“Best Practices” Inventory Management

1. Maximizing Profits and Staying in Business Forever How it Works “Best Practices” Inventory Management Taking a Closer Look Grant W. Howard 13214 Wallace Road Manchester, MI 48158 (734) 428-0529 ghoward685@aol.com

2. Day 1 - How it Works: • Company Objectives • Inventory Management Objectives • Inventory Management & Replenishment: • When to Replenish • What to Replenish and How Much • Other Things We Can’t Forget • Getting Better Results • Generating the Numbers • Summary Taking a Closer Look

3. Company ObjectivesThe Big Picture Profitability Growth Longevity Bottom Line Profits(P&L) GM and Oper. Efficiency Asset Management Customer Service & Retention Maintain the base Employee Happiness

4. Customer Service Availability (Fill Rates) Proper Backorder Handling On Time Delivery Accuracy: Item, Quantity, Price Profitability (ROI) GM Improvement (Sales and Cost) Freight Considerations - OC Analysis Efficiency & Asset Mgt: CtoC and CtoP Surplus Inventory & Safety Inventory Turns/Days supply, ROI/T&E/GMROI Inventory Management Objectives Watch the C to C (Warehousing, Handling, Obsol. & Shrink, Taxes, Ins, Interest) Watch the C to P (Purchasing/Replenishment, Receiving & Put-away, A/P)

5. Inventory Management & Replenishment

6. The Replenishment Model A Good Replenishment Model addresses the two objectives of Customer Service and Profitability When to Replenish? What to Replenish and How much? What is not needed?

7. EOQ Order Cycle Surplus Point PNA/Level Line Point or Max/EOQ Lead Time Order Point or Min Safety The Basics - Make Sure What is not Needed? What to Replenish and How Much? When to Replenish? When, What, How Much? What is not Needed?

8. When to Replenish Order Point

9. Sales/Transfer History Lost Sales Exceptional Sales Human input Demand/Usage Buckets Demand/Usage Seasonal? Method? Window Size? Paths?

10. Product Lead Times • Time to acquire items from source • Watch External vs. Internal • Seasonality Considerations • Normal “Worse” Case

11. Safety Stock • Extra stock carried in inventory to protect against reasonable variation in usage (demand) and/or lead time. • Safety stock turns zero times. It is a fixed asset. • Carrying inappropriate amounts of safety stock is one of the biggest factor in keeping inventory costs at unnecessarily high levels. • Safety is often needlessly used for the correction of “bad” data. With customers asking for higher and higher service levels, the cost of carrying safety stock is a big factor in total inventory cost. The cost of safety stock typically doubles when your service level increases from 90% to about 95%, again from 95% to 98%, and again from 98% to 99%. It doubles yet again in going from 99% to 99.2%. Yet most distributors apply broad generalizations and rules of thumb to determine how much safety stock they will carry.

12. Central Whse Supplier CW Point of Sale • Product stored at CW • Pulled or Pushed to Br. • Demand/Usage rolled up Understanding Replenishment and Paths Direct/Distributive Cross Dock Supplier Supplier Point of Sale Point of Sale CDC • Product ships directly to Br. • Don’t do it because everyone else is doing it, do it because it makes sense. • Use Order Cycle Days analysis • Negotiate lower mins and more drops • Most companies should use some combination of the above. • Proper ARP and Method Point of Sale • Product cross docked to Br. • “Need” is rolled up (i.e. multi P/O combining)

13. Average Monthly Usage (AMU): Usage Buckets Sales/Transfers Lost Sales Exceptional Sales Overrides/Human Usage Ctrl (UC) Average/Seasonal Number of Months Manual Trending Parameters Proper Path Lead Time (LT): Lead Time Buckets Lead Control (LC) Number of Receipts Not older than Manual Safety (SAF): Safety Control (SC) Percent/Days Manual Warning! How it All Works“When to Replenish (OP)”

