1. business and industrial
2. business operations
3. management
4. supply chain management

Inventory Management Best
Practices for 2012
December 1, 2011
produced by
event sponsor
info@mdm.com
www.manh.com
Inventory Best Practices
Webcast Speakers
Jon Schreibfeder
President
Effective Inventory Management, Inc.
Rod Daugherty
Senior Director of Product Strategy
Demand Forecasting and Inventory Optimization
Manhattan Associates
Thomas P. Gale
Publisher
Modern Distribution Management
Special offer for attendees: Get the book!
Achieving Effective Inventory Management
Fifth Edition
By Jon Schreibfeder
• 10% off $74 list price
• Free shipping
Order at www.mdm.com/store
Promotion code: Webcast
SCOPE® ~ Supply Chain Optimization…Planning through Execution
4
Principles of Inventory Optimization
5
First Steps to Achieving
Effective Inventory Management
Jon Schreibfeder
President
Effective Inventory Management
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
6
The Goal of Effective Inventory
Management
“Effective Inventory Management
enables a company to meet or exceed
customers’ expectations of product
availability with the amount of each
item that will maximize net profits or
minimize your inventory investment.”
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
7
First Steps to Achieve Effective Inventory
Management (EIM)
• Determining what needs to be stocked in each store, branch
or warehouse
• Liquidating unwanted material
• Analyzing and improving the accuracy of your forecasts of
future demand of products
• Maintaining reserve or safety stock quantities that will
ensure your meet or exceed customers expectations of
product availability at the lowest possible cost
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
8
What Do Your Customers Expect You to
Have in Stock?
• Stocking a product is a commitment to have that product
available in reasonable quantities
• Your facilities are probably filled with:
– Stock (Merchandise you intend to stock)
– Stuff (Material that inadvertently got stuck in your facility)
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
9
Over 71% of items in this warehouse had sales in
three or fewer of the past 12 months
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
10
Listing of Slow Moving Items
• List in Descending Order By Value of Inventory:
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
11
Question Why Each Slow Moving Product
is Stocked
• Do customers realistically expect it to be available
for immediate delivery?
• Is it a critical item that must be stocked in case of
emergency?
• Does the profit margin offset the cost of carrying
inventory for a prolonged period of time?
• Can a more popular item be used in its place?
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
12
Types of Stocked Inventory
• The GOOD: Inventory that you stock that provides
an acceptable return on your investment
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
13
Types of Stocked Inventory
• The GOOD: Inventory that you stock that provides
an acceptable return on your investment
• The BAD: Inventory that doesn’t provide an
acceptable return on your investment, but
contributes to other profitable sales
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
14
Types of Stocked Inventory
• The GOOD: Inventory that you stock that provides
an acceptable return on your investment
• The BAD: Inventory that doesn’t provide an
acceptable return on your investment, but
contributes to other profitable sales
• The UGLY: Inventory that doesn’t provide an
acceptable return on your investment, and doesn’t
contribute to other profitable sales
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
15
Can You Base Actual Profitability on Gross
Margin?
• Gross Margin is defined as:
Sales Dollars - Cost of Goods Sold Dollars
Sales Dollars
No, gross margin dollars don’t vary as
the amount of inventory increases
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
16
Is This Item Profitable?
• Sales
= $10,000
• COGS
= $6,000
• Gross Profit
= $ 4,000
• Gross Margin
= 40%
ave $12,000 in inventory!
– What are the risks of paying commissions on gross
margin?
– How could they have accumulated $12,000 in inventory?
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
17
How to Determine if Inventory is
Profitable
• Calculate the Adjusted Margin:
Annual Profit ($) - (Avg. Invty Investment ($) * Carrying Cost %)
Annual Sales ($)
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
18
Carrying Cost (“K” Cost)
 Accumulation of all of the costs involved in maintaining
inventory in your warehouse
◦ Cost of putting away stock receipts and moving material
within the warehouse
◦ Insurance and other charges on inventory
◦ Rent and utilities for the portion of your facility used to store
material
◦ Physical inventory and cycle counting
◦ Inventory shrinkage and obsolescence
◦ Opportunity cost of the money invested in inventory
Questionnaire at www.EffectiveInventory.com
Calculated at no cost and no obligation!
