What do you do now? Go back to your desk with your tail between your legs and forget about it? Dream about what it could be like if you were the boss? Start updating your resume? All those responses work but I have a better idea for you to try.

While it’s true that sometimes the boss resists change just because they are afraid of change, sometimes the person suggesting the change just does not know how to sell their ideas.

Jim Strong of the ACA Group (www.theacagroup.com) said in a recent article, “After 30 years in operations as a practitioner, manager and consultant, I have learned three things about managers that are important to understand when trying to sell them new ideas. First, most managers don’t have a lot of time or patience for listening to new ideas; therefore employees must be clear and concise in presenting their ideas.  Second, most employees don’t know how to present their ideas to management.  They need to learn to present ideas in a language and style that is familiar to managers; i.e. charts, graphs, financial measurements, etc.  Third, and most important, they need to back their ideas with factual data. Data speaks loud and clear to managers.”

            I couldn’t agree more, but I’d stress the financial measurement recommendation. To communicate in the language that senior managers understand most clearly, you must present your facts and data in terms of the impact to the bottom line. Show them the money.

            Using the example I started with, if you want to show the boss how you can reduce inventory, run the numbers. Do an analysis of the current inventory levels. Clearly identify how much excess you have. Identify specifically where you can reduce excess. Point out specific part numbers that can be reduced. Point directly to how that reduction will impact the bottom line.

            At www.inventoryperformance.com we offer just such an analysis of your inventory for free. When you provide key pieces of inventory data, we will run that data through their Inventory Quality Ratio tool and show you:

Current Inventory Quality Ratio (ratio of good inventory to bad inventory)

Number of parts and the dollar value of material that is active

Number of parts and the dollar value of material that is excess and slow moving

Potential inventory reduction dollar value including the impact on company profit

This is exactly the kind of bottom line data that gets managers attention. The information is clear, concise and relevant to managers because it translates parts numbers and quantities into dollars.

            IQR was designed by materials and purchasing managers. It presents all its information in terms of dollars. Specifically, IQR Targets functions help you develop meaningful bottom line objectives, for both inventory levels and increased profits. Each Target function requests user input to create specific “What if….” scenarios. The output is valuable information that can be used to focus the entire organization on a single goal. IQR’s Target functions include:

-          Profit Contribution from Improved IQR – This Targets tool displays the Inventory Reduction and the Contribution to Gross Profit resulting from a change in the Inventory Quality Ratio. You can see the inventory reduction and increased profits that you can expect from increasing the IQR percentage.

-          Inventory Reduction Estimate – This Targets tool displays the dollar value of inventory that you can reduce. You enter the percent of reduction you think you can achieve for each IQR Class and the tool will calculate the total dollar value of that reduction.

-          Profit Contribution from Improved Turns – This function calculates the Inventory Reduction and the Contribution to Gross Profit resulting from an increase in Inventory Turns. This item is particularly useful in setting realistic improvement objectives and programs if your company is accustomed to working with inventory turns.

Combined these and the other Target functions of IQR allow inventory managers to set realistic inventory reduction and increased profit plans based on facts and data.

 Whether it is inventory reduction, cycle time reduction, improved quality or any other improvement you want to suggest, you have to get your boss to want to change the way things are currently done. Getting your boss to change requires that you first get their attention. Facts and data presented clearly gets a manager’s attention. Once you have your boss’ attention you have to speak in language that has meaning and relevance to their concerns. Translating all improvements into dollar value, and showing impact to the bottom line is relevant to every senior manager. So next time you go see your boss with a new idea, be brief and clear, talk about the data and make it meaningful by knowing the monetary impact. If you want your boss to change, then show them the data.

Let’s apply this definition to inventory management. The overall purpose of Inventory Management is to ensure you have just enough of the materials you need when you need them. If you have too much material or if you have it too soon, you impact cash flow and the bottom line. . If you have too little of the material you need, you impact customer service and the bottom line. To be successful in inventory management you need to implement a strategy gets you just enough of the materials you need when you need them.

