Best Practice in Inventory Management Chapter 3 SHAPING

Best Practice in Inventory Management Chapter 3 SHAPING INVENTORY Dr Tony Wild

Figure 3. 1 Pareto curve 100% 90% 80% Effect % 70% 60% 50% 40% 30% 20% 10% 0% 10 20 30 40 50 Cause Best Practice in Inventory Management 60 70 80 90 100 % Dr Tony Wild

ABC ANALYSIS Best Practice in Inventory Management Dr Tony Wild

Figure 3. 3 ABC Inventory Control CHARACTERISTICS A ITEMS Few items Most of turnover B ITEMS Important items Significant turnover C ITEMS Many items Low turnover value (Few movements or low value items) POLICY Tight control Personal Supervision Communication JIT approach - balanced safety stock Lean stock policy Use classic stock control Fast appraisal method Manage by exception Minimum supervision Supply to order where possible Large orders Zero or high safety stock policy Best Practice in Inventory Management METHOD Frequent monitoring Accurate records Sophisticated forecasting Service level policy Rely on sophisticated method Calculated safety stocks Limit order value Computerised Management & exception reporting Simple system Avoid stockouts & excess Infrequent ordering Automatic system Dr Tony Wild

Figure 3. 4 Example of Pareto Analysis Best Practice in Inventory Management Dr Tony Wild

Figure 3. 5 Classification by Usage Value Item F 67 B 23 H 89 D 45 A 12 E 56 J 01 I 90 G 78 C 34 Total Annual Usage (units) 394 105 500 50 21 9 3 11 5 2 Unit Cost (£) 12 11 1 5 7 14 25 4 8 15 Best Practice in Inventory Management Annual Turnover (£) 4728 1155 500 250 147 126 75 44 40 30 7095 Annual Turnover (%) 66. 6 16. 3 7. 0 3. 5 2. 1 1. 8 1. 1 0. 6 0. 4 100 Rank Class Cumulative Percentage 1 2 3 4 5 6 7 8 9 10 A B B C C C 66. 6 82. 9 89. 9 93. 4 95. 5 97. 3 98. 4 99. 0 99. 6 100 Dr Tony Wild C C

Figure 3. 6 Summary of ABC Analysis Classification Percentage of Value Items* Value Class Per A 10. 0 66. 6 4728 B 20. 0 23. 3 1655 C 70. 0 10. 1 712 Total 100. 0 7095 Best Practice in Inventory Management Dr Tony Wild

Figure 3. 7 The Cumulative Pareto Curve Sequence of items Best Practice in Inventory Management Dr Tony Wild

Best Practice in Inventory Management Dr Tony Wild

Number of lines Figure 3. 5 Theoretical and Actual Inventory Profiles Stock cover in weeks (or days) Best Practice in Inventory Management Dr Tony Wild

Figure 11 a ABC Stock Balance Number of Items Value of turnover Stock Cover Average stock value Av Delivery Frequency Number of deliveries % % Weeks Annually A 10 65 1. 5 0. 975 3 173 B 20 25 3 0. 75 4 260 C 70 10 6 0. 6 12 303 Class Total Delivery Quantity Stock Best Practice in Inventory Management 2. 325 737 Dr Tony Wild

Figure 11 b 19% reduction in Inventory Value by more frequent A class supply Class A B C Number Value of of Items turnover % % 10 65 20 25 70 10 Stock Cover Weeks 0. 5 3 8 Total Delivery Quantity Stock Reduction in Inventory Value Best Practice in Inventory Management Average stock value Weeks 0. 325 0. 75 0. 8 1. 875 19% Av Delivery Frequency Weeks 1 4 16 Number of deliveries Annually 520 260 228 1008 Per 100 total lines Dr Tony Wild

Figure 11 c 5% reduction in Inventory Value maintaining similar workload Class Number of Value of Items turnover Stock Cover Average stock value Av Delivery Frequency Number of deliveries % % Weeks Annually A 10 65 1 0. 65 2 260 B 20 25 3 0. 75 4 260 C 70 10 8 0. 8 16 228 Total Delivery Quantity Stock Reduction in inventory Best Practice in Inventory Management 2. 2 748 5% Per 100 total lines Dr Tony Wild