14. What to Replenish & How Much Line Point & EOQ

15. Order/Review/Transfer Cycle • Concepts of OC/RC/XC: • Timing between transactions (Targets and/or C to P depts) • Creates LP which assures we replenish all products that are within the “cycle” of hitting their Minimum or Order Point • OC/RC/XC is calculated for product lines where a vendor target is the goal. It is how long it takes us to meet the target • OC/RC/XC is manually set for non-target lines and transfers, and it is the time between transactions based on C to P • Line Point is equal to Order Point plus usage during cycle In a Service Environment, Review Cycle does NOT mean we will review the line when that time frame expires

16. EOQ Total Cost 24 x Avg. Monthly Usage x Cost to Purchase (“R”eorder cost) Unit Cost x Cost to Carry (“K”eep cost) Cost Per Unit Ordered Cost to Carry (“K”eep Cost) C to C C to P Cost to Purchase (“R”eoder Cost ) 1. Not less than “x” weeks supply (1 week) 2. Not more than “x” weeks supply (1 year) Quantity Ordered Economic Order Quantity (EOQ) The EOQ formula minimizes the “Cost of Reordering or Purchasing” and the “Cost of Keeping or Carrying” which develops the lowest total hidden inventory costs - the lowest total inventory costs. The “How Much” decision affects your bottom line and service!

17. Usage Rate 1 Item Cost $100.00 Cost to Carry 24% Cost to Purchase $4.00 EOQ 2 $100 Month Usage, 2 Month Supply Usage Rate 100 Item Cost $1.00 Cost to Carry 24% Cost to Purchase $4.00 EOQ 200 $100 Month Usage, 2 Month Supply EOQ $Mth Usage Mth’s Supply $Inv $CtoC $CtoP M’s Sup (2.00CtoP) .01 200 (16.67 years)2.00 4.00 4.00 141 (11.75 years) .10 63 (5.25 years) 6.30 4.00 4.00 45 (3.75 years) 1 20 (1.67 years) 20 4.00 4.00 14.1 (1.18 years) 10 6.3 (189 days) 63 4.00 4.00 4.5 (135 days) 100 2 (60 days) 200 4.00 4.00 1.41 (42 days) 1,000 .63 (19 days) 630 4.00 4.00 .45 (13.5 days) 10,000 .2 (6 days) 2000 4.00 4.00 .141 (4.2 days) 100,000 .063 (1.9 days) 6,300 4.00 4.00 .045 (1.35 days) 1,000,000 .02 (.6 day)20,000 4.00 4.00 .014 (.42 day) $CtoC = $Inv x Month’s Supply x 1/2 x 2% (1/2 for Average Inventory, 2% Monthly CtoC) What about freight percentage and RC days?

18. “What” to Replenishment/Line Point: Replenishment Options: Line Buy (Make Target/Review Cycle) Fill In Transfer/Emergency Buy Do Nothing Replenish all items that will go BOP before the next replenishment cycle (Balance the Line) “How Much” to Replenish/Order Quantity: Up to Line Point/Remaining Cycle (Cycle Coverage - Freight/C to P) Compare to Suggested Order Quantity (EOQ/Class - CtoC and CtoP) Minimum Run Vendor/Transfer Package Rounding EOQ Order Cycle Surplus Point PNA/Level Line Point or Max/EOQ Lead Time Order Point or Min Safety What Items and How Much?

19. Review/Order/Transfer Cycle Days: Freight and Cost to Purchase/Transfer Considerations: Vendor Minimums Type: $, LBS, PCS, Cubes Target Internal/Manual - C to P Order Quantity: Cost to Carry and Cost to Purchase Considerations: EOQ: Cost to Carry (K cost) Cost to Purchase (R cost) Min and Max Weeks Supply Class: Break Points Minimum Runs Vendor/Transfer Pack How it All Works “What and How Much - LP/OQ/Pkg”

20. Other Things We Can’t Forget

21. How it All Works“Other Essential Items” • Status • Freeze • Usage Method • Weight/Cubes/Load Factors • Proper Replenishment Paths • Replenishment Method