Focus on increasing your IQR is an effective inventory management strategy used by a wide range of companies. As you know from reading this blog, IQR is a measure of inventory performance calculated as the percent of the total inventory value that is needed now. IQR measures inventory in two dimensions, value and timing. Value refers to how much inventory you currently have and is expressed in monetary units of measure. Timing is a measure of when you need the inventory you currently have and is usually measured in days or weeks worth of inventory. Increasing this ratio is a powerful strategy because it is easily understood, easily measured and because it will drive you to tactics that will not allow inventory to be created before it is needed. In other words, it links directly back to purpose of inventory management, ‘have just enough of the materials you need when you need them’.

A good inventory management strategy should define the results you want to achieve in terms of increased profits. There is a direct relationship between increasing your IQR and increasing profits. Every increase in IQR equals a decrease in the amount of money you have to borrow to fund inventory. Every dollar you don’t pay in interest is a dollar that goes directly to the bottom line. To help you set your increase profits goal, you can perform an analysis of how much your IQR needs to go up to achieve your desired increase in profits.

Tactics for executing your strategy include identifying individual parts with excess inventory and working the part with the greatest excess monetary value first to get the quickest bottom line results. That may sound simple but in the world of ERP systems the value of excess of individual parts is not easy data to get. ERP systems think in terms of inventory quantities and due dates of open orders. Working with inventory dollars instead of inventory quantities is a powerful tactic. Another effective tactic to increase your IQR is to identify the root causes of excess inventory and eliminate those causes. Companies that work to identify root cause of inventory performance issues usually discover that out of date planning factors are often to blame. Updating your planning factors is an excellent tactic.

So when applying Mr. Schneider’s definition of strategy and tactics to inventory management, increasing your IQR is a good way to state your strategy. That strategy sets the overall inventory performance goals and drives the tactics which are the individual steps taken to reach those goals.

Staying on top of your inventory levels in today’s continuously changing market is not easy. You’re being pressed to reduce inventory levels while improving service levels and increasing profitability.

Whether demand is going up or down, the technique presented in this webinar uses data you already have in your existing MRP or ERP system to go beyond merely planning inventory quantities to actually managing inventory dollars and working capital.

The Inventory Quality Ratio (IQR) methodology we will present was developed by 35 purchasing and materials managers just like you. This methodology can help you meet today’s challenges and improve competitive advantage in three critical ways:
• Improve inventory performance – Use demand-driven logic and a dollar focus to see exactly which actions you need to take to make rapid improvements in inventory performance.
• Drive operational efficiency – Make it easier for planners & buyers to reduce costs, and inventory levels while improving customer service.
• Enable financial planning – Set inventory reduction goals

Learn how you can gain competitive advantage through the actionable information the IQR method provides. Register for this new webinar today.

Title: Managing Inventory in a Changing Economy

Date: Wednesday, August 18, 2010

Time: 1:00 PM – 2:30 PM EDT

After registering you will receive a confirmation email containing information about joining the Webinar.

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Required: Windows® 7, Vista, XP, 2003 Server or 2000

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Required: Mac OS® X 10.4.11 (Tiger®) or newer

Space is limited.
Reserve your Webinar seat now at:

https://www1.gotomeeting.com/register/140790249

Supply Chain Digest and Gartner Research recently released the results of their annual survey of Supply Chain Digest’s readers. According to their survey, the number one supply chain initiative in 2010 is to “improve efficiency and/or productivity.” Productivity increases moved up from number four in 2009. It looks like that after heavy cut cost cutting and plenty of layoffs companies are now looking at how they can participate in the recovery without adding back to the headcounts that they had before the recession.

This productivity focus is seen in the tremendous increase in the number of SKUs each demand planner is now managing at most companies. The SKU / planner count has grown several fold over the past ten years.

The survey did not address any particular ways companies were using to increase productivity but we know you can’t get the desired level of productivity improvement doing things the way you have always done them. To keep up with and surpass their competition’s productivity improvements companies must use new methods and new tools.

New methods and tools can help improve efficiency in three ways:

• Improve inventory performance – Reduce inventory carrying cost and obsolescence.

