1. Mark Tomalonis Principal WarehouseTWO, LLC
The Basics of Inventory Management (for People NOT Responsible for Inventory Management)
Tip:
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Mark Tomalonis
Principal
WarehouseTWO, LLC

2. Three Questions “Why is this NOT in stock?”
“How did we end up with all of this surplus inventory?”
“What do you do for a living, inventory control person?”
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3. Workshop Topics To stock or not to stock?
Inventory management performance metrics
Basics of inventory management
Answers to the three questions
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4. To Stock or Not to Stock? Benefits & costs of stocking an item
Benefits & costs of NOT stocking an item
Finding a balance
The cost of customer satisfaction
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5. Benefits & Costs of Stocking an Item
Best product availability
High customer satisfaction
Low transaction cost
pick, pack & ship✓
Costs
Warehousing/storage
Material handling staff
Reduces available cash / credit line
Bad investment?
damage/theft/shrinkage
obsolescence
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6. Benefits & Costs of NOT Stocking an Item
Frees up cash/credit
Less warehousing
Avoids the purchasing of future surplus inventory✓
Costs
Higher transaction cost
PO, receipt, invoice
loss of discount?
expedited freight fees?
Lower customer satisfaction
lose an order?
lose a customer?
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7. Inventory Management Performance Metrics: Definitions
SERVICE LEVEL
Percent of sales order line items available to allocate to each sales order line at the time of new sales order entry✓
“Was enough of this item is stock to fulfill the demand for this new sales order?”✓
Measures the performance of your inventory, from your customer’s perspective
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8. Inventory Management Performance Metrics: Definitions
ON-TIME-DELIVERY
Percent of all order line items shipped by a specified date✓
“Did this order line item ship prior to <date>?”✓
Measures the performance of your inventory, from your customer’s perspective
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9. Inventory Management Performance Metrics: Definitions
ON-TIME-DELIVERY
What’s the “specified” date?
original customer requested date
original promise date
original negotiated committed-to date
modified requested, promise or committed-to date✓
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10. Inventory Management Performance Metrics: Definitions
TURNS
annual (or annualized) cost-of-goods-sold ($ACOGS) divided by value of current inventory✓
“How much have I invested in inventory to support my company’s sales?”✓
Measures efficiency of your inventory, from a financial perspective
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11. Inventory Management Performance Metrics
SERVICE LEVEL ON-TIME-DELIVERY TURNS✓
How does my ERP system measure these things?
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12. Maximize Service Level!
Stock MORE!
Manufacturers will never “get” the importance of short lead times
Your competitors have everything in stock
Blame it on the internet:
everything and anything is available NOW!
Customers have more choices✓
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13. $Cost of Goods Sold (at 27% GM)
Maximize Turns!
Stock LESS!
$Annual Sales
$Cost of Goods Sold (at 27% GM)
2 turns
4 turns
6 turns
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8 turns ✓

14. The Challenge: Finding a Balance
Stock
MORE!
Stock
LESS!
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15. The Cost of “Service Level”
Combined Costs
Transactions Costs
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Inventory Carrying Costs ✓

