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E-book Six Steps Inventory Optimization

E-book Six Steps Inventory Optimization

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Free samples of_e-book_6_steps_inventory Free samples of_e-book_6_steps_inventory Document Transcript

  • Antonio Zrilicww.logiko.hrSix Steps InventoryOptimization
  • Six Steps Inventory Optimization Antonio Zrilic1Table of ContentsInstead of Introduction.................................................................4First step – Analyze This ..............................................................8Material classification...................................................................8Pareto and His Pea......................................................................10XYZ Analysis of inventories ..........................................................18ABC/XYZ Cross Analysis...............................................................23Defining a strategy based on the ABC/XYZ analysis......................25Second Step – Inventory Management and Cash Flow Blues.37What is the turnover ratio anyway? ............................................37How to convert dead inventory into cash? ...................................49Third Step - Diagnose Before You Prescribe ...........................62The cause of death of dead inventory ..........................................62Ask! ............................................................................................65What does it have to do with inventory management? ................66Fishbone diagram .......................................................................67Fourth Step - Determining Inventory Policy ...........................79The wolf is full and no sheep are missing.....................................79Inventory types ...........................................................................82Inventory and Strategy................................................................84Cycle inventory............................................................................85Safety Inventory..........................................................................88
  • Six Steps Inventory Optimization Antonio Zrilic2How to optimize the safety inventory...........................................91Fifth Step – Who Can Tame the Inventory Beast ....................99Conflicting goals .........................................................................99Suboptimization........................................................................102Materials management manager..............................................105Sixth Step – Identifying and monitoring inventory keyperformance indicators (KPI) ..................................................107Defining goals...........................................................................111What units of measure to apply?...............................................112"Its not measurable!"...............................................................113Inventory performance indicators (KPI)......................................116Conclusion on Inventory Management.......................................119
  • Six Steps Inventory Optimization Antonio Zrilic3Tables:Table 1: ABC item distribution.........................................................16Table 2: Inventory distribution according to competitiveness............45Table 3: Analysis of Phisical inventory taking errors ........................71Figures:Figure 1: Paretos rule.....................................................................12Figure 2: XYZ Demand variation.....................................................19Figure 3: Determining XYZ categories.............................................20Figure 4: Characteristics of the item categories under the ABC/XYZmatrix ....................................................................................24Figure 5: Procurement initiated based on the ABC/XYZ classification..............................................................................................28Figure 6: ABC/XYZ classification-based principle of procurement....30Figure 7: The ABC/XYZ classification-based automatization level ofprocurement...........................................................................32Figure 8: Pareto analysis of Phisical inventory taking errors ...........72Figure 9: Fishbone diagram (Ishikawa diagram) .............................73Figure 10: Fishbone diagram analysis of Poor communication as oneof causes of excess inventory...................................................75Figure 11: Inventory availability by ABC groups..............................92Figure 12: Determining inventory availability based on the ABC/XYZclassification..........................................................................93Equation:Equation 1: Variation coefficient: 21Equation 2: Calculation of turnover ratio and Inventory days 39Equation 3: Safety inventory calculation formula (SI) 90
  • Six Steps Inventory Optimization Antonio Zrilic8First step – Analyze ThisSo, how to manage inventories? It was already saidthat the first thing you need to know is whatinventories are available to you. Inevitable tools atour disposal for this purpose are ABC and XYZanalysis and ABC / XYZ cross analysis whereininventories are classified according to theirimportance (value) and variations in sale.In this chapter we will make the first step, i.e.:What inventories are available to you at all, what istheir volume and how much they cost you.Material classificationIn most companies materials or items are usuallyclassified in a linear manner (one-dimensional),such as, for example, classification to rawmaterials, semi-finished products, finishedproducts, spare parts and trading goods. However,classification could be based on the intended use ofitems being classified. For example, inpharmaceutical industry additional breakdown tosolid oral forms, liquid and powder products ismade. Motor oils can be further divided, example,to application in industry, transport and end-user,etc.; further classifications can be done andbreakdowns per brands, markets etc. can be added.We suggest that before making any analysis, all thematerials and products concerned are classified.