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
19
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
20
Calculating the Adjusted Margin
Sales = $1,000
Gross Profit = $150
Gross Margin Percentage = 15%
K Cost = 20%
Average Inventory = $250
[$150 – (20% * $250)]/$1000 = 10%
Average Inventory = $500
[$150 – (20% * $500)] /$1000 = 5%
Average Inventory = $750
[$150 – (20% * $750)]/$1000 = 0%
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
21
A Combined Adjusted Margin for
Complementary Items
 “Bad” or “Ugly” Item
◦ Sales
= $500
◦ COGS
= $400
◦ GP$
= $100
◦ Avg Invty = $500
◦ K Cost% =
20%
 Supported Line
◦ Sales
= $50,000
◦ COGS = $42,500
◦ GP$
= $7,500
◦ Avg Invty = $5,000
◦ K Cost% = 20%
[$7,600 – (.20 * 5,500)] ÷ $50,500 =
12.9%
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
22
An Adjusted Margin for a Specific
Customer
Use total sales and profitability for the customer and
the average inventory investment for the inventory
maintained primarily for that customer
Sales =
$ 100,000
Avg Invty = $ 50,000
Profit = $ 15,000
KCost% = 21%
[$ 15,000 – ($50,000 x .21)] ÷ $ 100,000 = 4.5%
Note that the Gross Margin Percentage is 15%!
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
23
Liquidating Stuff and Excess Inventory
• A report should list items in descending order
based on the value of the value eligible to be
liquidated.
• Remember that inventory is a sunk expense. It is
not worth what you paid for it, it is worth what
someone is willing to pay you for it.
• “Don’t get emotional about stock, it clouds your
judgment” (Michael Douglas’ character Gordon
Gecko in the movie Wall Street)
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
24
Examples of Dead or Very Slow Moving
Inventory
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
25
The Liquidation of Unwanted Inventory
• Transfer excess stock to another company location where
the inventory is needed
• Reduce the price
• Offer salespeople a “spif” to sell the product
• Advertise the availability of this material to other suppliers
• Substitute the product for a less expensive item
• Return the material to the vendor
• Donate the material to a non-profit organization
• Throw it away
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
26
Transfer Inventory to Where it is Needed
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
27
Advertise Material to Other Suppliers
• Search the web with the words “Surplus Inventory [Product Line]:
• Some sites for liquidating industrial goods:
–
–
–
–
www.partsforindustry.com
www.excessconnect.com
www.industryrecycles.com
www.sbmac.com
• Some sites for liquidating consumer goods:
–
–
–
–
www.sellmyinventory.com
www.liquidation.com
www.directexcess.com
www.instantliquidators.com
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
28
New Stock Items
• New stock items should be maintained with manually set
parameters until enough usage history has been
accumulated to accurately forecast demand
• New stock items are usually the source of most dead
inventory. That is, it’s dead on arrival
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
29
New Item Questionnaire
 Who will buy this product or product line?
 What are the estimates of usage for each of the upcoming six months?
 What is the anticipated gross margin for sales of this item?
 What affect will usage of this product have on usage of other existing stock
items?
 How many month’s supply must initially be purchased? What investment is
necessary?
 Where will this new inventory be stored?
 How can any unsold stock be liquidated?
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
30
Evaluating New Item Questionnaires
• Committee of marketing, sales, management and
purchasing
• How accurate has the source been in the past?
• Three or more members must agree to add the product to
stock inventory in that location
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31
Keep Sales and Marketing Focused On
New Stock Items
 Provide salespeople with a weekly report of the
sales of new stock products. For each item:
◦
◦
◦
◦
◦
◦
Item and Description
Sales and Gross Margin Projections
Actual Sales and Gross Profits
Current Available Quantity
Value of Available Quantity
Person requesting that the product be stocked
 Consider a budget for new inventory items
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
32
Working with Non-Stock Items
• If a product is needed that is not on the approved
stock list:
– Customer must buy the entire quantity that must be
ordered
– Customer must pay for the entire quantity that must be
ordered
– Salesperson must pay for any stock that the customer
doesn’t buy or pay for
– Any remaining inventory is expensed against the
transaction
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
33
How Much of Each Stocked Item Will
be Used at Each Location?
A demand forecast is a prediction
of the quantity of a product that will
be sold, transferred or otherwise
used during a specific time period.
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
34
How Do You Forecast Future Demand
Now?
• Who forecasts?
• What method do you use to forecast?
• What do you consider when you forecast?
• When do you forecast?
• How far out into the future do you forecast?
• Historically how accurate are your forecasts?
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
35
Common Problems with Demand
Forecasting
• The “if it’s on paper it must be true” syndrome
• Most systems base demand solely on some average of past
usage. Often buyers/planners don’t know formula!
• Usually one formula is used to calculate demand for all
products
• There is usually no verification to see if the quantity forecast
for a certain month was actually sold or shipped in that
month
• No system for reliably obtaining future predictions of
demand from customers
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
36
Accurate Demand Forecasts Are Based On
Five Elements
• Past usage of the product
– A formula that includes observed increasing or
decreasing trends as well as possible seasonality
• External trends –
– Economic or environmental factors
• Events
– Promotions, holidays, etc.