16. The Basics of Inventory Management
Scope
Four parameters that determine stocking disposition
Possible item dispositions
Stocking methods
How much to stock? $ACOGS analysis
Inventory plan decision flow chart
Managing to Expectations
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17. Scope of Inventory Management
Balance SERVICE LEVEL and TURNS
maximize customer satisfaction
maximize asset (inventory) efficiency✓
Do it accurately, with no errors
Do it quietly, without whining
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18. Four Parameters that Determine Stocking Disposition
Unit cost
Quantity sold (in a selected time period)
Number of times sold (in one year; “# of Hits”)
Who buys it (distribution of sales by customer)
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19. Four Parameters that Determine Stocking Method Examples
One-Year Metrics I II
III IV
Unit Cost $5
$5,000
$100
$500
Quantity Sold
2000 2
100
$ACOGS
$10,000
$50,000
# of Hits 1 3 50
% Sold to Top Customer
17%
100%
33%
90%
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20. Inventory Management: Definitions
ERP system
Your company’s business software, used for order processing, inventory management, accounting, etc. (“Enterprise Resource Planning”)
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21. Inventory Management: Definitions
Forecasted Demand (anticipated consumption)
This is what your ERP system thinks you are going to sell✓
FMD (forecasted monthly demand)
FDD (forecasted daily demand; FMD/30)
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22. Inventory Management: Definitions
Hit (sales order or other consumption event)✓
LEAD TIME (LT) (a calculated average)✓
SAFETY STOCK (SS) (in days’ of demand)
desired minimum level of available inventory✓
REVIEW CYCLE (RC) (in days)
how often you consider placing a stock replenishment purchase order with the supplier
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23. Inventory Management: Definitions
NET STOCK (NS)
The quantity that would be available for sale after all open transactions were completed✓
= on hand (physically present)
- allocated (to an order, transfer, assembly)
- on backorder
+ on open purchase order (PO)
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24. Possible Item Dispositions (by # of Hits)
# hits in one year
high
medium
slow
inactive
# of Hits (in one year)
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all items, sorted by decreasing # of Hits (in one year) ✓

25. Stocking Methods… …tell you WHEN to buy …tell you HOW MUCH to buy ✓
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26. Stocking Methods Static✓ Dynamic✓
Micro-Managed (high volume, high risk)✓
Micro-Managed (exceptional circumstances)✓
Non-stock (potential stock)
ERP system can create a stock plan automatically✓
Non-stock (not subject to being stocked EVER)
ERP system cannot create a stock plan automatically
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27. Static Inventory Plan “minimum-maximum” (“MIN-MAX”)
two static control values, in quantities of the item✓
Intended to be used for:
infrequently sold items (e. g.: 3 to 6 Hits per year)
typical interval between Hits is greater than lead time✓
Inventory plan accommodates typical order size, not consumption rate
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28. Static Inventory Plan static values✓ WHEN to buy HOW MUCH to buy
net stock falls below “minimum” value (NS < MIN)
“minimum” value is a multiple of average Hit quantity✓
HOW MUCH to buy
“maximum” value minus net stock (MAX – NS)
“maximum” value is a higher multiple of average Hit quantity✓
Demonstration…
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29. Static Inventory Plan Effect on SERVICE LEVEL and TURNS
MIN affects SERVICE LEVEL
MAX affects TURNS
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30. Static Inventory Plan PROs easy to understand CONs
OK for slow-moving items✓
CONs
does not adapt to changes in consumption or lead time
easily misapplied to high usage items
easily misapplied to items with long lead times
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31. Answer: 400+ (2.67 month’s supply)
Static Inventory Plan
“MIN-MAX FAIL” (too often misapplied to high volume, long lead time items) Example
Monthly usage = 150, lead time = 45 days
What’s a reasonable “MIN” value?
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Answer: (2.67 month’s supply) ✓

32. Static Inventory Plan
How does my ERP system control a Static (MIN-MAX) inventory plan?
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33. Dynamic Inventory Plan
“Up-To” or “Order Point, Order Quantity”
control values are in days’ consumption, based on trailing average monthly usage✓
Intended to be used for:
frequently sold items (more than 6 “hits” per year)
items for which consumption and/or lead time changes over time
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34. Dynamic Inventory Plan
WHEN to buy
net stock falls below “Order Point” (NS < OP)
OP = FDD  (LT + RC + SS)✓
Example:
FDD = 5 units (= FMD of 150, divided by 30 days)
LT = 30 days
RC = 14 days (two weeks)
SS = 20 days
OP = 5 x ( ) = 320✓
static values✓
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dynamic values ✓

35. Dynamic Inventory Plan
HOW MUCH to buy
“Order Quantity” (OQ)
OQ = FMD x MS (MS = # of months’ supply) – NS✓
Example:
FMD = 150 units per month
MS = 2 months’ supply
NS = 100 units
OQ = (150 x 2) – 100 = 200
Demonstration…
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36. Dynamic Inventory Plan
Effect on SERVICE LEVEL and TURNS
SS (safety stock, in days) affects SERVICE LEVEL
MS (months’ supply) affects TURNS
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37. Dynamic Inventory Plan
PROs
adapts to changes in consumption and lead time
best tool to increase TURNS✓
CONs
difficult to understand; not intuitive
multiple control values to select (MS, RC, SS)
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38. Dynamic Inventory Plan
“Up-To FAIL” (forecasted usage does not accommodate typical order size) Example
Three orders per year, ten (10) units per order
What’s the forecasted monthly demand (FMD)?
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You might never stock enough to handle a typical sized order ✓