  • Six Steps Inventory Optimization Antonio Zrilic10 Finished products.Pareto and His PeaWe all know that the Italians are known forspaghetti and nice cars. However, all of us who arecoping how to be more efficient and productive, i.e.how to achieve more with less, should express duegratitude to one Italian, who was neither a chef nora designer of sports cars. Vilfredo Pareto was aneconomist and sociologist who lived at the turn ofthe 19thand 20thcentury who, based on his researchof the world wealth distribution, concluded that 20%of population owned 80% of the world wealth. Thisequation is now known as the Pareto’s law orPareto’s rule applicable beyond the economy aswell, so this rule has spread to all areas of humanactivities (80% of criminal offenses is committed by20% of criminals, 20% of drivers cause 80% of trafficoffenses and accidents, 20% of your customersaccount for 80% of your income, 20% of your timemakes 80% of money ... ). (ovdje nedostaje dio:Kako je Pareto bio stravstveni vrtlar, čak i unjegovom vrtu...) Even in the Pareto’s garden 80%of peas is derived from 20% planted stems. Ingeneral, we can say that 80 percent ofconsequences arise from 20 percent of causes.Accordingly, distribution can be made under which20 % of products accounts for 80 % of revenues (Aitems). Further 30 to 50 % of products account for15 % of revenues (B items), and remaining 30 to 50
  • Six Steps Inventory Optimization Antonio Zrilic11% of products account for only 5 % of revenues (Carticles).To make the data and interpretation of ABC analysisconsistent and meaningful, ABC analysis is doneseparately for each product category we have triedto define previously.ABC analysis is a method of classification ofmaterials into groups, each with a differentrelevance and significance for the business. Theirtreatment is determined according to thissignificance. The purpose of this method is toestablish an effective system of control andmanagement of items within the procurement, saleand warehousing operations by implementation ofvarious methods to achieve higher efficiency andproductivity of business operations.In inventory management this rule helps us todistribute, i.e. classify items according to theimportance these items have in our company. Thuswe get the inventory categories A, B or C, andattention is paid to them based on theirimportance. It is natural that A items are moreimportant to us and we will pay more considerationto them, i.e. more time will be spent on theiranalysis.
  • Six Steps Inventory Optimization Antonio Zrilic18XYZ Analysis of inventoriesIn explaining the ABC analysis we have alreadymentioned that only after the XYZ analysis is made,we will be able to give a thorough interpretation ofthe ABC analysis results because then the seconddimension will be also included. The XYZ analysismeasures variation of demand for particular itemsand grouping them into categories that containitems with the similar variability characteristics.After both analyzes are performed (ABC and XYZ)with the cross analysis of ABC / XYZ, we will obtainmatrix of nine groups of items that are thenindividually approached and the strategy ofprocurement, sale and warehousing for each ofthem is determined.Whereas the ABC analysis is the basic technique forthe supply chain management and is the primarytechnique for the analysis and control ofinventories, the XYZ analysis, on the other hand,enables us to perform the next step of the inventoryanalysis. It is a secondary analysis that tells us aboutthe stability in demand for items and is carried outby classifying items into three groups - X, Y and Z,but by applying the criteria of variation in demandcompared to the average demand. Measuring thevariation of sale is done by so-called variationcoefficient which is calculated by the ratio ofdeviation of monthly or weekly sale from theaverage sale.
