PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit What top management need to know about inventory management

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit The Challenge Minimise Cost Maximise Product Availability

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Growth – Customer Pull 13 years 200+ customers <90 consultants South Africa Australia USA UK Europe

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Selected Clients

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Client Market Profile

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Role of ERP Systems Inventory Management Inventory Management Levels Recommended Orders Sales Issues SonH SonO Control System Goods Received/ Dispatch Sales & Issues Arithmetic Management Reports Exception and action Reports Modelling & what-if Target Service Levels Monthly Weekly Daily Management Tools Policy Forecasting LT Safety Stock Optimisation

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Companies are frustrated in their efforts to improve availability and reduce inventory investment Expectations that a new computer system will deliver bottom line benefits have not been met Software or consulting alone will not manage inventory and deliver benefits needed to remain competitive Management is no longer in control of the key drives of their inventory – The Replenishment Process Our Experience Shows

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit There is no link between the level at which top management sets Corporate Stockholding POLICY (i.e. Target Investment Levels and Target Service Levels) and The level at which the INDIVIDUAL Line Item is ordered The Fundamental Problem

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit 1.Developed a Best Practices Inventory Management Methodology based on 80/20 principles 2.Developed a breakthrough method for optimizing line item inventory levels – Line Item Risk Profile 3.Understood that Inventory Management is a People’s Process 4.Have a Strategic Inventory Optimisation Modeling Tool that is process-based How do we do this?

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Best Practices Methodology Supplier Evaluation Excess Inventory Management Review Item Classification Demand Management Strategic Planning Order Management

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Computers cannot forecast Cannot interpret anomalies in history Have no knowledge of the future People People People Exception reports Fundamental training Predictive models Measurement of performance Commitment to targets Formalise the process Demand Management Can recognise the anomalies Trend Analysis

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Best Practices Methodology Supplier Evaluation Excess Inventory Management Review Item Classification Demand Management Strategic Planning Order Management

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit SUPPLYDEMAND MATCH SAFETYSTOCK Lead time unreliable Forecast inaccurate Line Item Risk Profiles CYCLESTOCK Cycles Batches Min Qty’s Sources of Risk

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Buffer/Safety stockReplenishment Cycle Model Stock Level Time Replenishment Cycle = 3 months 2.5 months Time Replenishment Cycle = 1 month Model 1.5 months Inventory Policy Model Buffer = 1 month - 40% Buffer = 1 month - 67%

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Time There are only two reasons for holding safety stock : To compensate for - Inaccurate forecast of demand Unreliable supply Primarysources of risk Inventory Policy Model Buffer/Safety stock Time Model Stock Level Time Replenishment Cycle = 3 months 2.5 months

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Months of Cover Time Forecast Accuracy Lead Time Reliability Replenishment Cycles Cycle Stock Safety Stock Review Periods Review Periods Target Service Levels Lead Time Six Dimensional Problem

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Forecast Error Lead Time Error Lead Time Investment Risk Profiles Target Service Levels Service or marketing Strategies Management Processes InvestmentDecisions Strategic Plans Functional Integration RISKSOURCESRISKMULTIPLIERSSTRATEGICOBJECTIVES X Review Period Repl. Cycle The Methodology Scope

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Safety Stock 70 % 75 % 80 % 85 % 90 % 95 % 100 % Availability ImproveAvailability ReduceInvestment ½ month 1 month ½ months 10 % 3 % 1 Optimising the Investment

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit WATER LEVEL INVENTORY LEVEL ROCKS INVENTORY RISK PROFILES Stockout JIT Principles - Covering the Defects

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit WATER LEVEL ROCKS INVENTORY RISK PROFILES INVENTORY LEVEL Covering the Defects

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit WATER LEVEL ROCKS INVENTORY RISK PROFILES INVENTORY LEVEL ROCKS INVENTORY RISK PROFILES Covering the Defects

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit 2.What about …Shopping basket effect? one stop shopping? Quantify the cost of stockouts 1.What % of stockouts result in lost sales? 60% 60% 3.What about losing customers? LSM £1m GP pm 1% increased avail. £ p.m. Lost Sales Multiplier

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Demonstration

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit People do Software does not manage inventory… Experience Tools Training and motivation Measurement of performance Targets & Goals Formal structure & procedures

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Corporate Funding Inventory Management Creditor Management Debtor Management Customary skills level (HAY EVALUATION UNITS) Experience

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Causes of Inventory Inaccurate Data Internal Processes Inefficient Distribution Network Ineffective Mgmt of Excess MOQ’s Product Range Lengthy Cycles Unreliability of Supply Excess Lead Times Unacceptable Forecast Error Inappropriate Safety Stock Investment in Inventory Most Leverageable? 1. Identify the “causes of inventory” 2. Quantify each cause 3. Prioritize (80/20) 4. Attack each Area 5. Ongoing Process Barriers

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Scenario Modeling OPTIMUS Recommended Actions with Quantified Targets Shorten Lead Times Current Increase Availability Set Safety Stock Action Excess Rationalize Product Range Improve Forecasting Inventory Value Initiatives Improve Supply Reliability Time Phased Targets

PROPRIETARY  2000 Optimus Inventory Ltd. All Rights Reserved. turning inventory into profit Best Practices Checklist your organisation…… Does your organisation…… Buy into your inventory and availability objectives?Buy into your inventory and availability objectives? Set Safety Stock based on individual line item forecast accuaracy and lead time reliability?Set Safety Stock based on individual line item forecast accuaracy and lead time reliability? Model the effects of different stockholding policies using Target Service levels?Model the effects of different stockholding policies using Target Service levels? Use a home-grown spreadsheet system to model inventory policies?Use a home-grown spreadsheet system to model inventory policies? Have a low order intervention rate – measured and audited?Have a low order intervention rate – measured and audited? Know what your forecasting and supply performance is?Know what your forecasting and supply performance is? Set excess stock targets on the top 20 excess stock items monthly?Set excess stock targets on the top 20 excess stock items monthly? Hold a monthly Inventory Manangement meeting to review performance against agreed targets and set new targets?Hold a monthly Inventory Manangement meeting to review performance against agreed targets and set new targets?