Inventory Management Best Practices for 2012 December 1, 2011 produced by event sponsor [email protected] www.manh.com Inventory Best Practices Webcast Speakers Jon Schreibfeder President Effective Inventory Management, Inc. Rod Daugherty Senior Director of Product Strategy Demand Forecasting and Inventory Optimization Manhattan Associates Thomas P. Gale Publisher Modern Distribution Management Special offer for attendees: Get the book! Achieving Effective Inventory Management Fifth Edition By Jon Schreibfeder • 10% off $74 list price • Free shipping Order at www.mdm.com/store Promotion code: Webcast SCOPE® ~ Supply Chain Optimization…Planning through Execution 4 Principles of Inventory Optimization 5 First Steps to Achieving Effective Inventory Management Jon Schreibfeder President Effective Inventory Management Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 6 The Goal of Effective Inventory Management “Effective Inventory Management enables a company to meet or exceed customers’ expectations of product availability with the amount of each item that will maximize net profits or minimize your inventory investment.” Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 7 First Steps to Achieve Effective Inventory Management (EIM) • Determining what needs to be stocked in each store, branch or warehouse • Liquidating unwanted material • Analyzing and improving the accuracy of your forecasts of future demand of products • Maintaining reserve or safety stock quantities that will ensure your meet or exceed customers expectations of product availability at the lowest possible cost Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 8 What Do Your Customers Expect You to Have in Stock? • Stocking a product is a commitment to have that product available in reasonable quantities • Your facilities are probably filled with: – Stock (Merchandise you intend to stock) – Stuff (Material that inadvertently got stuck in your facility) Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 9 Over 71% of items in this warehouse had sales in three or fewer of the past 12 months Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 10 Listing of Slow Moving Items • List in Descending Order By Value of Inventory: Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 11 Question Why Each Slow Moving Product is Stocked • Do customers realistically expect it to be available for immediate delivery? • Is it a critical item that must be stocked in case of emergency? • Does the profit margin offset the cost of carrying inventory for a prolonged period of time? • Can a more popular item be used in its place? Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 12 Types of Stocked Inventory • The GOOD: Inventory that you stock that provides an acceptable return on your investment Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 13 Types of Stocked Inventory • The GOOD: Inventory that you stock that provides an acceptable return on your investment • The BAD: Inventory that doesn’t provide an acceptable return on your investment, but contributes to other profitable sales Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 14 Types of Stocked Inventory • The GOOD: Inventory that you stock that provides an acceptable return on your investment • The BAD: Inventory that doesn’t provide an acceptable return on your investment, but contributes to other profitable sales • The UGLY: Inventory that doesn’t provide an acceptable return on your investment, and doesn’t contribute to other profitable sales Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 15 Can You Base Actual Profitability on Gross Margin? • Gross Margin is defined as: Sales Dollars - Cost of Goods Sold Dollars Sales Dollars No, gross margin dollars don’t vary as the amount of inventory increases Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 16 Is This Item Profitable? • Sales = $10,000 • COGS = $6,000 • Gross Profit = $ 4,000 • Gross Margin = 40% ave $12,000 in inventory! – What are the risks of paying commissions on gross margin? – How could they have accumulated $12,000 in inventory? Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 17 How to Determine if Inventory is Profitable • Calculate the Adjusted Margin: Annual Profit ($) - (Avg. Invty Investment ($) * Carrying Cost %) Annual Sales ($) Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 18 Carrying Cost (“K” Cost) Accumulation of all of the costs involved in maintaining inventory in your warehouse ◦ Cost of putting away stock receipts and moving material within the warehouse ◦ Insurance and other charges on inventory ◦ Rent and utilities for the portion of your facility used to store material ◦ Physical inventory and cycle counting ◦ Inventory shrinkage and obsolescence ◦ Opportunity cost of the money invested in inventory Questionnaire at www.EffectiveInventory.com Calculated at no cost and no obligation! Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 19 Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 20 Calculating the Adjusted Margin Sales = $1,000 Gross Profit = $150 Gross Margin Percentage = 15% K Cost = 20% Average Inventory = $250 [$150 – (20% * $250)]/$1000 = 10% Average Inventory = $500 [$150 – (20% * $500)] /$1000 = 5% Average Inventory = $750 [$150 – (20% * $750)]/$1000 = 0% Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 21 A Combined Adjusted Margin for Complementary Items “Bad” or “Ugly” Item ◦ Sales = $500 ◦ COGS = $400 ◦ GP$ = $100 ◦ Avg Invty = $500 ◦ K Cost% = 20% Supported Line ◦ Sales = $50,000 ◦ COGS = $42,500 ◦ GP$ = $7,500 ◦ Avg Invty = $5,000 ◦ K Cost% = 20% [$7,600 – (.20 * 5,500)] ÷ $50,500 = 12.9% Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 22 An Adjusted Margin for a Specific Customer Use total sales and profitability for the customer and the average inventory investment for the inventory maintained primarily for that customer Sales = $ 100,000 Avg Invty = $ 50,000 Profit = $ 15,000 KCost% = 21% [$ 15,000 – ($50,000 x .21)] ÷ $ 100,000 = 4.5% Note that the Gross Margin Percentage is 15%! Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 23 Liquidating Stuff and Excess Inventory • A report should list items in descending order based on the value of the value eligible to be liquidated. • Remember that inventory is a sunk expense. It is not worth what you paid for it, it is worth what someone is willing to pay you for it. • “Don’t get emotional about stock, it clouds your judgment” (Michael Douglas’ character Gordon Gecko in the movie Wall Street) Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 24 Examples of Dead or Very Slow Moving Inventory Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 25 The Liquidation of Unwanted Inventory • Transfer excess stock to another company location where the inventory is needed • Reduce the price • Offer salespeople a “spif” to sell the product • Advertise the availability of this material to other suppliers • Substitute the product for a less expensive item • Return the material to the vendor • Donate the material to a non-profit organization • Throw it away Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 26 Transfer Inventory to Where it is Needed Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 27 Advertise Material to Other Suppliers • Search the web with the words “Surplus Inventory [Product Line]: • Some sites for liquidating industrial goods: – – – – www.partsforindustry.com www.excessconnect.com www.industryrecycles.com www.sbmac.com • Some sites for liquidating consumer goods: – – – – www.sellmyinventory.com www.liquidation.com www.directexcess.com www.instantliquidators.com Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 28 New Stock Items • New stock items should be maintained with manually set parameters until enough usage history has been accumulated to accurately forecast demand • New stock items are usually the source of most dead inventory. That is, it’s dead on arrival Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 29 New Item Questionnaire Who will buy this product or product line? What are the estimates of usage for each of the upcoming six months? What is the anticipated gross margin for sales of this item? What affect will usage of this product have on usage of other existing stock items? How many month’s supply must initially be purchased? What investment is necessary? Where will this new inventory be stored? How can any unsold stock be liquidated? Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 30 Evaluating New Item Questionnaires • Committee of marketing, sales, management and purchasing • How accurate has the source been in the past? • Three or more members must agree to add the product to stock inventory in that location Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 31 Keep Sales and Marketing Focused On New Stock Items Provide salespeople with a weekly report of the sales of new stock products. For each item: ◦ ◦ ◦ ◦ ◦ ◦ Item and Description Sales and Gross Margin Projections Actual Sales and Gross Profits Current Available Quantity Value of Available Quantity Person requesting that the product be stocked Consider a budget for new inventory items Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 32 Working with Non-Stock Items • If a product is needed that is not on the approved stock list: – Customer must buy the entire quantity that must be ordered – Customer must pay for the entire quantity that must be ordered – Salesperson must pay for any stock that the customer doesn’t buy or pay for – Any remaining inventory is expensed against the transaction Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 33 How Much of Each Stocked Item Will be Used at Each Location? A demand forecast is a prediction of the quantity of a product that will be sold, transferred or otherwise used during a specific time period. Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 34 How Do You Forecast Future Demand Now? • Who forecasts? • What method do you use to forecast? • What do you consider when you forecast? • When do you forecast? • How far out into the future do you forecast? • Historically how accurate are your forecasts? Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 35 Common Problems with Demand Forecasting • The “if it’s on paper it must be true” syndrome • Most systems base demand solely on some average of past usage. Often buyers/planners don’t know formula! • Usually one formula is used to calculate demand for all products • There is usually no verification to see if the quantity forecast for a certain month was actually sold or shipped in that month • No system for reliably obtaining future predictions of demand from customers Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 36 Accurate Demand Forecasts Are Based On Five Elements • Past usage of the product – A formula that includes observed increasing or decreasing trends as well as possible seasonality • External trends – – Economic or environmental factors • Events – Promotions, holidays, etc. • Collaborative information from customers or salespeople • Appropriate forecast horizon or time period Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 37 Improving the Forecast Accuracy Average forecast error percentage reduced from 583% to 15% Now 18 months into the program turnover exceeds four annual turns! Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 38 Calculating the Forecast Error [Absolute Value of (Usage – Forecast)] Lower of Forecast or Usage A100 Usage Forecast Calculation Error% 50 100.0% Oct 100 50 [ABS(100 – 50)] Sep 50 100 [ABS(50-100)] 50 100.0% Aug 95 100 [ABS[(95-100)] 95 5.3% Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 39 The “Average” Forecast Error In a study done by EIM of a wide range of distributors using a wide range of computer systems: ◦ The mean forecast error was 682% ◦ The median forecast error was 381% “Best Practice” companies had an error that was approximately 1/10th of the average forecast error in their industry The better your forecast, the less you need to stock to maintain your desired level of customer service Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 40 Different Patterns of Usage Require Different Forecasting Methods Item Nov ‘11 Oct ‘11 Sep ‘11 Aug ‘11 Jul ‘11 Jun ‘11 May ‘11 Apr ‘11 Mar ‘11 Feb ‘11 Jan ‘11 Dec ‘10 A100 100 120 80 90 110 105 88 109 98 118 112 108 B200 300 260 220 188 160 142 138 122 109 98 80 76 C300 1020 28 1030 34 990 39 1034 26 D400 41 241 370 36 20 85 160 Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 36 1033 398 224 27 1004 129 57 24 41 Different Items Have Different Patterns of Usage…… A100 B200 150 100 A100 50 400 300 200 100 0 B200 0 C300 D400 1500 600 1000 C300 500 0 Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 400 D400 200 0 42 Events and External Factors will Affect Usage • Events do not occur at exactly the same time each year – Some holidays – Promotions • External factors are outside of your control but may affect usage – Changing market tastes – Economy – Weather Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 43 Analyze Each Event & External Factor 1. Hypothesis: I think this event will affect usage 2. Test: Does it affect usage? 3. Record results: When this occurs again, I can adjust the forecast to take into account the results of this event or external factor 4. Clean usage history: Adjust out the effects of the event from usage history. After all, this event will not occur at exactly the same time next year. Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 44 Measuring the Effect of Events Event Start Day End Day Prior – Prior–Post Event % Event% Centennial 04/23/2011 Founders’ Day 04/30/2011 -25.0% 10.0% Promo-1 06/01/2011 06/07/2011 26.8% -0.8% Promo-1 09/01/2011 09/07/2011 14.0% -4.7% Promo-2 10/01/2011 10/07/2011 13.2% -13.0% Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 45 Effect of 100 Year Celebration ril 2 ril 1 125 3 6 120 Ap Ap 2 ril 9 ril 0 Ap Ap Actual Sales 119 Adjustment for Event Normalized Usage 89 +30 120 125 119 119 The 25% decrease in usage during Centennial Founders’ Day will not reoccur. The 25% decrease in sales is compensated for in Normalized Usage. Formula: Actual Usage ÷ (1 ±% Difference from Normal Usage) Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 46 Effect of Promotion #1 5 8 1 e1 y2 y1 y1 488 Ju n Ma Ma Ma Actual Sales 524 462 Adjustment for Promotion Normalized Usage 595 -126 488 524 462 469 Promotion #1 resulted in a 26.8% increase in sales. This increase should be adjusted out of usage history. When Promotion #1 is offered in the future, the forecast for that week should be adjusted by the average previous results of Promotion #1. Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 47 Buyers Should Bring Possible Unusual Usage to Sales • Even after automatic adjustments to usage have been applied there still may be significant differences between the demand forecast and actual usage • Salespeople are closest to the customers • Salespeople can best determine if possible unusual usage is: – Activity that will not reoccur – Start of a new trend Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 48 Usage This Inventory Period > “x%” of the Forecasted Demand y uar ch il y uar Jan r Feb Ma r Apr Ma y e Jun Usage 1500 410 290 375 450 303 Forecast 368 420 305 368 404 334 For Example: Usage in June (1500 pieces) is greater than four times forecasted demand Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 49 Usage this Inventory Period < “y”% of the Forecasted Demand y uar ch il y uar Jan r Feb Ma r Apr Ma y e Jun Usage 40 210 260 185 290 160 Forecast 224 208 274 202 269 204 For Example: Usage in June is less than 20% of the forecasted demand Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 50 List by Rank of Product by Size of the Discrepancy • We have noticed that products with an item number starting with “A” or “1” have better performance than products with an item number beginning with “Z” • Examine transactions, talk with salespeople and customers to determine if any unusual activity occurred Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 51 Reasons for Possible Unusual Usage • Quantity sold or used during the month was affected by activity that won’t reoccur • A new sales trend has begun • The wrong forecast formula is being used to predict future demand of the product Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 52 Compensating for an Unusual Sales Quantity In reviewing all of the transactions for June, the buyer notice an unusual sales of 1,000 pieces. After talking to the salesperson or customer it was decided that this transaction was unusual y uar ch il y uar Jan r Feb Ma r Apr Ma y e Jun Usage 1500 410 290 375 450 303 Adjustment -1000 0 0 0 0 0 Normalized Usage 500 410 290 375 450 303 Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 53 Compensating for a New Sales Trend A new customer will continue to buy approximately 1,000 pieces a month for the foreseeable future y uar ch il y uar Jan r Feb Ma r Apr Ma y e Jun Usage 1500 410 290 375 450 303 Adjustment 0 1000 1000 1000 1000 1000 Normalized Usage 1500 1410 1290 1375 1450 1303 Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 54 Forecast Horizon If the anticipated lead time for a product is 90 days, you’re buying in early February to satisfy demand in May The forecast horizon starts at today’s date plus the lead time Place Order with Supplier Anticpated Stock Receipt Anticpated Lead Time Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. April May 89 Days March 59 Days February 28 Days January 55 Maintain Adequate Safety Stock • Safety stock is reserved inventory maintained to protect customer service in case of unusual demand or delays in receiving a stock receipt during the time it takes to replenish inventory. • Like any other type of insurance safety stock is an expense, not an investment Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 56 Items That Require More Safety Stock •“Painful Backorder” - items (1/2% - 11/2%) of the products you stock • Products with erratic usage • Products with erratic lead times • High profit items • Stock reserved for a specific customer Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 57 Items That Require Less Safety Stock • Items with very consistent usage and lead times • Products with a large number of “hits” • Low usage items, especially very expensive low usage items Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 58 Safety Stock Based on the Deviation Between Forecast Demand and Usage 150 Forecasted Monthly Demand Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. June May April March February 50 January 100 59 Safety Stock Based on the Avg. Deviation Between Forecast Demand and Usage 150 Forecasted Monthly Demand April June February 100 Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. May March January 50 60 The Deviation Multiple Deviation Approx Multiple Service Lvl 1 65.0% # of times Each Total Usage Qty was Recorded A lot more safety stock needed for relatively few months with large quantities 2 95.0% 3 97.5% 4 98.5% 5 99.0% Total Usage Recorded in a Month Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 61 Determining the “Right” Amount of Safety Stock Safety Stock Amount↓ Avg Total SS$ Average Res$ Service Level 2 * Average Deviation $1,146,066.11 $1,690,213.52 94.4% 3 * Average Deviation $2,292,132.22 $2,836,279.63 96.8% 4 * Average Deviation $3,438,198.34 $3,982,345.74 98.1% Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 62 The Goal of Effective Inventory Management “Effective Inventory Management enables a company to meet or exceed customers’ expectations of product availability with the amount of each item that will maximize net profits or minimize your inventory investment.” Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 63 First Steps to Achieve Effective Inventory Management (EIM) • Determining what needs to be stocked in each store, branch or warehouse • Liquidating unwanted material • Analyzing and improving the accuracy of your forecasts of future demand of products • Maintaining reserve or safety stock quantities that will ensure your meet or exceed customers expectations of product availability at the lowest possible cost Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 64 If you have questions….. Jon Schreibfeder, President Effective Inventory Management, Inc. 120 South Denton Tap Road Suite 450 – 200 Coppell, TX 75019 Phone - 972 304-3325 Fax - 972 393-1310 [email protected] www.EffectiveInventory.com Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution. 65
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