• Drive operational efficiency – Make it faster and easier for supply chain professionals to execute analysis and actions.

• Enable financial planning – Set inventory goals and track progress against those goals.

Again, while not addressed in the survey we know one method used by hundreds of companies worldwide to increase productivity. It is the Inventory Quality Ratio (WWW.InventoryPerformance.com).

IQR was developed by 35 purchasing and materials managers. They have been using the IQR method for 20 years to manage inventory levels and increase turns, while avoiding shortages and improving working capital positions.

The inventory reduction methodology embedded in IQR is designed to:

• Improve inventory performance by using demand-driven logic and a dollar focus to see exactly which actions are needed to make rapid improvements in inventory performance.

• Drive operational efficiency by putting the critical information buyers and planners need at their fingertips making it easier for them to reduce inventory levels while improving customer service.

• Enable financial planning by highlighting how the bottom line is impacted by inventory reduction goals based, making it easy to track progress against those goals and giving instant access to the actionable information that will ensure you will meet those goals.

The best companies seem to be making the one time investment in new tools and technology to avoid making the on-going investment of hiring more people. I’m looking forward to next year’s survey too see how the strategy pays off.

An ERP implementation is usually a sizable investment in relation to your yearly sales. Companies can tell you exactly how much they spent and how long it took. Most companies can tell you if they achieved a return on that investment and how they got the ROI. Many companies can show you key business metrics before and after the implementation to prove that things are better.

That’s great as far as it goes. Let’s assume you measured the initial ROI perfectly, but what’s happening today? How do you measure how well the system is being used? What is the right measure of an ERP system performance?

I suggest that the correct measure of ERP is a measure of MRP. At the heart of every ERP system is an MRP engine. MRP is designed to balance supply and demand. It’s important to balance supply and demand because when they are out of balance you build inventory and inventory costs money. It takes cash to buy or build inventory. Many, if not most, companies borrow to support their short-term cash needs. When you borrow, you pay interest. Every dollar paid in interest comes right off the bottom line. To avoid paying interest on excess inventory, planners make sure supply and demand are in sync in both quantity and time.

Supply and demand are balanced through MRP’s two basic outputs, planned orders and exception messages. Planned orders are new supply orders needed to fulfill demand. Exception messages are instructions to planners to change existing supply orders in terms of quantity and/or date.

 If cash flow and profit are the most important measure of the business as a whole then planned orders and exception messages are the most important way ERP affects those measures. So measuring MRP output is the most important way to measure an ERP system’s performance. Therefore the right measure of an ERP system is how well the planners are reacting to planned orders and exception messages.

 Demand and supply are changing every day. Planners get more action messages than they can work. I know of environments where planners get hundreds of messages every day. They could never work them all. All the un-worked orders and messages represent supply and demand that are out of balance so the best way to measure how the planners are reacting to planned orders and exception messages is measure the backlog of un-worked orders and messages.

 If all the orders and messages in the backlog were created equal you could develop a simple measure of ERP performance by just counting them. All items in the backlog are not created equal so we need a measure of their individual impact.  

 We could measure the date variance of each order and messages or we could measure the quantity variance of each item, but there is a better way.  The best way to measure the order and message backlog is by measuring the value of the item. Every message and every order refers to a part. Every part has a cost. Multiple the part’s cost times its value and you get the best measure of the impact of the backlog. In other words, to measure the performance of your ERP system, follow the money.

 I know of no ERP system that provides a dollar focus to the backlog of orders and messages. There are two ways to make up for this shortcoming; you can buy a solution or build a solution. There are prebuilt business intelligence (BI) tools like the Inventory Quality Ratio, IQR, (www.InventoryPerformance.com) that are designed to provide the dollar focus that is lacking in ERP systems’ MRP engine. IQR not only has overall metrics based on dollars rather than parts but it also presents the planners and buyers with a list of parts to be worked by their extended value. This way they can have the biggest impact on working capital and cash flow in the shortest amount of time. Alternatively, you can use your existing BI tool set to develop a dollar focused measure of the backlog of planned orders and messages. Either way, the planners can be much more efficient, having a bigger impact on the business with less effort by focusing on dollars instead of part quantities.