  • Six Steps Inventory Optimization Antonio Zrilic19The XYZ analysis is, therefore, the methodcomprising the second dimension i.e. the variationin demand for certain items. As in the ABC analysis,which we performed in the previous stage (anddescribed in the previous chapter), the purpose ofthis classification is establishment of an effective(optimal) system of supply, sale and warehouseoperations to reduce costs of inventories,procurement and warehousing, which is one of thefundamental objectives of logistics, especially intimes of recession.Figure 2: XYZ Demand variationHow to determine what category an item belongsto?The category under which an item will be classifieddepends much on the branch of industry in which a
  • Six Steps Inventory Optimization Antonio Zrilic20company is doing its business. According to somesources (see Figure 2) X products are those thatdeviate up to 10% of the average, Y productsdeviate 10-25%, and all above 25% is sporadicdemand and belongs to the Z items. What I can sayfrom my personal experience is that this distributionin most companies with whom I worked, is ratheroptimistic, bent and that it "does not hold water." Inmy experience (and also according to experiences ofsome global companies), distribution can be done sothat the X products are those who deviate up to 50%from the average, Y products deviate 50-100%, andZ are all items which deviate by more than 100%.VariationcoefficientDeviation fromthe averageX 0-50% Do 50%Y 30% Do 100%Z 100% and more Over 100%Figure 3: Determining XYZ categoriesHow to calculate the variation coefficient?The next task is how to determine what 50% or 100%of the variation in demand means. As shown inFigure 3 such determination depends in the
  • Six Steps Inventory Optimization Antonio Zrilic23trigger detailed measures, particularly for criticalmaterials. The characteristic of these products isthat forecasting is highly demanding and verydifficult and it is recommended to spend more timein forecasting and that the procurement is mademanually, without any automatization.ABC/XYZ Cross AnalysisIn order to provide a fuller interpretation of theresults obtained with the ABC and XYZ analyses it isnecessary to make the ABC/XYZ cross analysismatrix. From this analysis we get nine groups ofproducts with the characteristics of ABC and XYZanalysis, to which one can approach individually anddetermine the strategy of procurement andwarehousing for each and every of them separately.When these two analyzes (ABC and XYZ) arecombined, additional insights can be obtained aswell as the opportunities to act on specific groups ofitems through specific strategies for each of thecategories.Interpretation of such analysis is shown in the tablewith the ABC / XYZ cross analysis below – Figure 4:
  • Six Steps Inventory Optimization Antonio Zrilic24A B CX Very high share intotal value constant usage High reliability offorecast of demand Medium share intotal value constant usage High reliability offorecast of demand Low share in totalvalue constant usage High reliability offorecast ofdemandY Very high share intotal value neither constant norsporadic usage Medium reliabilityof forecast ofdemand Medium share intotal value neither constant norsporadic usage Medium reliabilityof forecast ofdemand Low share in totalvalue neither constantnor sporadicusage High reliability offorecast ofdemandZ Very high share intotal value Sporadic usage Low reliability offorecast of demand Medium share intotal value Sporadic usage Low reliability offorecast of demand Low share in totalvalue Sporadic usage Low reliability offorecast ofdemandFigure 4: Characteristics of the item categories under the ABC/XYZmatrixAX, AY and BX CategoryMaterials in group AX, AY and BX have a medium or alarge share in total values, stable consumption andmedium to high reliability of forecasting thedemand. This group accounts for a quite large shareof all items and it should be given adequateattention in order to achieve as favourablepurchasing prices as possible and supply with aslower inventories as possible. The AX group is
  • Six Steps Inventory Optimization Antonio Zrilic25particularly important because it has characteristicsof the A products (i.e. large share in turnover) and Xproducts by which it is easy to predict sale infuture. This group has a very high potential tooptimize inventories and their costs.AZ, BY and CX CategoryThe middle AZ, BY and CX group is quiteheterogeneous, both as regards the share in totalconsumption value and variations in sale. This groupshould be given a normal (average) attention and toorganize individual supply to meet customersdemand.BZ, CY and CZ CategoryBZ, CY, and CZ groups are given relatively littleattention, the needs are determined stochastically,i.e. from need to need and supply is realized fromown inventories.After this detailed analysis of inventories it is mucheasier to determine whether some inventories aretoo high, and perhaps others are too low. Then wecan, and in the following steps we will, go intodetermining the optimal or desired level ofinventories.Defining a strategy based on the ABC/XYZanalysisBy combining the ABC and XYZ analyses we get the