39. Dynamic Inventory Plan
If the company that provides my ERP system can predict the future, why doesn’t it make software to help me win in the stock market????
How does my ERP system calculate Forecasted Demand?
How does my ERP system control a Dynamic inventory plan?
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40. Micro-Managed Items: High Volume, High Risk
Qualifiers
item’s $ACOGS in top quartile of total $ACOGS
top customer consumes 50%+ of item’s consumption✓
Why it matters
most common source of future surplus✓
Recommended action
review these items every month
collaborate with customer (forecast)
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41. Micro-Managed Items: Exceptional Circumstances
Qualifiers
stocked per salesman’s request
items consumed but not sold (Teflon tape)✓
Why it matters
potential for future surplus or unintended stock-out✓
Recommended action
isolate from your ERP’s auto-reclassification
manually review quarterly
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42. How Much to Stock? $ACOGS Analysis
Step 1: Create buckets of items by $ACOGS✓
Step 2: Determine desired stock levels to balance SERVICE LEVEL and TURNS✓
Relative to how much you sell:
stock a lot of the slow movers, to keep overall SERVICE LEVEL HIGH
stock very little of the fast movers, to keep overall TURNS HIGH✓
Demonstration…
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43. Inventory Plan Constants by ABCD*
Static Plans
Dynamic Plans
$ACOGS
MIN
(multiple of average HIT size)
MAX MS
(months’ supply) SS
(safety stock) A
$$$$ B
$$$ C $$ D
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* Your ERP system may allow for greater resolution than just four “buckets” (A, B, C, D). ✓

44. Possible Item Dispositions (by # of Hits)
# hits in one year
high
medium
slow
inactive✓
DYNAMIC or
STATIC
STATIC or
NON-STOCK
NON-STOCK
# Hits (in one year)
DYNAMIC
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all items, sorted by decreasing # Hits (in one year) ✓

45. Quarterly Inventory Plan Method Selector (Concept)
Start
Recent &
anticipated sales
activity?
Lots of hits?
High $$$
mostly to one
customer?
YES
YES
YES NO NO NO
Special
circumstances?
Static
Dynamic
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YES
Micro-Managed
Nonstock NO ✓

46. Quarterly Inventory Plan Method Selector (Example)
Start
last 6mo: 2+ hits?
prev. 6mo: 1+ hits?
future sales?
last 6mo: 4+ hits?
$ACOGS > $25K?
> 75% sales to
one customer?
YES
YES
YES NO NO NO
Stock request?
New customer?
Strategic item?
Service item?
Static
Dynamic
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YES
Micro-Managed
Nonstock NO ✓

