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Blog, Inventory Management, Logistic, Supply Chain

Who’s pulling the weight

August 02nd, 2010

In more than 80% of organizations, management of min-max is left in the hands of managers who are often caught between a rock and a hard place. On the one hand the sales people operations and maintenance all strive to ensure they do not encounter any shortages. On the other hand, the finance people, bankers and shareholders are all concerned about the money tied up in inventory.
Inventories are manually adjusted in response to the company’s crises. If a major customer encountered a stock shortage, the min-max are increased. At quarter end finance people want the inventory as low as possible. Procurement is stopped and the min-max are reduced.

The “Miracle Department” reacts again and corrects the situation. The expectations of the organization are extremely high towards the inventory management department. It is expected that these individuals manually adjust min-max for 15,000 to 35,000 items without making any mistakes. They must consider seasonality as well as upward or downward demand trends. They know when an item, used twice a year, will be requested next.

A recipient of a master’s degree in Operations Research, I have over 30 years of experience and am recognized as a leader in Quebec in Inventory Management. However, even with my experience, I do not have the capability to manage 35,000 items and to manually determine the optimal min-max.

The good news is that inventory management is now a science. There are formulas and calculations which allow optimizing inventory management and automatically and dynamically setting (with automatic and computerized revisions at month-end) the min-max in order to achieve the organizational objectives of service while minimizing inventories. Min-max that are managed using this approach usually increase the overall rate of availability of parts or items with 25% to 50% less inventory.

Another positive point is that inventory management is also an art. The machine does not know everything. A good inventory management system will notify managers it is time to adjust a min-max when:
- there are sudden changes in the pattern of consumption;
- a new item has now enough history to use the automatic mode;
- the system has difficulty in establishing reliable consumption forecasts for a given item;
- there is an open order to the supplier for an item in surplus (a customer order might have been canceled, stock might have been returned from another customer or for any other valid reason);
- an item has not been consumed for six months;
- the calculated min-max for the coming month is quite different from the previous min-max;
- or for any other defined signal.

Put a talented and artistic inventory manager in command of a good scientific system and you will obtain the perfect balance for managing inventory. It’s a thousand times more effective!

Robert Lamarre

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Blog, Economic, Inventory Management, Logistic

Inventory management and health

June 29th, 2010

The AQLASS conference held last week brought together Supply Chain professionals from Quebec’s health care sector. The challenges of inventory management are important. Most managers have few tools to manage the services offered to the users based on the availability of their inventory. Supply chain leaders must manually review the Min and Max for thousands of items to prevent shortages and provide excellent service. Obviously, this is accomplished with much higher inventory levels than necessary. Nevertheless, they still face shortages.

The ABC classification of their items is not frequently used.  Few tools are used to manage the delivery lead time.

There is no forecasting tool to predict future needs.

Communication with health-care units to determine what should be kept in inventory is still the only form of forecasting. However, there are ways to automating and optimizing the inventory management. Health care institutions in the United States have an edge over in this field.

It was significant to see more than 300 Supply Chain professionals of the health care sector meet and, among other things, discuss how they could improve inventory management in our institutions. There is money to save, but more importantly, the institutions are seeking greater control of their service levels and on the availability of the medical supplies.

We were proud to be invited and participate at this major event and which will undoubtedly have positive repercussions for the Quebec’s health institutions.

Robert Lamarre

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Inventory optimization and customer service (part 2)

June 21st, 2010

Among key indicators of a company’s dashboard, the higher management must determine its customer service objectives by class and/or by family of products.  These service objectives are part and parcel of the strategic data that sets your business apart.

Service wise, these objectives will take into account customer needs and the market positioning desired by the company in terms of service as well as its capacity to invest in its inventory to reach its goals.

It must be noted that the higher the service objectives are, the more the inventory level must be increased to guarantee the level of service.  The proper software can assist the company in linking its service objectives with the inventory required.

A trustworthy computer system dealing in inventory management should compute efficiently the parameters of inventory management in relation to the service objectives.  A good system will establish the level of buffer stock required in relation to the optimal service desired by the company.  The buffer stock should normally also take into account delivery schedules as well as the forecast of the demand or demand variability.

To achieve a sustainable level of service, it is imperative to establish variables such as the minimums and maximums on hand that will not only be dynamic but also correlate with the desired service goals.

Interestingly, there are companies today that offer services that provide dynamic calculations of the parameters of inventory management that consist in updating the Min Max according to the service objectives sought by way of dashboards, via the WEB, through a set of indicators that follow the evolution of inventory management.  The IMAFS system also offers exception reports on a pay-as-you-go basis for inventory management.  It is undeniable that an inventory management system will increase a company’s profitability, thus guaranteeing a return on its investment.

In conclusion, we have a better understanding of how inventory management and optimization of customer service go hand in hand.

Robert Lamarre

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Inventory optimization = better service and more sales (part 1)

June 15th, 2010

When maintaining an inventory, the first goal of any company is to service its clients adequately through sufficient stocking of its inventory.  An ideal scenario would consist of clients willing to wait it out to meet their needs and companies could thus operate with a zero stock inventory.

However, the reality is that companies function on a tightrope and expect their suppliers to fulfill their stock requirements faster than the supplier itself can from its own sources.  Customer satisfaction becomes the main goal in maintaining inventories.

This observation brings to mind that it is essential to be fully aware of customer service issues if an optimal inventory is to be maintained.  One of the most commonly used methods to evaluate customer service consists of drawing up the ratio of customer orders delivered on time versus the total quantity required by the client in relation to the number of lines on all its orders.

It is surprising to learn that most companies have difficulty in establishing this guideline.  Many computer systems, including some reputable ERPs, are not helpful in this regard.  Also, a number of administrators have not understood the importance of this measure that greatly accounts for their customers’ satisfaction.  Another challenge for administrations is the recordkeeping of their lost sales.  The client that checks stock availability but does not place a backorder request is as important as the customer that accepts a late delivery.

A certain discipline is required to maintain records of lost sales especially when clients have Internet access to stock availability.  Stock levels are checked online but no orders are placed.  Some companies have developed ways of assessing these stock inquiries and classify them as lost sales.  This procedure is ideal for establishing service levels.

When a company’s service level is unknown and no tools are in place to assess it, it can resort to a simple procedure for evaluation purposes.  First, a snapshot of the inventory in hand is necessary.  Afterwards, for the items that have no stock when the snapshot was taken (excluding seasonal items, obsolete or no stock), a compilation of the number of requests for these no-stock items during the previous year is performed (note that it is the number of requests and not the total quantity requested).  We establish the proportion between the number of requests for no-stock items in relation to the snapshot versus the total quantity of requests during the year and we obtain the estimated service rate.

One could even go further by measuring the level of service according to the ABC classification of the items or by family of items.

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