• Collaborative information from customers or
salespeople
• Appropriate forecast horizon or time period
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
37
Improving the Forecast Accuracy
Average forecast error percentage reduced from
583% to 15%
Now 18 months into the program turnover exceeds four
annual turns!
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
38
Calculating the Forecast Error
[Absolute Value of (Usage – Forecast)]
Lower of Forecast or Usage
A100 Usage Forecast
Calculation
Error%
50 100.0%
Oct
100
50
[ABS(100 – 50)]
Sep
50
100
[ABS(50-100)]
50
100.0%
Aug
95
100
[ABS[(95-100)]
95
5.3%
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
39
The “Average” Forecast Error
 In a study done by EIM of a wide range of distributors
using a wide range of computer systems:
◦ The mean forecast error was 682%
◦ The median forecast error was 381%
 “Best Practice” companies had an error that was
approximately 1/10th of the average forecast error in their
industry
 The better your forecast, the less you need to stock to
maintain your desired level of customer service
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
40
Different Patterns of Usage Require
Different Forecasting Methods
Item
Nov
‘11
Oct
‘11
Sep
‘11
Aug
‘11
Jul
‘11
Jun
‘11
May
‘11
Apr
‘11
Mar
‘11
Feb
‘11
Jan
‘11
Dec
‘10
A100
100
120
80
90
110
105
88
109
98
118
112
108
B200
300
260
220
188
160
142
138
122
109
98
80
76
C300
1020
28 1030
34
990
39 1034
26
D400
41
241
370
36
20
85
160
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36 1033
398
224
27 1004
129
57
24
41
Different Items Have Different Patterns
of Usage……
A100
B200
150
100
A100
50
400
300
200
100
0
B200
0
C300
D400
1500
600
1000
C300
500
0
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400
D400
200
0
42
Events and External Factors will Affect
Usage
• Events do not occur at exactly the same time each
year
– Some holidays
– Promotions
• External factors are outside of your control but may
affect usage
– Changing market tastes
– Economy
– Weather
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43
Analyze Each Event & External Factor
1. Hypothesis: I think this event will affect usage
2. Test: Does it affect usage?
3. Record results: When this occurs again, I can
adjust the forecast to take into account the results
of this event or external factor
4. Clean usage history: Adjust out the effects of
the event from usage history. After all, this event
will not occur at exactly the same time next year.
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
44
Measuring the Effect of Events
Event
Start Day
End Day
Prior – Prior–Post
Event % Event%
Centennial 04/23/2011
Founders’
Day
04/30/2011
-25.0%
10.0%
Promo-1
06/01/2011
06/07/2011
26.8%
-0.8%
Promo-1
09/01/2011
09/07/2011
14.0%
-4.7%
Promo-2
10/01/2011
10/07/2011
13.2%
-13.0%
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
45
Effect of 100 Year Celebration
ril 2
ril 1
125
3
6
120
Ap
Ap
2
ril 9
ril 0
Ap
Ap
Actual Sales
119
Adjustment for
Event
Normalized
Usage
89
+30
120
125
119
119
The 25% decrease in usage during Centennial Founders’
Day will not reoccur. The 25% decrease in sales is
compensated for in Normalized Usage. Formula:
Actual Usage ÷ (1 ±% Difference from Normal Usage)
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46
Effect of Promotion #1
5
8
1
e1
y2
y1
y1
488
Ju n
Ma
Ma
Ma
Actual Sales
524
462
Adjustment for
Promotion
Normalized
Usage
595
-126
488
524
462
469
Promotion #1 resulted in a 26.8% increase in sales. This
increase should be adjusted out of usage history. When
Promotion #1 is offered in the future, the forecast for that
week should be adjusted by the average previous results of
Promotion #1.