 How do you measure ERP performance? By developing a dollarized measure of planned orders and exception messages that are not being worked.

Excess inventory is to be avoided for several reasons. First, it takes cash to buy or build inventory. Many companies borrow to support their short-term cash needs. When you borrow, you pay interest. Every dollar paid in interest comes right off the bottom line. Second, excess inventory takes up space. You may have to rent space to store the excess materials you are carrying. Third, you typically have to count your inventory either in a year end physical or by cycle counting it on an on going basis. Either way, counting costs you money. I could go on, suffice to say there are many reasons why you want to avoid creating excess inventory.

The following method of avoiding excess inventory comes from the  Inventory Quality Ratio methodology. 

Many articles have been written over the years on how to reduce excess inventory, I want to tell you how to avoid creating excess inventory in the first place.

If you want to avoid excess, you have to understand the root causes that create it and take steps to eliminate them. Some typical root causes of excess inventory include; not adjusting order quantities and due dates when requirements change, accepting orders early from suppliers, and planning factors that are either out of date or just plain wrong. In the short space I have here, I’ll focus on the planning factors. Critical planning factors include safety stock, lead times, lot sizes and order policies such as minimum order quantities, and order multipliers.

To identify and correct these root causes, you must have a way to identify the parts that have issues. For example, you need to compare safety stock to future requirements. A good rule of thumb is to question the reason that any part has safety stock greater than one month’s requirements. Following that rule of thumb, you want to create a list from your planning system of all parts where safety stock is greater than one month’s requirements. For each part on that list, you should verify that you have so much variance in demand or supply that you need that level of safety stock. If you do not have high levels of variance, reduce the safety stock level to a more reasonable level.

The same process should be applied to each potential root cause. Extract a list of parts with lot sizes that are large compared to the current requirements. Identify all parts with order policies that bring in large number of periods worth of inventory. Look at parts with significant minimum order quantities or high order multipliers. With those lists in hand, verify that all these planning factors are appropriate to current requirements and correct those that are not.

Notice that in all the root cause analysis, I recommend comparing the planning factors to the current requirements. All too often companies set planning factors on parts once and don’t make the time to adjust them as circumstances change. Comparing planning factors to current demand is a great way to avoid excess.

Instead of trying to figure out how to reduce excess after it already exists, avoid excess in the first place by identifying the root causes of excess and correcting them on a regular and on going basis.

SPECIAL OFFER TO READERS OF THIS BLOG
If you would like a free analysis of your current inventory including your opportunity to avoid excess inventory, go to www.InventoryPerformance.com and click on the “FREE analysis of your inventory” box.

Part 5 – Act to Make the Reductions Permanent

Following the Plan, Do, Check, Act cycle calls for you to analyze your current condition and create a Plan to improve toward a goal that you set. Once you have the goal, you Do what it takes to improve the current condition. A regular intervals you Check your progress. Based on what that check shows, you take the appropriate Action to make the changes permanent.

 Making your inventory reductions permanent means you have understand the root cause and take steps to eliminate them. Some typical root causes of too much inventory include not adjusting order quantities and due dates when requirements change, accepting orders early from suppliers, and planning factors that are either out of data or just plain wrong. Critical planning factors include lot sizes and order policies, minimum order quantities, order multipliers, lead times and safety stock.

To Act on these root causes, you must have a way to identify the parts that have issues, review the data and Act to correct the data. For example, you need to compare safety stock to future requirements. A good rule of thumb is to question the reason for any part having safety stock that is greater than one month’s requirements. Following that rule of thumb you want to get a list from your planning system of all parts where safety stock is greater than one month’s requirements. For each part on that list, you should Act to verify that you have that much variance in demand. If you do not, reduce the safety stock level to a more reasonable level.

The same process should be applied to each root cause category. Get a list of all parts that have open orders that are due within your current weeks supply on hand. Reschedule all the parts on that list. For example, a part number has 5 weeks worth of inventory on hand right now. You look at the report of open orders and you see that a PO is scheduled to be received in two weeks. You should reschedule that PO out to 5 weeks from now.