  • Six Steps Inventory Optimization Antonio Zrilic26results and groups of items that involve the commonfeatures of both analyzes. These commoncharacteristics can help us to define strategies forsale and procurement and inventory policy for eachgroup of items, according to their characteristics,specifics and needs.Using this combined analysis can provide you withthe improved availability of items, the basis formore efficient inventory management, reducingnumber of non-moving items, improving the deliveryschedules and for "shaking" the item range.In order to get more from the mentioned benefitsthe action in the four directions is recommended:1. Organization and strategy of procurement –identification of organizational measures forindividual categories of items2. Demand forecasting – Selection of appropriateforecasting method3. Inventory planning – Selection of appropriatemethod and procedure for inventory planning4. Shaking of the item range – Optimization ofproduct number1. Organization and procurement strategy As we noted earlier, the ABC / XYZ analysis givesyou a basis for implementation of specific actionsyou can take supported by the data supplied. Thefirst action that you can start relates to theorganizational measures and strategies that can be
  • Six Steps Inventory Optimization Antonio Zrilic37Second Step – InventoryManagement and Cash FlowBluesElimination of slow-movers or dead inventory is next stepaimed to achieve an optimal level of inventory.Analysis of the inventory turnover ratio will help us to doit. Two points are important in respect of slow-movers:Firstly, trying to get rid of them in every possible way(sell-off, write-off, etc.) so that they do not burdenyou in terms of cash-flow and space (Let’s call in mindthe example of a company that set its targets, but it didnot rid of slow-movers which hindered its sale).Secondly, introducing regular monitoring of these slow-movers in order to respond promptly to their repeatedoccurrence.What is the turnover ratio anyway?To measure whether some item is slow or fast-mover you can use turnover ratio. Generallyspeaking, the turnover ratio is an indicator ofefficiency at which a company uses its assets; itshows how many times in a given period, individualtypes of assets in a company are turned over. It canbe calculated for total business assets or for currentassets (which include inventory).The turnover ratio of working capital is obtained bydividing the sale value by the average working
  • Six Steps Inventory Optimization Antonio Zrilic38capital used in a business year. In addition to thesegeneral turn over ratios, partial ratios, i.e. ratiosshowing the turnover for certain types of workingcapital (in our case - inventory) are also used (asseen in Equation 2). The larger turnover ratio meansfaster turnover of the capital in the company (it ispossible to finance same volume of business withsmaller amount of working capital) and is generallyconsidered it has a positive impact on increase ofthe company’s efficiency.Thus, the turnover ratio should to be examined inevery stage of business. Taking into account that ahuge part of working capital is hidden and trappedin the inventory, the Inventory turnover ratio shouldalways be kept under control. For keeping it undercontrol, the 3-step plan from the next chaptershould be made and carried out): Determining thecriteria for slow-movers, Slow-movers analysis andRegular write-off.
  • Six Steps Inventory Optimization Antonio Zrilic42o Higher transport costs per unit - if you areordering more frequently and in smallerquantities in order to increase the turnoverratio it will increase transportation costs perunit of product.o Higher purchase cost per unit - the purchasecost of a product per unit will increase forsame reason as we mentioned in the previousparagraph.The inventory turnover ratio is an adequate measureof operating efficiency, when used for comparison.One should, of course, be aware that the high andlow turnover ratio is a relative term, which iscalculated for historical data and in relation to aspecific industry and is difficult to generalize andsay what ratio is optimal for you.3-step plan for increasing inventory turnoverSome companies analyze slow-movers once or twice ayear, while some do it every month. Optimal controlshould be conducted at least once in a quarter,however, the best- in- class companies do it once amonth or even more frequently. The essence is to do iton a regular basis. The following plan should be followedto achieve this:1. Determine criteria for slow-movers - What is theinventory turnover ratio (TR) which would besatisfying for your company? Is it 5, 10 or 20turnovers per year? I know some companies
  • Six Steps Inventory Optimization Antonio Zrilic49to be done and then quick action was takento resolve this issue. We are talking aboutthree hundred thousand U.S. dollars, whichshould be written off at the time when themarket was not exactly prospering, and thusstill further reduced profits.The point of the story about Pokémon and guttersand of the whole topic of slow-moving inventory isthat the slow-movers should be regularly analyzed,and regularly got rid of while they are still small.When they grow, it is much more difficult to get ridof them and the pain caused is much stronger.How to convert dead inventory into cash?So if youre looking at a build up of your deadinventory, and feel overwhelmed by the enormity ofit, in this chapter, we will introduce to you some ofthe ideas proposed by Ted Hurlbut, in his articleThe Challenge of Turning Dead Inventory into Cashand by Nick Bragg in his article Strategies for DeadStock, but also some other ideas of our own to helpyou in turning dead inventory into cash.1. Patience and persistence.You didnt get into this situation overnight, andyoure not going to get out of it overnight. Build upsof dead inventory are frequently accompanied by acash flow crunch, so the instinct to search for a
