Question: Signs of inventory problems

Frequent discrepancies that lead to expediting fees.

Cause: The most common sources of discrepancies are many: undisciplined inbound processing;
non-compliant labels or inadequate/non-standardized label formats; inadequate returns
processing; and lack of three-way matching.

Inadequate inbound processing

Cause: Aside from a disciplined workforce that properly accounts for inbound inventory, the
most common cause of inadequate inbound processing is lack of collaboration around purchase
orders (PO), including:

i. Use of software that doesn’t allow visibility to the status of shipments from suppliers

ii. Suppliers shipping against POs that have changed since initial issuance

iii. Inability for suppliers and their trading partners to “ping” each others’ ERP systems to
check PO status and update quantities

iv. Lack of package-level tracking, via Package Tracking Number (PTN) or Global Trade
Identification Number (GTIN).

Label systems are non-compliant, or irreconcilable with customer

Cause: Recording an ASN number can tally the total shipment, but you may have been delivered
only half of it in a split delivery. Discrepancies between the ASN quantity and the actual
shipment contents may go undetected, introducing inventory errors into your system. Label
compliance problems are generally caused by lack of sophistication or lack of compliance
incentives within your supplier base. Unless the suppliers have sophisticated IT programs for
shipping compliance, the cost of managing changing formats is often too much for them to bear.
They tend to focus only on customers representing a large portion of businesses, and ignore the
needs of lower-volume customers.
Inadequate returns process

Cause: It is common that returned products often have improper or inaccurate disposition codes
when they are placed back into inventory, if you do not have an adequate and accurate returns
process. The easiest process to put in place is to ensure that there are da
ta fields in your ERP to facilitate recording proper disposition of the inventory, e.g.
returned/available for re-sale, or returned/unavailable due to breakage, damaged, etc. Otherwise
inventory can end up on the shelf and not in your ERP system.

Lack of three-way matching

Cause: When disparate ERP systems can’t communicate with one another to automatically
reconcile discrepancies, or when companies’ internal business rules don’t force reconciliation
among packing slip + invoice + warehouse receipt + authorized purchase order, then completely
irreconcilable data records with glaring errors potentially go unexamined and worse, unresolved.

Question: Purchasing role in inventory management; inventory reduction.

Ten inventory Reduction Techniques (Cavinato)

1. Improve communications in the supply chain.

The supply chain is the network by which products and services are moved to the customer.
Historically there is duplicate safety stock (back up inventory) carried at each level of the supply
chain. By improving communications safety stock can be reduced without impacting customer
service. There are many tools that purchasing can use to foster better communication in the
supply chain. Two of these tools are:

o Electronic commerce- Exchange information throughout the supply chain

electronically. Purchasing can work with suppliers to establish  electronic links.
Information can also be passed electronically from  customers to suppliers.
 o In house supplier personnel- Another tactic purchasing can use to help
communication is to locate supplier personnel at different levels of your supply
chain. Some non-traditional ways the supplier can be involved are:

o Supplier personnel in house in your office to expedite orders and manage

schedules.

o Supplier systems personnel working with our retail locations to capture retail
sales.

o Suppliers help in selling and promoting products to increase sales.

2. Reduce supplier lead times.

Lead times have a direct impact on the amount of inventory that is carried. The shorter the lead-
time, the less backup stock that needs to be carried. Lead times consists of as much as 95% of
idle time and 5% of actual production time needed to make the product. The challenge for
purchasing is to work with suppliers to reduce the idle time. These are steps to take to reduce
supplier lead times:

o Track and measure lead times - Measure how long it takes for each step of the
supply chains. Track supplier lead times, inbound transportation time,  transport
time to the customer, manufacturing lead times and distribution  cycle times.
Recognize which suppliers and which commodities have the  longest lead times
and start with these.

o Negotiate lower lead times - The buyer must challenge supplier lead times.  Ask
for a break down of the components of the lead-time. Compare one  supplier lead-
time to others. Challenge the supplier to reduce his idle  time. For some products
utilizing distributors is another method to  reduce lead times.