22. How it All Works“Product Stock Level/PNA” Level/PNA = On Hand less Committed plus Incoming • On-hand accuracy everyday: • Systems &Tools, Processes & Procedures, Education & Understanding • Good Suggested/Cycle Count Program • Make the adjustments when you find them • Accurate committed and incoming everyday: • Paperfloat and Paperflow - Open Trans. Summary Report • Dates and Quantities • Watch the consignment warehouses • Use “Alternate Inventory” Buckets • DWIADT and DIRTFT

23. “When” to Replenish Fixed Interval - Timeframe or Target - Profits only (Watch for nothing BOP) Flexible Interval - Trigger Point (Order Point) - Service and Profits “What” to Replenish Replenishment Cycle (Line Point) Controls the frequency of P/O’s and Transfers This is the speed control (Frequency) Target and/or C to P driven “How Much” to Replenish Order Quantity Controls the quantity of items on P/O’s and Transfers This is the workload/spread (Amplitude) C to C, C to P and Freight driven EOQ Order Cycle Surplus Point PNA/Level Line Point or Max/EOQ Lead Time Order Point or Min Safety “When, What and How Much” What’s the Difference RC = 0; RC = 1 week OQ = 1 week; OQ=4 weeks RC = 1 week & OQ=1 week; RC = 1 week & OQ = 4 weeks

24. Profitability, Asset Management, and Efficiency Better Numbers Better Tools

25. Fix some things Improve some things Add some things 70 - 80% SKU Coverage to 80-95+% 15-25,000 SKU/Buyer to 40,000-100,000+ Hits and Ranking Usage Lead Time Safety Stock Order Point Adjusters Review Cycle Control Order Qty Control Getting Better Results

26. Ranking and Hits • Good Product Ranking is Critical for: • Parameter setting • Good exception reporting • Good analysis/priority reporting • Using Line Hits: • Hits: Sales, Transfers, Lost Sales, No Exc • Percentage and Set hits • New Items? • Frozen, OAN, DNR?

27. Sales/Transfer History Lost Sales Exceptional Sales Human input Demand/Usage Buckets Demand/Usage Seasonal? Method? Window Size? Paths?

28. Better Usage and AMU: Lost Sales/Exception Sales (Rifle approach) Usage Control Window by Rank Seasonal Trending and Advance by Lead time Transfer Usage History vs Roll up Improving Demand/Usage

29. Lost Sales & Exceptional SalesKey for Good Demand • Lost Sales = Qty Less Ship and B/O • Exceptional Sales is flagged by a “X” in the Tax Field Exceptional Sale

30. Lost Sales/Exceptional Sale

31. Usage/Demand Window • Seasonal or Non-seasonal - Correct Method • Usage/Demand Window: A 2-3 B 3-4 C 4-5 D 5-6 E 6 • Window size can help control season start/end

32. Same Period one year ago usage 100 J J A J J A Usage - Seasonal Trend % Seasonal Trend % = 150 = 1.5 or 150% 100 Previous 3 months usage 150

33. 90 Day Lead Time A M J J A S A Usage Seasonal LT Advance

34. Transfer Usage Concerns: Path exception (P/O or Transfer) Usage exception overrides on “Child” Changing Paths and rebuilds Follows each warehouse’s Usage Control Central Whse Supplier AMU=26 Dep=12 Total=36 CW AMU=12 Point of Sale • Product stored at CW • Pulled or Pushed to Br. • Demand/Usage rolled up Usage Roll Up

35. Product Lead Times • External vs. Internal Lead Times • Min and Max Lead Times • Number of Receipts & Age • Ignore Lead Time • Lead Time Exceptions • Lead Time Maintenance

36. Safety Stock • Safety Control by rank: • Safety Control Method by Lead times • Percentage or Days Safety LT < 14 Percent LT>60 A 7 50 30 B 10/7 75 45/30 C 14/7 100 60/30 D 21/7 125/0 75/30 E 0 0 0 What about Direct vs CW Child/Baby? • Safety to Available Analysis

37. Properly managed safety stock will result, over time, in this configuration of remaining stock levels at time of receiving the replenishment PO. Impossible task if done manually. Enhancement automates the monitoring. X = Actual stock available at time of receiving X X Safety Stock Level 75% X X X 50% X X X X 25% Stock out X X Safety Stock - Service and Turns