  • Six Steps Inventory Optimization Antonio Zrilic62Third Step - Diagnose BeforeYou PrescribeThe cause of death of dead inventoryInventory will not die just like that overnight. Inmost cases, causes of dead inventory are poorpurchasing decisions. However, you must know whatthe main causes are and how they could beimproved.Its hard to avoid piles of dead inventory if you haveno control over the purchasing process. Often, thethrill of increased growth, expansion into new areasand new products result in numerous items of deadinventory.When we talk about new products for which there isno historical experience to rely on, we use othermethods. Depending on the product category, it ispossible to take some of the products and test themon our key customers. If you get the blessing of thecustomer, then there is a good chance that theproduct will be successful.Even after a product review by the customer, thereis still a chance that the product will fail and stuckin dead inventory. So, before investing in a newproduct, you must provide and arrange withsuppliers that, if a particular product doesnt sell,
  • Six Steps Inventory Optimization Antonio Zrilic63you can return it with little or no cost. Withoutprior agreement (or contract) with suppliers, youwill much harder return the dead inventory.Wholesale distributors are a great resource for thepurchase of special items or products requested bya few customers. Manufacturers often have highorder minimums and with only a few customers whoneed these goods, the rest is converted into a deadinventory. Wholesales allow their customers to buyas many products as they need.Wholesalers to end customers and retailers allowlow inventory because they do not have to keep alot of SKUs.So, heres a tip: products with larger volumes are tobe purchased from the manufacturer and productswith smaller volumes from wholesalers. Thewholesalers will supply you on a daily or weeklybasis, so you dont have to carry more than twoweeks worth of inventory.Find out the Causes of Excessive InventoryWithout a doubt, poor inventory management is themost common cause of dead inventory and itincreases the problem of dead inventory in thedistribution and warehousing. When people arentpaying close and regular attention to the movementof their inventory, dead inventory occurs.
  • Six Steps Inventory Optimization Antonio Zrilic64Unfortunately, we must admit that most ofcompanies still dont have any software to trackinventory in the warehouse, or if they have it, theystill dont utilize it to its maximum potential. Themost important thing that companies need to learnis how to extract and manipulate data in theirwarehouse management software program.As we have already discussed in the section on deadinventory, one of the main tasks of the warehousestaff is to read regularly the inventory reportspaying close attention to the slow-movers (thosethat are sold poorly or not sold in the last 12months) in order to find out on time that they areconverting into "dead" inventory.These reports allow professionals responsible forinventory management to get ahead of the problem,i.e. to detect the first signs of a product losingfavour with customers and get rid of it. The worstthat can happen is that someone comes and buys aproduct from the list of "dead" inventory and youwill need to re-purchase it.Another tip. Thus, the power of a professional whodeals with inventory management is to detect deadinventory before they die, and to take proactiveand preventive actions in order to resolve them.
  • Six Steps Inventory Optimization Antonio Zrilic79Fourth Step - DeterminingInventory PolicyThe wolf is full and no sheep are missingDefining inventory policy is one of the mostimportant elements of inventory management. Thatis - determining the value of target inventory. Whatis target inventory? - I thought youd never ask ...Well, heres a short answer. It is the total amount ofinventory, with total value and structure sufficientto enable us carrying out our planned sales strategy,and still not having "excess fat”, i.e. costs thathinder us in these efforts. If you are not satisfiedwith this answer, you can find detailed and specificanswers hereinafter.Most small and medium-sized (but also a number oflarge) companies do not have a defined inventorypolicy, but they follow "Forest Gamp" policy: Weneed as much inventory as we need ... I have afriend who works as an assistant logistics director ina regional pharmaceutical company and isresponsible for all warehouses, inventory andproduction planning. In the first year of recession hewas often hold accountable by the management foroverstocking. He opposed saying: "OK, how do youknow we have excessive inventory? Firstly, suchinventory level we had last year, and nobody saidanything, and secondly, what the indicator orcriterion you use as the basis for your opinion we
  • Six Steps Inventory Optimization Antonio Zrilic80are overstocked, when you did not set any targets inthis regard." Of course they did not define anyindicators, but only estimated by "approximation"method that they had excessive inventory, becausethe revenues simply reduced and they realized thatit was too difficult to finance so many inventory andthat a part of cash was ‘frozen’ in them. The lessonof this story is that the inventory policy must bedefined so that we know at any time what ourposition is in relation to the goals we have set.Some companies define inventory policy somethinglike this: If our lead time is 20-30 days, then weshould hold in stock the inventory forapproximately 60-90 days... Good side of thisinventory policy is that you will find quite rare inthe stockout situation. However, negative side isthat you will definitely have excessive inventory andsooner or later the issue of optimization willemerge. Exactly this happened to one client, whonoticed that certain goods was too long in stock andslowly turns into slow-movers or even deadinventory. The inventory policy of the clientdescribed above is simply not sustainable because ittreats all the items equally and creates thepotential of future costs due to too much spaceoccupied by it, financing of excessive inventory,insolvency and write off the dead inventory.However, good news is that there are methods thatcan approach each category of items in anindividual way enabling to hold an exact inventory
