Best Practices for Inventory Reduction

Gary Gossard
IQR International

Presentation Outline
Best Practices Top Ten Inventory Reduction Practices Inventory Quality Ratio Reduction Strategies and Case Studies
Identify and Reduce the Excess Revise Material Ordering Guidelines Use Continuous Improvement

Summary & Conclusions

1992-2005 IQR International, Inc.

Definition 1
A Best Practice is a process or technique that has a proven record of success in providing significant improvement in cost, schedule, quality, performance, safety, environment or other measurable factors which impact the health of an organization.
The Best Manufacturing Practices Center of Excellence

1992-2005 IQR International, Inc.

Definition 2
A Best Practice is a group of tasks that optimizes the efficiency or effectiveness of the business discipline or process to which it contributes. It must be implementable, replicable, transferable and adaptable across industries.
The Gartner Group

1992-2005 IQR International, Inc.

Inventory Reduction Best Practices Survey

Inventory Management Report
Improving Logistics & Supply Chain Management

Survey of inventory managers Reported top 5 best practices Tabulated by company size
Under 500 employees Over 500 employees

Ranked 20 practices by overall utilization

1992-2005 IQR International, Inc.

Top Ten Reduction Practices

Conduct periodic reviews Analyze usage and lead times Reduce safety stocks Use ABC approach (80/20 rule) Improve cycle counting Shift ownership to suppliers Re-determine order quantities Improve forecast of A and B items Give schedules to suppliers Implement new inventory software
1992-2005 IQR International, Inc.

65% 50% 42% 37% 37% 34% 31% 23% 22% 21%

Survey Conclusions
Periodic Review still most popular Order Quantities biggest gain Using more analytical approaches
Past usage and safety stocks Lot sizes and order quantities ABC classifications

Takes more than one best practice Inventory reduction a two step process
1992-2005 IQR International, Inc.

Introducing IQR
A comprehensive approach to reducing inventory investment. A more useful method of measuring inventory performance. Developed by 35 materials managers. Combines 7 of top 10 best practices.
1992-2005 IQR International, Inc.

Inventory Quality Ratio

Inventory management technique Works with your existing system Top-down focus on inventory dollars Measures performance by segment Gives planners information they need Enhances any MRP/ERP/SCM system No additional data entry required.
1992-2005 IQR International, Inc.

IQR Logic
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1992-2005 IQR International, Inc.

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Inventory Quality Ratio

IQR =
Active Inventory Dollars Total Inventory Dollars A1 + A2 A1 + A2 + E1 + E2 + E3 + SM + NM

IQR =

Perfect IQR = 100%

1992-2005 IQR International, Inc.

Inventory Quality Ratio

IQR =
Active Inventory Dollars Total Inventory Dollars A1 + A2 A1 + A2 + E1 + E2 + E3 + SM + NM

IQR =

30-50% Average IQR = 30-45%

1992-2005 IQR International, Inc.

10%

The IQR Logic

Analyzes inventory using:
Balance on hand and unit cost Past usage and future requirements ABC techniques and user-defined parameters

Develops inventory quality categories:

Active: reqmt/use, balance within limits Excess: reqmt/use, balance over users limits Slow Moving: no reqmt, no use in 6 months No Moving: no reqmt, no use in 12 months

Measures overall inventory performance. Combines BPs with a dollar focus.

1992-2005 IQR International, Inc.

Inventory Reduction Strategies

with Case Studies of IQR Results

1. Identify and Reduce the Excess

Rapid Inventory Reduction at IGT

2. Revise Material Ordering Guidelines

Working Smarter, Not Harder at AGCS

3. Use Continuous Improvement

World Class Performance at Steelcase
1992-2005 IQR International, Inc.

1. Identify & Reduce the Excess

Quick Look Good and Bad Focus on Dollars Action Items Open Orders Action Codes
1992-2005 IQR International, Inc.

Case 1 - Rapid Reduction

International Game Technology (IGT) Gaming equipment manufacturer Markets and products evolving Shortages increasing Inventories growing & turns falling Tired of Program of the Month Managements demands of consultant
Long-term solution Short-term benefits Reduce inventory $10 million by FY end.
1992-2005 IQR International, Inc.

Inventory Dollars by Category

Purchased and Manufactured at IGT
Quick Look Dollars ($1000) by Purch/Manuf and Quality Category
Purch Manuf P M Active 1 351 21 Active 2 16,994 695 Excess Excess Excess 1 4,097 121 2 26,879 385 3 0 0 Slow No Total Value 53,458 1,507 IQR Ratio 32.4% 47.5%

Moving Moving 1,738 18 3,400 267

Total

372

17,689

4,218

27,264

1,756

3,667

54,965

32.9%

Excess 2: The biggest and best reduction opportunities.

1992-2005 IQR International, Inc.

Rapid Reduction Phase

By fiscal year end - 3 months
Over $10 million reduction (20%) 27% reduction in Excess 2 inventories Management very happy.

By calendar year end - 5 months

$16.4 million reduction (31.5%) 53% reduction in Excess 2 inventories $14 million increase in cash flow.

Increased turns, cash flow and ROA.

1992-2005 IQR International, Inc.

Rapid Inventory Reduction

Inventory Dollars and IQR Performance
60,000 50,000

IGT
45 40 35

40,000

30 25 20

30,000

20,000 Added 10,000 more inventory items 10,000

15 10 5

6/98

8/98

10/98

12/98

2/99

4/99

Rapid Reduction Phase

1992-2005 IQR International, Inc.

