Inventory Management Using Plan, Do, Check, Act

Doug Howardell
San Gabriel Valley Chapter

Session Overview
PDCA Explained Definition and Importance of Inventory Management The Plan, Do, Check, Act Cycle Applied to Inventory Management Inventory Management Using the Inventory Quality Ratio Case study results Summary

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

PDCA Explained
Plan Define the desired condition Measure the current condition Set improvement targets Do Take corrective action Check Track progress to target Act Identify root cause & correct

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Defining Inventory Management

management : The organizational process that includes strategic planning, setting objectives, planning directing resources, deploying the human and financial assets needed to achieve objectives, and measuring 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 Important?

It takes cash capital to produce or acquire inventory That 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]

Importance of Business Benefits of Supply Chain Management

Increased Inventory Turns Decreased Carrying Costs
Reduction in Cycle Times Improved Fill Rate ATP to Customers Transportation Costs Warehouse Operating Costs Reducing Mfg. Overhead Plant Utilization Manufacturing Cycle Times Collaboration

72% 67% 62% 59% 58% 49% 44% 40% 44% 43% 33%
AMR Research

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Why is Getting the Right Level of Inventory Hard?

Major Reasons
We have too much inventory to begin with We dont react to changes in demand soon enough Our inventory systems and metrics are backward looking turns not demand driven Our ABC classifications are out of date Our order quantities and safety stocks are based on past usage We are still planning part quantities, rather than managing inventory dollars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?

2008 Conference Responses
Not sure what an ABC analysis is Dont do ABC inventory analysis Use ABC for cycle counting only Use ABC for managing inventory levels (days-on-hand, order quantities,etc.) Use for both cycle counting and active inventory management Over half use ABCs to manage inventory 33% 21% 3% 15% 29%

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

What is your ABC based on?

2008 Conference Responses
Unit cost Inventory quantities Current inventory dollars Past usage dollars (last 12 months) Future demand dollars Other Not sure Only 11% are forward looking 14% 12% 13% 36% 11% 10% 5%

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Inventory Management Using PDCA

Plan Define the desired amount of inventory Measure the current amount of inventory Set inventory improvement targets Do Take steps to reduce inventory Check Track progress to target Act Identify root cause of high inventory levels & correct

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Inv Mgt thru Inventory Quality Ratio

aggregate 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 Ratio

Metric, Methodology & Tool
Top-down focus on inventory dollars Works with your current systems Enhances any MRP/ERP/SCM system No additional data entry required Gives planners and buyers the information they need to free-up working capital

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

IQR Inventory Analysis

Value Time Usage History

Copyright 2008 Doug Howardell

Today

Future Demand

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IQR Inventory Analysis

400K

Value

300K

GHI

DEF

ABC

200K

100K

Time

-12

-6

-3

Today

Usage History
Copyright 2008 Doug Howardell

Future Demand
626-390-6935 [email protected]

IQR Inventory Analysis

400K

Value

300K

GHI

DEF

ABC
Rule

200K

100K

Time

-12

-6

-3

Today

Usage History
Copyright 2008 Doug Howardell

Future Demand
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IQR Inventory Analysis

400K

Value

300K

200K

Part no. 1-1 Class D

100K

Time

-12

-6

-3

Today

Usage History
Copyright 2008 Doug Howardell

Future Demand
626-390-6935 [email protected]

Rule

IQR Inventory Analysis

400K

Value

300K

200K

A1
100K

A1
Time
-12 -6 -3

Today

Usage History
Copyright 2008 Doug Howardell

Future Demand
626-390-6935 [email protected]

Rule

E1

IQR Inventory Analysis

400K

E2 E2 A1 A2 A2
Today
1 2 3

Value

300K

200K

100K

A1
Time
-12 -6 -3

Usage History
Copyright 2008 Doug Howardell

Future Demand
626-390-6935 [email protected]

Rule

E1

Part No 2-2 Class A

E2

IQR Inventory Analysis

400K

E2 E2 E1 A1 A1 E2 A2 A2
Today
1 2 3

Value

300K

200K

E3
Part No. 3 -3 Class A

E3 E3

100K

Time

-12

-6

-3

Usage History
Copyright 2008 Doug Howardell

Future Demand
626-390-6935 [email protected]

IQR Inventory Analysis

400K

E2 E2 E1
SM

Value

300K

200K

E2 A2 A2
Today
1 2 3

E3 E3 E3

A1 A1
-6 -3

100K

SM
Time
-12

Usage History
Copyright 2008 Doug Howardell

Future Demand
626-390-6935 [email protected]

IQR Inventory Analysis

400K

E2 E2 E1
SM

Value

300K

200K

E2 A2 A2
Today
1 2 3

E3 E3 E3

A1 A1
-6 -3

100K

NM SM
Time
-12

Usage History
Copyright 2008 Doug Howardell

Future Demand
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Inventory Quality Ratio Metric

IQR =
Active Inventory Dollars Total Inventory Dollars

Active inventory = Material you need now Total inventory = Active inventory plus all the other stuff you
have on hand

Perfect IQR = 100%

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

IQR Calculation
IQR = IQR = IQR =
Inventory Value
400K

A1 + A2 A1 + A2 + E1 + E2 + E3 + SM + NM 200k + 200k 200k+200k+100k+300k+200k+200k+100k