3. Standardize.
Purchasing should work with suppliers to reduce the number of items carried. The number of
parts can be reduced by:

o Substitute for standard parts

o Consolidate common part numbers

Fewer items with greater quantities makes forecasting more accurate. The lower the number of
items to buy means less safety stock is needed and inventory is lowered. By standardizing the
buyer will also: lower costs, lower process costs and often have less quality problems.

4. Reduce surplus/obsolete inventory.

Surplus or obsolete inventory can be reduced without risk to customer service. Purchasing should
be active members of the committee to review and dispose of surplus. The following are methods
that can be used to dispose of surplus or obsolete inventory:

o Use it elsewhere within your firm.

o Negotiate to return it to the supplier.

o Sell the inventory to other companies

o Promote and sell at a discounted price to customers.

o Donate the inventory to a local charity.

o As a last resort scrap the parts.

5. Improve supplier quality.

Poor supplier quality will result in added costs in many areas including additional inventory as
well as the cost of rejections, rework, warranty, inspection and excessive expediting. The
challenge for purchasing is to select suppliers with superior quality. The buyer should be
involved in the supplier quality audit process or push the supplier to become ISO certified. When
suppliers have quality problems, the buyer should initiate a corrective action plan and make sure
it is followed. By improving supplier quality the amount of safety stock inventory can be
reduced.

6. Challenge MOQ's and price quantity breaks.

Supplier minimum order quantities and price quantity breaks can cause surplus inventory.
Suppliers require MOQ's or quantity price breaks to compensate for their costs of setting up a
job. The goal is to work with supplier to reduce set-ups. Another option is to propose an annual
commitment agreement with the supplier so he can build the entire MOQ, but agrees to hold the
inventory and ship it in small quantities.

Have parts delivered more frequently.

The more often a part is delivered the lower the investment in inventory. The chart below
displays how increasing the order frequency of your high volume, A and B class items, will
reduce your average weeks supply of inventory from 3.7 weeks to 1.9 weeks.

Class Frequency Ave. Inventory New Frequency New Ave. Inventory

A Monthly 2 weeks Weekly .5 weeks

B Quarterly 6 weeks Monthly 2 weeks

C 6 Months 24 weeks 6 Months 24 weeks

Average Inventory 3.7 weeks 1.9 weeks

The cost of ordering and receiving. For most companies the correct strategy in to increase the
order frequency of the high dollar "A" items only.

7. Improve on time delivery.

One of the reasons that extra inventory is carried is to compensate for suppliers who can't be
counted on to deliver on time. Recent surveys of purchasing professionals indicate that the
average on time delivery percentage is about 70%. With such poor delivery performance, our
choices are either: 1) carry great amounts of safety stock, or 2) drain purchasing manpower by
expediting parts to keep the production line going. Either choice adds costs to our operations.
The following are steps the buyer can take to improve supplier delivery:

o If you don't measure on-time delivery, you won't improve it -There are many
different methods to measure on-time delivery. The method you select  doesn't
matter as long as supplier on-time performance is tracked.

o Make sure the supplier understands - Talk to suppliers and make sure they  are
aware how you measure their delivery performance. Some of the items  to clarify
include: the window used, ship date or receipt date, how  calculated and how
short-lead-time orders are counted.

o Set supplier goals- Set on-time delivery goals with supplier. Make delivery  one
of the key measures in your supplier rating program.

o Reward superior performance - Recognize supplier who achieve their on-time

goals. Give annual awards for suppliers who exhibit world class  performance.

8. Set up a supplier managed inventory program.

Purchasing has the opportunity with work with key suppliers to develop a program to manage
and hold inventory for you. The idea is to reduce the amount of total inventory not just transfer
inventory to the supplier. There are many popular programs used today including:

o Vendor managed inventory (VMI) - The supplier performs the inventory function
for the customer.

o Point of sale (POS) - The supplier reacts to customer demand and replenishes the
inventory level.

o Consignment stocking - The supplier owns the inventory when it is in your

facility. Payment is made when the inventory is used.

Supplier stocking - The supplier carries safety stock and ships Just-in-Time.

9. Give credit for inventory reduction.

Inventory reduction has a direct impact to your company's financial success. Recognize the
importance of inventory reduction by:

o Get everyone involved - Teach the impact inventory has on the bottom line.  Form
a team to focus on inventory reduction projects. Get suppliers,  engineering,
manufacturing, finance, and marketing involved in the team.

o Count inventory reduction as a cost reduction - In many companies, inventory

reduction is not counted as a cost reduction. Inventory reduction is  important and
should be recognized as a cost reduction.