Continuing Improvement Phase

Inventory Quality Ratio (%)

Inventory Dollars ($000)

Added

Continuing Improvement Phase

Deployed IQR to all planners Doubled the parts managed with IQR
Added 10,000 items and $14 million New items lowered overall IQR Total inventory base $69 million

$30 million reduction (43% in 14 months) Purchased parts reductions

Excess 2: $20.3 million (61%) SM + NM: $3.8 million (52%)
1992-2005 IQR International, Inc.

2. Revise Ordering Guidelines

Inventory Profile Target Setting What Ifs Custom Analyses Safety Stocks Ordering Rules
1992-2005 IQR International, Inc.

Case 2 - Working Smarter

AG Communication Systems (AGCS)
Lucent Technologies and GTE $350 million total sales

Central office switching networks Genoa, IL: 800 employees, 300K s.f. Inventories
20,000 active part numbers $16 million purchased parts $9 million WIP and finished goods
1992-2005 IQR International, Inc.

Inventory Performance Pressures Mounting

Aggressive growth plan Shorter product life cycles Inventory investment increasing Inventory turns deteriorating Obsolescence exposure growing
20% of inventory balance Reserve funded from net income
1992-2005 IQR International, Inc.

New Approach Needed

Had been using
State-of-the-art systems Event-driven replenishment Make-to-order assembly Experienced planners

The results just werent there!

Spending too much time on C items Need to focus on $$$, not quantities

Saw IQR as a more effective method

1992-2005 IQR International, Inc.

Improvement Strategy
A Three Step Approach
1. Stop the Bleeding
Cancel or defer excess open orders

2. Clean House
Identify slow and obsolete inventories Assess potential for reducing write-offs

3. Take Away the Knife

Apply ABC classifications Re-evaluate ordering guidelines Synchronize IQR and MRP
1992-2005 IQR International, Inc.

Inventory Dollars and IQR

Purchased Parts by Category and IQR Performance
12,000 10,000

AGCS
50

45

8,000

SM+NM IQR %

35

30

6,000

25

20 4,000 15

10 2,000 5

0 0 1 2 3 4 5 6 7 8 9

Months After Implementation

1992-2005 IQR International, Inc.

Inventory Quality Ratio (%)

Inventory Dollars ($1000)

Active Excess

40

The Results and Benefits

IQR doubled in nine months 35% reduction in excess inventory $3.8 million inventory savings Doubled active inventory available Fine tuned their MRP system Orders now consistent with targets Everyone working smarter, not harder Quicker response to product changes
1992-2005 IQR International, Inc.

3. Use Continuous Improvement

The Second Step Movement Matrix Flag Changes Financial Impact Track Results Root Causes
1992-2005 IQR International, Inc.

Three Causes of Bad Inventory

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Materials

Sales

Engineering

1992-2005 IQR International, Inc.

Case 3 - Steelcase (four plants) World Class Performance

4 - 12 - 24 IQR= 80-90% 1 - 2 - 6 IQR= 40-50% 6 months IQR= 55-70% Over 42 turns Make to order Benchmark Revise rules Dont outgrow The best get better.
1992-2005 IQR International, Inc.

30 turns 40 turns

Best Practices and IQR

Conduct periodic reviews Analyze usage and lead times Reduce safety stock levels Use ABC approach (80/20 rule) Shift ownership to suppliers Re-determine order quantities Update inventory systems

IQR adds the dollar focus

1992-2005 IQR International, Inc.

IQR Environments
Manufacturing companies
material planners buyers production schedulers operations management financial management

Distribution and logistics Utilities and MRO stores Management consultants

1992-2005 IQR International, Inc.

Best Practice Criteria

A Best Practice is a process or technique that has a proven record of success in providing significant improvement. It must be implementable, replicable, transferable, and adaptable across industries.
1992-2005 IQR International, Inc.

IQR Use is Spreading

Airtechnics Alcatel Allergan Medical Amtrol Incorporated Andrew Corporation Arvin Meritor Avery Dennison Banner Pharmacaps Beckman Coulter BiltBest Products Binney & Smith Black & Decker Bosch Corporation Bunn-O-Matic Corp Carrier Corporation Chamberlain Group Dana Corporation
1992-2005 IQR International, Inc.

Dialogic - Intel Corp. Dow Chemical Eastman Chemical Engenio IT - LSI Logic Erico Incorporated GKN Automotive Honeywell Hyundai Johnson & Johnson Katy Industries Korry Electronics Kohler Companies Krebs Engineers LuK Automotive Motorola National Oilwell National RV Newell-Rubbermaid

Nilfisk-Advance Oakley Ocean Cuisine OSullivan Industries Pharmacia Italia Rheem Manufacturing Ricon Corporation Schering-Plough Schlumberger Stanley - MAC Tools Telex Communications Tyco Electronics Unilever Bestfoods Wellman Products Wenger Corporation Woodward Governor Valmont Industries Vita-Tech International

Conclusions
MRP/ERP good for planning Best practices needed to manage IQR combines best practices with $ focus Keys to reducing inventories:
Focus on the dollars prioritize opportunities Identify the excess stop the bleeding Apply dynamic ABC analysis work smarter Re-evaluate ordering rules fine tune MRP Monitor movement address root causes

Make the planners job easier. Improve turns, cash flow and profits.
1992-2005 IQR International, Inc.

Thanks for attending.

Questions?
Gary.Gossard@IQR.com (949) 487-5400

1992-2005 IQR International, Inc.