Look at your excess inventory by supplier to identify if certain suppliers are constantly delivering early. Let that supplier know that you will no longer be accepting orders before their due dates. Look at your list of parts with large lot sizes, with order policies that bring large period worth of inventory, with significant minimum order quantities or order multipliers, and look at list of parts with long lead times. Verify that all these planning factors are appropriate to current circumstances and correct those that are not.

IQR has a series of standard Action Item functions that are used to identify existing or potential problem areas.  Each Action Item report includes the necessary information for you to take action in keeping your inventory exposure to a minimum. 

Each Action Item report presents your inventory data in a unique way. The Action Items menu in IQR includes following:

Purchase Orders for Non-Active Inventory & Manufacture Orders for Non-Active Inventory - Identifies open Purchase or Manufacture Orders for items where some of the material on hand has been categorized as non-active (E1, E2,E3, slow move or no move). Parts that are in one of these IQR categories already have more inventory than you need. Open orders must be reviewed to make sure they are not going to add to the current problem. For each E1, E2,E3, slow move or no move part, the display shows the current inventory balance in thousands of dollars, the weeks supply represented by that inventory, the open order quantity and due date. At a glance you can see what orders need to be canceled or rescheduled.

Potential Shortages – Items listed on this display represent potential shortages by IQR criteria.  These items are A1 and A2 only, for which the Balance On Hand is less than the requirements in the next month, and for which there are no open orders (either Purchase Orders or Manufacture Orders).  The display shows the balance on hand, the requirements quantity for each of the next three months, the lead time and the supplier. This is all the information you need to quickly get the parts on order and avoid the shortage.

IQR has a series of report that help identify potential problems with planning factors.

Questionable Safety Stock  – This report will list all parts where the safety stock is greater than on month worth of requirements or one month’s usage if there are no requirements. Look at every part on this list and make sure you really need that much safety stock.

Lead Time Longer Than X Days – You enter the number of days of lead time you think is a good maximum, and the report will list all parts whose lead time excees that number. Verify the lead time of each of these parts to make sure you are not putting parts on order early and therefore getting them delivered too soon.

Minimum Order Quantity Greater Than 3 Month’s Requirements or Usage but Lead Time Less Than 30 Days and Order Policy Code Greater than 8 Month’s of Requirements or Usage – These reports highlight order quantities that don’t make any sense. Review and correct as needed.

The information presented in the Action Item functions helps you close the loop and meet the targets you set in your Plan back at the beginning of the cycle. All that’s left tot do is to start the cycle again. Review your current Inventory Quality Ratio and use the Target functions to create your Plan. Do the analysis and define what steps you need to take to reduce the inventory levels. Use Action Codes to mark specific parts and comments to denote what needs to be done. Check the level of improvements using the IQR Performance functions. And finally Act on specific issues using Action Items functions.

This post ends our discussion on the methodology. I discussed the metric in earlier posts. Next time I will explain IQR the tool.

Part 4 – Check if You Are Getting the Results

As I explained last time, IQR is an abbreviation for Inventory Quality Ratio. IQR is a system that helps prevent the formation of excess and obsolete inventory.  That means less money in inventory, lower carrying costs, and increased capital to operate your business.  IQR is an inventory performance metric, an inventory reduction methodology and an inventory management tool. I’ve explained the metric (see earlier posts) and last time I started to explained the inventory reduction methodology. I got through the Plan part of the cycle.

The IQR inventory reduction methodology follows the Plan-Do-Check-Act cycle made famous by Dr. Deming that has become the standard for any process improvement. The IQR tool supports the methodology perfectly. This time I’ll address the Do step in the Plan, Do, Check, Act cycle.

Your Plan is to reduce inventory levels, to Do that you need to know which parts have excess, slow move or no move inventory. In the Plan phase you were looking at gross inventory metrics. In the Do phase you need to know about individual part numbers. You need a list of parts identifying which individual parts are in which condition and to what degree. To be efficient, you need to get that list sorted by value of excess. You are likely to have hundreds, even thousands of parts that need to be addressed. You want to work the ones that will have the biggest impact on your reduction targets first. Here’s an example of a list. The inventory balance on hand is expressed as a value, as thousands of dollars, not quantity of pieces. The excess is also expressed in thousands of dollars. This is critical. You want to focus on the biggest bang for your buck so you need to know the value. You really don’t care if that value is one piece or a million pieces. 

