Three Techniques to Reduce Your Inventory Mark K. Williams, CFPIM, CSCP QAD Supply Chain Solutions Center QAD Explore 2012

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3 Why is reducing inventory so hard? Eliminating obsolete inventory Using ABC analysis Implementing cycle counting Questions Agenda Three Techniques to Reduce Your Inventory

4 Why Is Reducing Inventory So Hard? Three Techniques to Reduce Your Inventory

Improve productivity Improve customer service Reduce inventory investment The Conflicts Three Techniques to Reduce Your Inventory Finance (Low Capital Usage) Customer Service (Many Parts--Always Available) Productivity (Long Runs--Few Parts) 5

Cost of Capital % Warehouse space2 - 5% Obsolescence and shrinkage4 - 6% Insurance1 - 5% Material Handling1 - 2% Taxes2 - 3% Total Annual Costs % Inventory Costs Add Up! Three Techniques to Reduce Your Inventory 6

Cost of Capital$100,000 – 150,000 Warehouse space$20,000 – 50,000 Obsolescence and shrinkage$40,000 – 60,000 Insurance$10,000 – 50,000 Material Handling$10,000 – 20,000 Taxes$20,000 – 30,000 Total Annual Costs$200,000 – 360,000 For Every Million Dollars of Inventory Three Techniques to Reduce Your Inventory 7

8 Finding & Eliminating Obsolete Inventory Three Techniques to Reduce Your Inventory

Not purchased or used in 6 – 24 months? Not in sales catalog? Not in any bill of material? Spare part for a machine sold last year? Aged Inventory Three Techniques to Reduce Your Inventory Cost of carrying aged inventory $3,000,000 x 10% = $300,000 $300,000 x 33% = $100,000 9

Part #On HandLast UsedCost /5/2007$ /18/2009$5,763, ,9655/03/2009$132, ,8998/29/2009$72, /15/2009$8, /27/2010$730, /03/2010$ ,4115/19/2010$62,311 Finding Aged Inventory Three Techniques to Reduce Your Inventory 10

How Long Will the Inventory Last? Three Techniques to Reduce Your Inventory 11

1.Verify inventory is truly aged and/or excess 2.Discount it to a special customer 3.Sell it on promotion 4.Sell it to a sister company 5.Return to supplier – pay restocking fee 6.Sell to company that handles distressed merchandise 7.Throw away & take the tax break 7 Steps to Dispose of Aged Inventory Three Techniques to Reduce Your Inventory 12

13 Using ABC Inventory Management Three Techniques to Reduce Your Inventory

First noted by Pareto A items -20% of items = 80% of usage B items -30% of items = 15% of usage C items -50% of items = 5% of usage ABC Inventory Management Three Techniques to Reduce Your Inventory 14

What a Difference ABC Makes Three Techniques to Reduce Your Inventory 15

What a Difference ABC Makes Three Techniques to Reduce Your Inventory ABC method yields a 35% decrease in inventory ! 16

A Customers -Top 15% - 25% that generate 60% - 85% of revenue -Try to obtain future purchase requirements -Work closely on promotional planning B Customers -Next 20%-40%, 10%-20% of revenue -Standard service C Customers -Bottom 50% of customers, 5%-10% of revenue -During times of a shortage, they bear the brunt ABC Customer Segmentation Three Techniques to Reduce Your Inventory 17

A Suppliers -Top 15% - 25% of suppliers, 60% - 85% of spend -Share future purchase requirements -Work to reduce lead times B Suppliers -Next 20%-40% of suppliers, 10%-20% of spend -Standard treatment C Suppliers -Bottom 50% of suppliers, 5%-10% of spend -Try to consolidate ABC Supplier Segmentation Three Techniques to Reduce Your Inventory 18

19 Implementing Cycle Counting Three Techniques to Reduce Your Inventory

20 The efficient use of a few experienced people continuously throughout the year results in: Timely detection and correction of causes of errors Fewer mistakes in item identification Minimum loss of productive time Advantages of Cycle Counting Three Techniques to Reduce Your Inventory

Flowcharting Control group counting Establishment of initial balances Determining count frequency 4 Phases of Implementing Cycle Counting Three Techniques to Reduce Your Inventory 21

Flowchart Your Process Three Techniques to Reduce Your Inventory 22

23 Flowchart Your Process Three Techniques to Reduce Your Inventory

Select of your highest velocity items Assure complete synchronization between shelf count and perpetual inventory Count items each day Investigate every inconsistency Change procedures to eliminate problems Train individuals to execute new procedures Continue until consistently at 90 percent compliance Control Group Three Techniques to Reduce Your Inventory 24

Ready to graduate to cycle counting Thorough – and accurate – physical inventory Double-blind count preferred When complete, ready for cycle counting Establishment of Initial Balances Three Techniques to Reduce Your Inventory 25

Prepare for cycle count Enter all transactions Count items Compare counts with system inventory Determine reasons for variances Correct causes of variances Steps for Cycle Counting Three Techniques to Reduce Your Inventory 26

Typical ABC Cycle Count Frequency Three Techniques to Reduce Your Inventory Inventory Record Accuracy 27

Determining Daily Cycle Counts Three Techniques to Reduce Your Inventory Inventory Record Accuracy 28

29 Summary Three Techniques to Reduce Your Inventory

30 Using the three techniques -Eliminating obsolete inventory -Using ABC inventory management -Implementing a cycle counting program You can reduce your inventory without sacrificing customer service In Summation Three Techniques to Reduce Your Inventory

31 Find out what your inventory level is Investigate your obsolete inventory See how you are using ABC inventory management Determine your inventory accuracy When You Get Back Home Three Techniques to Reduce Your Inventory

32 Mark K. Williams, CFPIM, CSCP QAD Supply Chain Solutions Center Questions & Answers Three Techniques to Reduce Your Inventory

33 Three Techniques to Reduce Your Inventory © QAD Inc 2012