47. Four Parameters that Determine Stocking Method Examples
One-Year Metrics I II
III IV
Unit Cost $5
$5,000
$100
$500
Quantity Sold
2000 2
100
$ACOGS
$10,000
$50,000
# of Hits 1 3 50
% Sold to Top Customer
17%
100%
33%
90%
Disposition
dynamic
non-stock
static
micro-managed
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48. Inventory Control Values
Step 1: Define $ACOGS thresholds for ABCD classification
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49. Inventory Control Values
Step 2: Define thresholds for assigning stock plans (static, dynamic, micro-managed)✓
Examples:
Nonstock: fewer than 3 Hits in 12 months✓
Static: 3+ Hits in 12 months, 2+ in last 6 months✓
Dynamic: 4+ Hits in last 6 months✓
Micro-Managed: “A” item, top customer buys 75% of all consumption in last 6 months
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50. Inventory Control Values
Step 3: Define control values for stock items, by ABCD classification
Static Plans
Dynamic Plans
$ACOGS
MIN
(multiple of average HIT size)
MAX MS
(months’ supply) SS
(safety stock) A B C D
Static Plans
Dynamic Plans
$ACOGS
MIN
(multiple of average HIT size)
MAX MS
(months’ supply) SS
(safety stock) A
> $5000
1.5
2.0 1 15 B
< $5000
3.0 2 20 C
< $1000
2.5
4.0 3 25 D
< $300
5.0 4 30
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51. Managing to Expectations
Clearly define performance expectations
SERVICE LEVEL
ON-TIME DELIVERY
TURNS✓
Measure and review at least quarterly!
measure by ABCD classification and inventory control method
change ABCD threshold values and control values and then measure again…
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52. This is Soooooo Complicated!
Doesn’t my ERP system do all of this stuff for me, automatically?
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53. What Could Possibly Go Wrong????
You have assigned the responsibility of inventory management to the wrong person✓
Item usage is not reviewed often enough✓
Control values are not set correctly or reviewed✓
How your ERP system works is not understood✓
The tools in your ERP system are not used
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54. Who Makes a Good Inventory Manager?
Pays attention to details✓
Is a good puzzle solver (crosswords, Sudoku, etc.)✓
Knows your ERP system and MS Excel✓
Is comfortable saying “no”✓
Is comfortable saying “no” to YOU✓
Does not crave glory or attention
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55. Three Questions “Why is this NOT in stock?”
“How did we end up with all of this surplus inventory?”
“What do you do for a living, inventory control person?”
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56. “Why is this NOT in stock?”
No stock plan
Not enough sales history to justify a stock plan
No “speculative” stock plan request submitted✓
Bad stock plan
Plan is not appropriate for current consumption rate✓
Exceptional consumption (😃) or lead time (😠)✓
Purchasing error
You did not buy to stock plan
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57. “How did we end up with all of this surplus inventory?”
High volume high risk item was not “micro-managed”✓
Bad stock plan
Plan was not reviewed often enough✓
Bad speculative stock request✓
Periodic factory inventory returns not done✓
Error in purchasing or order entry
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58. “What do you do for a living, inventory control person?”
“Inventory control” is NOT “purchasing”
inventory control is PRO-active
purchasing is RE-active✓
Monthly tasks
Quarterly tasks
Annual tasks
On-demand/periodic tasks
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59. MONTHLY Inventory Control Tasks
“Micro-manage” high volume, high risk items
Review recent consumption
Review forecasted consumption
Consult with sales person
Review inventory plan
Review incoming POs
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60. QUARTERLY Inventory Control Tasks
Review inventory control metrics
SERVICE LEVEL (availability from stock)
ON-TIME DELIVERY
TURNS
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61. QUARTERLY Inventory Control Tasks
Review/reclassify all items in ERP database
ABCD classifications
Non-stock, Static, Dynamic or Micro-Managed✓
use automated tools (ERP tools or spreadsheet)✓
Identify potential surplus items✓
Review speculatively stocked items
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62. ANNUAL Inventory Control Tasks
Static Plans
Dynamic Plans
$ACOGS
MIN
(multiple of average HIT size)
MAX MS
(months’ supply) SS
(safety stock) A
> $5000
1.5
2.0 1 15 B
< $5000
3.0 2 20 C
< $1000
2.5
4.0 3 25 D
< $300
5.0 4 30
Review/revise $ACOGS ABCD thresholds
Review/revise MIN-MAX control values for Static items by ABCD class
Review/revise MS (months’ supply) and SS (safety stock) control values for Dynamic items by ABCD class✓
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63. ON-DEMAND Inventory Control Tasks
Item database maintenance
part number, list price, cost, PO cost calculation✓
Process new speculative stock requests
Dispose of surplus inventory
Annual inventory returns/exchanges
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64. Workshop Topics To stock or not to stock?
Inventory management performance metrics
Basics of inventory management
Answers to the three questions
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65. Questions?
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66. Visit us at Booth #7 in the Exhibitor Area.
Learn how “inventory-sharing” with over 250 other Eaton distributors can help you improve product availability for your customers, while reducing your own surplus Eaton inventory.
Visit us at Booth #7 in the Exhibitor Area.
Register an account at