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Sage User Network Managing your stock for profit Steve Tattum Product Manager Sage (UK) Ltd.

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Presentation on theme: "Sage User Network Managing your stock for profit Steve Tattum Product Manager Sage (UK) Ltd."— Presentation transcript:

1 Sage User Network Managing your stock for profit Steve Tattum Product Manager Sage (UK) Ltd

2 2 Managing your stock for profit Are stockouts affecting your delivery service levels? Do you keep running out of the same items? Why are there never any A4 pads in the stationery cupboard? Profile your stock for better service levels and improve your cash flow forecasting.

3 3 Horror stories … We pay for 3 rd party secure warehouse storage for some promotional packaging materials and labels. The stock is never issued and increases each year - currently valued at £1.5m Our sales staff will not confirm despatch until they have walked across the site and seen the stock for themselves. Production has stopped for lack of a critical part. We have ‘ring fenced spares stock’ which cannot be released. “I’ve triple checked the stock count – which number would you like?”

4 4 Alphabet soup How many of these do you know? ATO CTO ETO MTS ATS MTO ROL ROI EOQ FIXED PERIOD DAYS FIRM PLANNED MRP DRP JIT JT(F)L 2-BIN KANBAN

5 5 Same problem – different perspectives Sales – all items, all variants, in-stock, all the time Production – ‘you should have planned / forecasted earlier’, ‘why can’t you sell what we have in stock?’ Finance – ‘pay me now’, ‘pay you much later’, order the bare minimum but buy cheap Product support – we need all the parts for products we have sold in the last 5 years, on the shelf

6 6 Inventories / Stock All organisations have stocks –Raw materials –Bought in or made-in-house components –Work in progress - partly finished goods –Finished goods in warehouse –Inventory in transit –Goods for sale and on display –Spare parts for machinery

7 7 Reasons for Having Inventories Goods made / packed / delivered in batches Demand is seasonal, supply is constant and / or limited Demand cannot be predicted exactly So that work centres do not have to wait for components / work from previous centres To supply materials quickly (e.g. from a warehouse) To take advantage of favourable prices (discounts) To protect against price rises or shortages

8 8 Stock Profile over Time Stock Level Time ROL Place Order Now Lead time MIN

9 9 Reorder Level Decision Decision rule: –when the stock level reaches a certain point - the re-order level (ROL) - order some more. What should the ROL be? ROL Stock-out

10 10 Maintaining inventory levels Task - order a number of ‘parts’ which are in regular use –e.g. dog food, photocopier paper, product labels Two problems –When to order?, how much to order? Issues –Cost of holding inventory –Cost of placing orders –Uncertainty of demand, time to replenish stock –Obsolescence –Space, money constraints

11 11 Economic Order (Batch) Quantity EOQ / EBQ Key Assumptions –Demand is constant and known –Replenishment is instantaneous (zero lead time) or at least fixed –Cost of holding stock is known –Cost of placing an order for an item known and independent of order size and other orders (often called the setup cost) –No limitations on space, cash –No discounts (price is fixed) Is this the real world ? Orders are placed immediately for a fixed quantity

12 12 EOQ model The optimum solution is given by (D=demand 1000 p.a. S= setup/order cost £15 H= holding cost /unit p.a. £3 ) Order quantity Ordering costs Stock-holding costs Total costs EOQ Costs EOQ = 100

13 13 ROQ and ROL Method ROL is determined to give a 95% (or other) service level. –5% of stock cycles will lead to a stock out ROQ = EOQ. Example of simple rule: –when the stock level falls below 50 (ROL) or 200 (ROQ) order more.

14 14 Keeping the information up to date Re-order levels are constantly reviewed as our product lines evolve and sales patterns change Supplier lead times are continuously monitored and updated Life is full of good intentions !

15 15 So how many of you use this ?

16 16 Creating the update formulae

17 17 Testing the formulae

18 18 Setting the inventory policy QAMRDQAMRD

19 19 Inventory policy QExact quantity AMinimum of EOQ MMultiples of EOQ RMinimum of EOQ + multiples of ROI DDiscrete batches of EOQ (works orders only) QAMRDQAMRD Demand = 23 EOQ = 15 ROI = x 15

20 20 And changing the numbers …. QAMRDQAMRD Demand = 27 EOQ = 25 ROI = x 25

21 21 Problems with the EOQ Model Demand may not be (approximately) constant –seasonal, fashion goods –rapidly changing ‘technology’ products The stock holding costs may be a simple linear model –small increase in stock may need new warehouse Setup / ordering costs are very difficult to identify –are labour costs fixed or variable? –depend on other items being ordered EOQ forces us into a way of thinking –let’s do things differently We need to be agile, innovative and still employ simple systemsWe need to be agile, innovative and still employ simple systems

22 22 It could be as easy as ABC …. ABC analysis provides a mechanism for identifying items which will have a significant impact on overall inventory cost whilst also providing a mechanism for identifying different categories of stock that will require different management and controls Wikipedia

23 23 Pareto Curve for ABC Classifications Cumulative % of total value % of total number of items Class A items Class B items Class C items 80 Based on usage value = Usage(items/year) x Cost(£/year)

24 24 ABC Analysis Typically –A: 20% of items (fast moving, valuable) account for 80% of the stock turnover –C: 50% of items (slow moving, low value) account for 10% of the stock turnover –B: the middle 30% of items (middle value or turnover) account for the remaining 10% Policies: –Develop class A suppliers more – premium service –Give tighter physical control of A items –Forecast A items more carefully – buy on demand –Schedule deliveries of B items – call-off against best price contracts –Simple re-order and EOQ rules for C items

25 25 Managing exceptions New items New suppliers Problematic quality Single source of supply Promoting to Class A Managing the risk How much is this worth ?

26 26 Putting it all together So using ABC to profile our stock we can:- –Reduce the number of orders to achieve better focus –Count the important items more frequently. EOQ helps us to manage stable, low cost, high usage items (C class) more effectively. We can automatically review and update EOQs

27 27 Setting up ABC categories

28 28 Using the tools

29 29 Using the tools y, n, or i

30 30 More Reams of Paper … “Our MRP report is 500 pages long” “And it makes stupid suggestions …” –Reduce the quantity of labels from 10,000 by 9 to 9,991 –Re-schedule the order as it will arrive 1 day too early “We placed orders for suppliers from A to S then the next report arrived ….so we started at the beginning …..” “MRP recommended the purchase orders too late … and no works orders at all !”

31 31 How many wheels on your car ? Data integrity 99% BOM Accuracy Realistic lead times Realistic average batch sizes Overdue orders - reprioritised Close orders delivered ‘short’ We make lawnmowers …. It’s late March and we have run out of wheels which are on a 12 week delivery !

32 32 Priorities Red flags “the MD’s best friend” Marketing’s next big order Shop floor bonus & piece work MRP only knows about due dates

33 33 Filters An electronic ‘RED PEN’ Put your buyers’ practical knowledge into the system Manage by exception Remove the trivial and irritating recommendations Focus on the important items

34 34 Summary Use Re-Order reports or KANBAN to manage ‘C’ items. Set up your inventory policy and keep it under review. Use MRP to recommend orders for Make or Buy. Order what you need, plan deliveries for when it is needed. Set ‘fixed period days’ - group demands for the stock item. Maintain your data accuracy – responsibility & accountability. Count the cash ….


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