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
47
Buyers Should Bring Possible Unusual
Usage to Sales
• Even after automatic adjustments to usage have been
applied there still may be significant differences between the
demand forecast and actual usage
• Salespeople are closest to the customers
• Salespeople can best determine if possible unusual usage
is:
– Activity that will not reoccur
– Start of a new trend
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48
Usage This Inventory Period >
“x%” of the Forecasted Demand
y
uar
ch
il
y
uar
Jan
r
Feb
Ma r
Apr
Ma y
e
Jun
Usage
1500
410
290
375
450
303
Forecast
368
420
305
368
404
334
For Example: Usage in June (1500 pieces) is
greater than four times forecasted demand
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49
Usage this Inventory Period < “y”% of
the Forecasted Demand
y
uar
ch
il
y
uar
Jan
r
Feb
Ma r
Apr
Ma y
e
Jun
Usage
40
210
260
185
290
160
Forecast
224
208
274
202
269
204
For Example: Usage in June is less than 20% of
the forecasted demand
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50
List by Rank of Product by Size of the
Discrepancy
• We have noticed that products with an item number starting
with “A” or “1” have better performance than products with
an item number beginning with “Z”
• Examine transactions, talk with salespeople and customers
to determine if any unusual activity occurred
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51
Reasons for Possible Unusual Usage
• Quantity sold or used during the month was affected by
activity that won’t reoccur
• A new sales trend has begun
• The wrong forecast formula is being used to predict future
demand of the product
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52
Compensating for an Unusual Sales
Quantity
In reviewing all of the transactions for June, the buyer notice
an unusual sales of 1,000 pieces. After talking to the
salesperson or customer it was decided that this
transaction was unusual
y
uar
ch
il
y
uar
Jan
r
Feb
Ma r
Apr
Ma y
e
Jun
Usage
1500
410
290
375
450
303
Adjustment
-1000
0
0
0
0
0
Normalized
Usage
500
410
290
375
450
303
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53
Compensating for a New Sales Trend
A new customer will continue to buy
approximately 1,000 pieces a month for the
foreseeable future
y
uar
ch
il
y
uar
Jan
r
Feb
Ma r
Apr
Ma y
e
Jun
Usage
1500
410
290
375
450
303
Adjustment
0
1000
1000
1000
1000
1000
Normalized
Usage
1500
1410
1290
1375
1450
1303
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54
Forecast Horizon
 If the anticipated lead time for a product is 90 days, you’re
buying in early February to satisfy demand in May
 The forecast horizon starts at today’s date plus the lead
time
Place Order with
Supplier
Anticpated Stock
Receipt
Anticpated Lead Time
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
April
May
89
Days
March
59
Days
February
28
Days
January
55
Maintain Adequate Safety Stock
• Safety stock is reserved inventory maintained to protect
customer service in case of unusual demand or delays in
receiving a stock receipt during the time it takes to replenish
inventory.
• Like any other type of insurance safety stock is an expense,
not an investment
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56
Items That Require More Safety Stock
•“Painful Backorder” - items (1/2% - 11/2%) of the
products you stock
• Products with erratic usage
• Products with erratic lead times
• High profit items
• Stock reserved for a specific customer
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57
Items That Require Less Safety Stock
• Items with very consistent usage and lead times
• Products with a large number of “hits”
• Low usage items, especially very expensive low usage
items
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
58
Safety Stock Based on the Deviation
Between Forecast Demand and Usage
150
Forecasted
Monthly
Demand
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
June
May
April
March
February
50
January
100
59
Safety Stock Based on the Avg. Deviation
Between Forecast Demand and Usage
150
Forecasted
Monthly
Demand
April
June
February
100
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
May
March
January
50
60
The Deviation Multiple
Deviation
Approx
Multiple Service Lvl
1
65.0%
# of times Each Total
Usage Qty was Recorded
A lot more
safety stock
needed for
relatively few
months with
large
quantities
2
95.0%
3
97.5%
4
98.5%
5
99.0%
Total Usage Recorded in a Month
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61
Determining the “Right” Amount of Safety Stock
Safety Stock Amount↓
Avg Total SS$
Average Res$
Service
Level
2 * Average Deviation
$1,146,066.11
$1,690,213.52
94.4%
3 * Average Deviation
$2,292,132.22
$2,836,279.63
96.8%
4 * Average Deviation
$3,438,198.34
$3,982,345.74
98.1%
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
62
The Goal of Effective Inventory
Management
“Effective Inventory Management
enables a company to meet or exceed
customers’ expectations of product
availability with the amount of each
item that will maximize net profits or
minimize your inventory investment.”
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
63
First Steps to Achieve Effective Inventory
Management (EIM)
• Determining what needs to be stocked in each store, branch
or warehouse
• Liquidating unwanted material
• Analyzing and improving the accuracy of your forecasts of
future demand of products
• Maintaining reserve or safety stock quantities that will
ensure your meet or exceed customers expectations of
product availability at the lowest possible cost
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
64
If you have questions…..
Jon Schreibfeder, President
Effective Inventory Management, Inc.
120 South Denton Tap Road
Suite 450 – 200
Coppell, TX 75019
Phone - 972 304-3325
Fax - 972 393-1310
jons@EffectiveInventory.com
www.EffectiveInventory.com
Copyright 2011 Manhattan Associates, Incorporated. Strictly Confidential. Not for Distribution.
65