  • Six Steps Inventory Optimization Antonio Zrilic81amount a particular product as needed, and thusachieving a win-win situation.Heres another example. Again frompharmaceutical industry: A large regionalpharmaceutical company had the inventory policy(as it is proper for a well organized company) whichdetermined they could have an average of 15inventory days (inventory days answer us thequestion: How many days on average is required toturn inventory into sales revenue? – Inventoryrelated indicators will be further discussed in StepSix). When it was acquired by other globalpharmaceutical company, the new owner introduceda new policy. And, what do you think – what thisinventory policy said? I am happy you asked that.You thought that the answer is eight inventory daysor so...? Wrong! Their new inventory policy saidthat they should have 30-45 inventory days. How’sthat? Didn’t they have to keep the same 15 days ifnot even reduce the number of inventory days?However, we all know that a policy is neither goodnor bad, but it simply reflects the current situationi.e. balance on the market and implements theplanned strategy. In this case the new owner had anew strategy for this market and he wanted toincrease sales, i.e. take an additional percentage ofthe market share from competition.Inventory policy is directly related to the level ofcustomer service. Therefore, the higher inventorylevel, the higher percentage of customers who can
  • Six Steps Inventory Optimization Antonio Zrilic82meet their needs. But the costs of their holding arealso higher. However, there is another catch. Thiscatch-22 says that the inventory level must notsimply identify with availability because theavailability depends not only on the level but alsoon the structure of inventory. It is also impossible tosatisfy customers in all 100 percent of cases,because it just costs too much. Therefore, in orderthe wolf (in this case, customer) is full, and nosheep (inventory) are missing (optimum), it isnecessary to determine the preferred inventorylevel consisting of the optimal inventory level foreach item according to the specific demand for suchitem.Inventory typesThe question now is how to determine the preferredoptimal inventory level? To answer this question, weshould first define the inventory structure,categories of inventories, and how much of eachcategory is actually needed. In fact, we can talkabout three types of inventory:1. Cycle inventory – is operating inventory tosatisfie demand for the product in the periodbetween two orders. Companies tend toproduce and to purchase in large lots in order togain the advantages that economie of scale canbring. The order size is determined by LeadTime average consumption, i.e. sales orconsumption during this period.2. Safety inventory – is necessary to cover the
  • Six Steps Inventory Optimization Antonio Zrilic84To obtain total optimal inventory it is necessary tocalculate the optimum for each of these inventorytypes.Inventory and StrategyThe question of all questions in determining theinventory policy is: What is our strategy? Thestrategy of a company determines what level of ourinventory should be. So, in case we want to have agood inventory policy we must have a definedbusiness strategy. In some cases, we can perhapshave inventory policy without clear strategy, butthen the inventory is not in function ofimplementing the strategy. In any case, in order todetermine the target inventory we need a strategyto match inventory policy.The second thing we need to know is what areinventory comprise of. In the previous section, thetypes comprising our inventory in the warehouse arepresented. We mentioned that they include safetyinventory, cycle and seasonal inventory. As the lastone (seasonal inventory) are not characteristic of allcompanies, we will concentrate on the two otherones - safety and cycle inventory that all companieshave or should have.The following formula can be used to determine thetarget inventory value+ Determining preferred service level
  • Six Steps Inventory Optimization Antonio Zrilic91How to optimize the safety inventoryAlthough safety inventory is relatively smallcompared to total inventory in stock (while cycleinventory can be quite high if lead time is long), itshould be borne in mind that safety inventory, bydefinition, are always in stock. In some way itmakes them fixed and not current assets because, inideal case, they are never used.Considering the above two elements that affect thelevel of safety inventory (preferred availability andvariations in demand), well balanced combination ofthese two factors can result in optimum level ofsafety inventory.If you now refer to the first step and the section onPareto rule and ABC analysis, you can say that ourABC analysis enables us optimization of inventory bycreating risk profiles for each group of materials (A,B and C). It means that it is not necessary to havethe same service level for all product categories. Itdoes matter what service level (meaning:availability of inventory) you will have forindividual items or group of items. Therefore, riskprofile should be determined for each category.
