– Develop class A suppliers more – premium service

– Give tighter physical control of A items

– Forecast A items more carefully – buy on demand

– Schedule deliveries of B items – call-off against best price contracts

– Simple re-order and EOQ rules for C items

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Managing exceptions

• New items• New suppliers• Problematic quality• Single source of supply

• Promoting to Class A

• Managing the risk

• How much is this worth ?

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Putting it all together

• So using ABC to profile our stock we can:-

– Reduce the number of orders to achieve better focus

– Count the important items more frequently.

• EOQ helps us to manage stable, low cost, high usage items (C class) more effectively.

• We can automatically review and update EOQs

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Setting up ABC categories

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Using the tools

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Using the tools

y, n, or i

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More Reams of Paper …

• “Our MRP report is 500 pages long”

• “And it makes stupid suggestions …”– Reduce the quantity of labels from 10,000 by 9 to 9,991– Re-schedule the order as it will arrive 1 day too early

• “We placed orders for suppliers from A to S then the next report arrived ….so we started at the beginning …..”

• “MRP recommended the purchase orders too late … and no works orders at all !”

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How many wheels on your car ? Data integrity

• 99% BOM Accuracy• Realistic lead times• Realistic average batch sizes • Overdue orders - reprioritised• Close orders delivered ‘short’

We make lawnmowers …. It’s late March and we have run out of wheels which are on a 12 week delivery !

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Priorities

• Red flags• “the MD’s best friend”• Marketing’s next big order• Shop floor bonus & piece work

MRP only knows about due dates

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Filters

• An electronic ‘RED PEN’

• Put your buyers’ practical knowledge into the system

• Manage by exception

• Remove the trivial and irritating recommendations

• Focus on the important items

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Summary

• Use Re-Order reports or KANBAN to manage ‘C’ items.• Set up your inventory policy and keep it under review.• Use MRP to recommend orders for Make or Buy.• Order what you need, plan deliveries for when it is needed.• Set ‘fixed period days’ - group demands for the stock item.• Maintain your data accuracy – responsibility &

accountability.

Count the cash ….