31%
E2 E2 E1
SM
100K

300K

200K

E2 A2 A2
Today
1 2 3

A1 A1
-6 -3

E3 E3

NM SM
-12

Usage History

Time

Future Demand

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Measuring Inventory Performance

Inventory Turns is the traditional measure

Current Inventory Cost of Goods Sold for the past 12 months

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Problems 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 causes Inventory 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 Metric

Quick Look Actionable Information

Copyright 2008 Doug Howardell

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Example of IQR Metric

Note that inventory is displayed in the IQR categories in terms of dollars, not pieces The IQR metric is 39.2%

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Example of IQR Actionable Information

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

Copyright 2008 Doug Howardell

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Actionable 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 Methodology
Plan
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]

Examples of IQR Method

Plan 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 Set the Rules & Targets

Set 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 Inventory

Work the parts with the highest excess first Drill 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 Inventory

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

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Check Progress
Two types of progress reports, a snapshot and trend chart

Copyright 2008 Doug Howardell

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Act 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 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 Ratio

Provides A Dollar Focus
Inventory Value
400K

E2 E2 E1
SM

300K

200K

E2 A2 A2
Today
1 2 3

A1 A1
-6 -3

E3 E3

100K

NM SM
-12

Usage History

Time

Future Demand

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Inventory Quality Ratio

Measures Inventory Performance Based on Future Requirements
Inventory Value
400K

E2 E2 E1
SM

300K

200K

E2 A2 A2
Today
1 2 3

A1 A1
-6 -3

E3 E3

100K

NM SM
-12

Usage History

Time

Future Demand

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Inventory Quality Ratio

Dynamically Calculates A B C Classes
80155 G H I 80155 D E F 80 15 5 A B C
Inventory Value
400K

E2 E2 E1
SM

300K

200K

E2 A2 A2
Today
1 2 3

A1 A1
-6 -3

E3 E3

100K

NM SM
-12

Usage History

Time

Future Demand

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

First Year Results

80000 70000 60000 50000 40000 30000 20000 10000 0

Pharmaceutical Company

22% Overall Inventory Reduction & 46% Excess Reduction

Total Inventory by IQR Category
80000 70000 60000 50000
Active 1

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

40000 30000 20000 10000 0

Active 2 Excess 1 Excess 2 Excess 3 Slow Moving No Moving

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Results - Inventory Dollars and IQR

Purchased Parts by Category and IQR Performance
12,000 50 45 10,000 Active Excess SM+NM IQR% 40

Inventory Dollars ($1000)

35 30

8,000

6,000

25

20 4,000 15

10 2,000 5

0 0 1 2 3 4 5 6 7 8 9

Months After Implementation

Lucent Technologies & GTE

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Inventory Quality Ratio (%)

Inventory Analysis at Any Level

Corporate

Division A

Plant 1 -- Oracle

Plant 2 -- SAP

VP Supply Chain

Business Units

Materials Director

Finance

Planning Mgr Make Parts

Purchasing Mgr Buy Parts

Planner A

Planner B

Planner C

Buyer D

Buyer E

Buyer F

Products

Contracts

Suppliers

Commodity

Copyright 2008 Doug Howardell

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Inventory Analysis at Any Level

Product Team 1

Product Team 2

Product Team 3

Copyright 2008 Doug Howardell

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First Year Results

Electronics Company

18% reduction in 5 months & 32% reduction in 12 months

All Teams Combined 3/29/2009

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Typical 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 Environments
Manufacturing companies
material planners buyers production schedulers operations management financial management

Distribution and logistics Utilities and MRO stores Management consultants

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Use of IQR is Spreading

Airtechnics Alcatel Allergan Medical American Capital Andrew Corporation Armstrong ArvinMeritor Avery Dennison Banner Pharmacaps Beckman Coulter Binney & Smith Black & Decker Bosch Corporation Boston Scientific Bunn-O-Matic Corp Carrier Corporation Cummins Inc. Dana Corporation Dialogic - Intel Corp. Dow Chemical Dr Pepper Snapple Eastman Chemical Engenio - LSI Logic ERICO Incorporated Esterline Corporation Hendrickson Intl Hope Global HunterDouglas Hyundai Johnson & Johnson Kinetic Concepts Korry Electronics Kohler Companies Krebs Engineers LuK Automotive Motorola Natures Way Newell-Rubbermaid Oakley Ocean Cuisine Pfizer - Pharmacia Rheem Manufacturing Sanford Corporation Schering-Plough Schlumberger Sikorsky Aircraft SP Richards Company Telex Communications Tighe Industries Tyco Electronics Unilever Bestfoods Valmont Industries Vita-Tech International Wellman Products Wenger Corporation Woodward Governor Yamaha Corporation

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Summary
Inventory systems are backward looking Future demand is better than past usage IQR is a metric, a method and a tool IQR logic is demand-driven & dollar-focused Keys 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 easier Improves turns, cash flow and profits!

Copyright 2008 Doug Howardell

626-390-6935 [email protected]

Thanks for attending! 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

Copyright 2008 Doug Howardell

626-390-6935 [email protected]