Summary

Purchasing can make a major impact on the amount of inventory invested. The Japanese have
taught us well that it is evil to tie up cash in inventory. Every dollar saved in inventory has a
direct impact to the bottom line profits of our companies. Use these ten inventory management
techniques to save your company money:

 Work with suppliers to improve communications in the supply chain.

 Negotiate lower lead times with suppliers.

 Reduce the number of part numbers carried.

 Find ways to reduce surplus and obsolete inventory.

 Improve supplier's quality to reduce costs.

 Challenge and reduce minimum order quantities and price quantity breaks.

 Have high impact parts delivered more frequently.

 Improve suppliers on time delivery performance.

 Set up a supplier managed inventory program.

 Take credit and track your efforts to reduce inventory.

REFERENCE

Cavinato, Jo.,& Kauffman, Ralph G., Purchasing Handbook Sixth Edition, New York: McGraw-
Hill, 2000, Chapter 26 "Inventory Management" , edited by Miller, Mark S.

Question: Operation research tools in inventory management.

Distribution System Optimization

What is the optimal number of warehouses, trucks and routes to minimize out-of-stocks, or
minimize distribution costs or maximize delivery speeds? Where should the warehouses be
located? What are the most efficient delivery routes? What size should the trucks be? How
should the products be packaged and palletized for most efficient shipping?

Retail Site Selection Optimization

Which markets offer the greatest potential for new retail outlets? What store density maximizes
sales revenue or profits? What’s the interaction between advertising investments and number of
retail units? What sections of a metropolitan area offer the greatest potential for new retail units?
What specific retail locations will yield the greatest return on investment? What deployment of
retail units minimizes supply chain and distribution costs?

Store Design Optimization

What type of store design will maximize consumer visits, time spent in store, or sales? What
elements of store design are most important to consumers, and what arrangements of these
elements are optimal? How should store design vary to maximize appeal to a particular
demographic target or for a given location? What product mix corresponds to and supports the
optimal store design?

Store Merchandise Optimization

What is the optimal mix of merchandise in a given store to maximize sales or profits? How
should this optimal mix vary across different types of geographic areas and demographic groups?
How should this product mix vary throughout the business cycle? What are the optimal
marketing elements to support the optimal merchandise mix?

Retail Category Optimization

There are many categories of products within a retail store. Retailers often strive to maximize
sales within each category. What is the optimal mix of brands, sizes, and facings to increase
category sales? Will optimization of one category negatively affect other categories? How can
product categories be optimized without hurting overall store sales?

Supply Chain Optimization

What’s the optimal way to manage the flow of raw materials, components, and supplies from
various vendors to the manufacturer, under conditions of varying and uncertain demand?

Manufacturing/Production Optimization
What organization, machines, processes, and work flows will maximize quality, minimize costs,
and maximize output? Optimizing manufacturing processes must be closely integrated with
optimization of the related supply chain and distribution system.

Network Optimization

How should airports be designed to handle luggage and passenger flow? How should traffic
lights be organized and timed to maximize traffic flow? What is the optimal design of an
electrical grid or a communications network?

Transportation Optimization

What route structure minimizes the number of trucks, railcars, or school buses needed to achieve
a certain service threshold or minimizes waiting times? Which common carriers provide the most
efficient distribution services for a particular business? How should these transportation
solutions vary as conditions change (weather, time of day, traffic density, etc.)?

Scheduling Optimization

What type of schedule or scheduling system will yield the greatest revenue, minimize costs,
reduce delivery times, or meet other objectives? How should scheduling change as conditions
and the business environment change?

Strategy Optimization
What markets, technologies, systems and processes, products and services, and positioning and
messages will achieve the greatest long-term success for a given brand, business unit, or
corporation? That is, what is the optimal business model for a given company in a given
industry?

Trading and Markets Optimization

Some problems can be addressed via artificial markets (e.g., “cap and trade”) wherein interested
parties bid against each other and trade with each other. What is the optimal way to build such a
market, and how can the results be evaluated and understood?