Part Number   Part Description                $1000 On Hand $1000 Excess

7900-0041     P-3,CVR,BCKRE                 207.9                      191.3

17100026      DASHBOARD                        152.4                     138.9

3600001        SHAFT,AL,1.088                116.8                      116.5

8024528        CLEARW,TTD,SK                 111.5                     109.1

8024135        CLRWTR                                 68.7                        65.3

8024527        CLEARW,TTD                      62.7                         58.4

7900-0042     P-3,CVR                             175.4                       54.3

17040124      PAD,STBCK,CSS               56.7                          50.9

8025116        SEAT,SOT,FSH                  50.7                         47.4

 In IQR you can quickly and easily drill down from summary data to details. The first drill down level is going from summary data (such as the number of items and total dollar value) to a listing of the individual records comprising that particular category. This listing shows every part in the category you selected to drill down on. For every part on the list, you see: Part number, Description, planner code, balance on hand in thousands of dollars (not the quantity, IQR focuses on inventory value), Weeks of supply that the balance on hand represents, the excess inventory in thousands of dollars, and the number of open orders including their value. This view points out clearly which parts need your attention. For example, you can see at a glance that a part has thousands of dollars of excess material and has more material on order.

From your list, you select an individual part to work. Of course you select the one on the top of the list because it has the greatest potential for reduction. To realize that potential, you need to see all the details about that part. Critical details include information like usage history, future requirements, last used date, and key planning factors. With that information before you, you can see what must be done to reduce inventory on that part. The specific action you take depends on what you see. Here are some general guidelines.

If the part has no requirements and no recent usage history, you should get it off the books. Remember, you are paying carrying cost for every part in your inventory. Carrying cost typically equals 25% to 30% of the part’s cost and you pay that every year you hold this useless part. Sell it at a discount. Return it to the supplier. Donate it to a charity. What the heck, sell it on e-Bay. Many companies are reluctant to write off inventory but it’s the action of last resort. When you have no other options, write it off the books and throw it away.

If the part has requirements or recent usage but you have too much of it or have it too soon, you should attempt to reduce your overage but definitely prevent any more from coming in until you need them. This usually means rescheduling purchase orders and production orders.

Once you’ve done that analysis, you take the action required to reduce the inventory.

In IQR when you see a part that has a condition that needs your attention, like the parts described above, you can drill down on that part to get more details. The second level of drill down is known as a Part Detail screen, and is used to see all of the information for a particular record (specific part number). Some of the fields you can see in the detail screen include: Usage history, requirements details, and panning factors like lead time, safety stock, and order quantities. On this screen you see all the data you need to take action to resolve the issue. (To see what a Part Detail screen looks like, go to www.InventoryPerformance.com)

When you’ve looked at the detailed data and determined what action you need to take, you can mark the part with an Action Code. Action Codes are input by the user based on their analysis of the detailed data and signal the planned action or current review state of an item. In addition to the action code the user can add comments to any part to further defining what needs to be done. Action codes and Comments become the to-do list that will help you reduce inventory to meet you plan.

Next time: Check – Checking your results to date

As I explained last time, IQR is an abbreviation for Inventory Quality Ratio. IQR is a system that helps prevent the formation of excess and obsolete inventory.  That means less money in inventory, lower carrying costs, and increased capital to operate your business.  IQR is a inventory performance metric, an inventory reduction methodology and an inventory management tool. Last time I explained the metric. This time I’ll start to explain the inventory reduction methodology.