38. Order Point Adjusters • Threshold • Manually set minimum order point • Average Sales Quantity (ASQ) • Total usage for a defined period divided by the hits for that period • 5 - Hi • Average of 5 largest sales over a defined period (throw out the largest sale)

39. Average Sales Quantity (ASQ) Usage = 40 Lead-time = 7 Safety = 50% Order Point (ICAMM calc.) 15 Safety 5 0 S/O 4 Hits - ASQ = Order Point of 10 2 Hits - ASQ = Order Point of 20 Cost and Hits Considerations

40. Five High (5-Hi) Average of Larger Sales Quantities Order Quantities during period: 100 20 100 50 10 625 100 30 100 Five Largest Sales 100 100 625 100 100 400 Total 400/4 = 100 is the 5-Hi Ordering Point Costs and Hits Considerations

41. Review/Order Cycle Improvements: Based on Purchasing History or Extended AMU Min, Max and Exception Transfer Cycle Days OC/RC Analysis Order Quantity (EOQ) Improvements: Co, Whse, Pline, Product level Vendor and Transfer (Path) Min and Max Supply Calculate but do not use (SP) Use of Hits and “Smart” Item Ranking “Smart” Parameters and Controls EOQ EOQ Total Cost Order Cycle Surplus Point PNA/Level Cost Per Unit Ordered Line Point or Max/EOQ “K”eep Cost Lead Time “R”eoder Cost Order Point or Min Safety Quantity Ordered “Best Practices”Better Numbers - Line Point and OQ

42. Data, Set up, and Generating the Numbers It All Starts Here

43. BCC with Priority, Target & 1-Stop Data Parameters & Controls “Too Late” EOQ Order Cycle Surplus Point PNA/Level Line Point or Max/EOQ Lead Time Too Late Too Early Proactive Fixing Order Point or Min 0/- days 0-30 days 30/+ days “Too Early” Safety Out In Out Out Generate the Numbers OP, LP, EOQ Rank,AMU, Saf, RC, SP Surplus Monitoring and Measurement What is not needed? What needs to be replenished and how much? When to Replenish? The Numbers The Tools What is incoming and will be late? What is incoming and will be early or is not needed?

44. Parameters and Set-up • “Smart” Parameters Maintenance • Warehouse Maintenance • Product Line Maintenance • Product Maintenance At start up and as needed

45. Product Record Product Line Record Vendor Record Warehouse Record Company Record “Smart” Parameters Table Driven/Automated Depth Balanced

46. Data • Usage buckets: Sales, Transfers, Lost Sales, Exceptional Sales, Manual/Automated overrides • Lead Time buckets: P/Os, Transfers, Manual overrides • Purchasing History: Review Cycle Calculation Option • Purchasing Net Available: On-hand and open docs – Orders, Transfers, P/Os, Workorders

47. Generating the NumbersThe Forecast • Rank (Rank and Class) • Review/Order/Xfer Cycle • Usage, Safety, OP, LP, OQ • Exception Reporting* Monthly and as needed * Discussed With Maintenance Section

48. EOQ Order Cycle Surplus Point PNA/Level Line Point or Max/EOQ Lead Time Order Point or Min Safety The Results What is not Needed? What to Replenish and How Much? When to Replenish? When, What, How Much? What is not Needed?

49. Final Thoughts

50. Measurement Fill Rate, BO’s Turns, Excess, Mix T&E, GMROI Data to Info The Tools Data Usage - OE/WT Lead Time - PO/WT Level/PNA Info - OH & Paperfloat Purch Hist Replenishment Buyer’s Ctrl Center Items BOP/Priority The Numbers Hits/Ranking Order Cycle Ave Usage, Safety, OP, LP, Order Quantity Timeline Analysis Too Late Too Early Set-up “Smart” Set-up Co. and Whse. Product Pline Product Master Product Whse. Surplus Inventory External/Lng. Term Internal/St. Term Maintenance One Stop Inq/Maint Proofs/Mass Update Exc Control Center