  • Six Steps Inventory Optimization Antonio Zrilic94percent AY. In combination with the strategyplanning and procurement AZ group will beprocessed manually anyway, and because of largefluctuations it does not make sense to go to highavailability because it would require too largesafety inventory, which is quite expensive, with riskthat the planned sales will not occur. Group ‘B’ isnow divided to 95 percent availability for BX, 90%for BY and 80% for BZ. Group ‘C’ is divided asfollows: 90% availability for CX, 80% for CY and 60percent availability for CZ.How to determine optimum inventoryIn previous sections two very important things ininventory management are elaborated, i.e. thecurrent status of inventory (the analysis of inventorystructure) and the preferred status of inventory(inventory policy). On the one side, we have anactual status (which depended on the past, eithergood or bad, decisions), on the other side we havethe preferred status (which will depend on ourfuture decisions, which should be based on thestrategy we are implementing). If the previous stepswere done properly, we basically get two points orfigures (representing the inventory value) and whatwe should do is to get from one point to other.The preferred inventory value is the sum of safetyinventory, which were calculated based on the pre-defined factors (preferred availability for eachcategory and/or a particular item, fluctuations in
  • Six Steps Inventory Optimization Antonio Zrilic99Fifth Step – Who Can Tamethe Inventory BeastWhen we talk about the responsibility for inventoryat the Inventory management- related workshopsand I ask who is responsible for inventory, no oneanswers and they look each other with surprise.Then I slightly rephrase the question and ask: "Well,who is to blame if there is not enough inventories orif there is excessive inventory?" Well, now itsclearer and they all know what we talk about.However, it is not always so easy to determine whoresponsible person is and who is the scapegoatwhatever happens (good or bad) with inventory. It isespecially difficult when there is a sharedresponsibility or, in other words, when they are allresponsible. Well, then, in fact no one is responsibleand such a situation should be avoided.Conflicting goalsA recent conversation I had in a reputable foodcompany is the best illustration of the situationdescribed above. At that meeting I was told aboutthe following: The biggest problem we have is todefine the responsibilities and conflict situationsarising from it. It is not debatable that theProcurement Department is responsible for the rawmaterials inventory (although production orders rawmaterials and packaging under standards), but for
  • Six Steps Inventory Optimization Antonio Zrilic107Sixth Step – Identifying andmonitoring inventory keyperformance indicators (KPI)Question: For some time I run a small tradefirm that was founded as a family enterprise.As soon as I took it over, I started, as a CEO,with the restructuring in terms of leadershipand management of people. Namely, in ourenterprise the question of adequateremuneration has always be skipped andpersonnel was given a fair salary comparedto similar jobs in other enterprises on themarket.Until now we did not have an adequatecomputer program to be able monitor someprocesses in a quality manner. The newsoftware is purchased, weve made decisionabout changes, and we already managed toimplement some recommendations onmeasuring the sales and customers, but weare still grouping in the dark in some areas.My question is whether you could help mewith a few recommendations on the ways ofmeasuring and assessing the warehouse and
  • Six Steps Inventory Optimization Antonio Zrilic113"Its not measurable!"Admit - youve certainly said these words at somepoint, when you discussed some goals or results thatwere quite immaterial and intangible, and you couldnot remember any measure at the moment. Thenyou took a deep breath: "Its not measurable!”.It might be a goal such as rising innovation orengagement of employees, or quality of customersatisfaction; or employees’ satisfaction andwillingness to change, or guidance, or futureviability, or... There are so many goals and resultsthat, at first glance, look immeasurable. However,do not give up so easily.Do not give up and so let the goal is not measuredat all. I admit that it is a great temptation, becauseanyway all agree with you that it is difficult tomeasure. Time is short anyway - you do not have allthe day to devise a measure for one goal. It isbetter to move to the next target to see if it iseasier to measure. But before you move on, youshould know that almost every organization is facedwith this challenge. The problem is not that yourgoal is not measurable, or that you have chosen thewrong goal from the beginning. In fact, the languageyou use to express your goal may not be specificenough.So, when someone says that something is notmeasurable and wants to move on to some other