The IQR inventory reduction methodology follows the Plan-Do-Check-Act cycle made famous by Dr. Deming that has become the standard for any process improvement. The IQR tool supports the methodology perfectly. Here is what you do for each stage of the Cycle:

• Plan to improve your operations first by finding out what things are going wrong (that is identify the problems faced), and come up with ideas for solving these problems.
• Do take the steps designed to solve the problems. Keep track of your efforts and the results. Document what you do.
• Check whether the steps you are taking are achieving the desired result or not. Track trends over time and Check key results to identify any new problems when they crop up.
• Act to implement changes on a permanent basis. Look for root causes of the problem and act to eliminate those. This means making the changes a routine part of your activity.

When you have completed the cycle, go back to the Plan stage to identify the next issue.

Now let’s look at how that cycle is used in inventory management and how it’s supported in the IQR methodology and tool.

Plan Your Inventory Reduction

Plan - Improve find out what things are going wrong, and come up with ideas for solving these problems

In inventory management the obvious thing that is going wrong is that you have too much money tied up in inventory. What is not obvious is the right amount of inventory to have. There is no standard answer to how much you should be carrying. Your specific situation will determine how much inventory you should have. Variables that go into your thought process should include your ability to generate working capital.

It takes cash to buy or build inventory. Money that is used to fund operations and inventory is called “working capital. Working capital that is tied up in inventory is not available for other parts of the business. Since many companies barrow to support their short-term working capital needs, this has a real cost to the business, usually called the cost of capital. This cost of capital reduces profits. So every dollar in inventory reduction, leads to a dollar reduction in working capital requirements and therefore, to an increase in profits. 

With the impact to working capital in mind, you can set a rule about how much inventory you should have. Ideally this rule will vary by the A B C classification of your parts. A good starting rule is;

A items  = 2 weeks worth of your requirements or recent usage history

B items = 6 weeks worth of your requirements or recent usage history

C items = 12 weeks worth of your requirements or recent usage history

Remember these are just guidelines. You have to set your own rules based on the cost of capital.

In IQR you start by entering the rules. The rules you use will greatly affect inventory quality as measured by IQR. IQR has a set of default values at the time of your installation based on the normal use of IQR.  You can, and should, establish your own rules, based on your specific business needs. 

In IQR a Rule is the number of weeks supply based on requirements or usage. The Rule used to calculate the maximum inventory quantity that a part may have and still be assigned to an active category.  Rules are calculated for most items that have either Known Requirements, or Usage within the past six months.

Defining how much inventory you should have is step one in creating your plan. You’ve set the requirements that your current inventory will be measured against. The second step in the Plan activities is comparing what you currently have to how much you want to have.

You probably know how much inventory you have in aggregate terms. Good inventory managers know the total value of their inventory. They know their inventory turns  and may know their days supply of inventory or some other time based measurement. What may not be known is which parts you have too many of and which parts do you have too few of. What may not be obvious is which product lines are affected by too much inventory, which plants have too much of a part and which have too few of the same part.  The second Plan step then involves looking closely at your current inventory position by all the segments that are meaningful to your situation. To help you create your inventory reduction plan, you need visibility of the details of the current situation so you can take action.

IQR provides several ways to view summarized inventory data quickly, and the ability to look at the detailed records comprising the summary totals. The summary views in IQR are called Quick Looks, and they are just that, quick ways to look at summary data. With a single click of your mouse you can see your inventory value by product line, plant, warehouse, account number, buyer/planner or vendor. Each Quick Look displays the inventory value for each inventory segment (each product line, each plant, etc.) in each of the IQR categories (Active 1, Excess 1, Active 2, etc.). Quick Looks give you the detailed visibility you need to understand your current situation perfectly. (To see examples of Quick Looks, go to www.InventoryPerformance.com)

When you have that kind of visibility, you can take the next step in the Plan phase, setting your targets. A target is a meaningful objective to improve the business. Your targets should include a reduced overall inventory level, a reduced level of excess and obsolete inventory and an increased profit from lowering the level of working capital. When you’ve set your targets, you have completed you Plan.

IQR Targets functions help you develop meaningful objectives, for both inventory levels and increased profits.  Each Target function requests user input to create specific “What if….” scenarios.  The output is valuable information that can be used to focus the entire organization on a single goal.  IQR’s Target functions include:

Profit Contribution from Improved IQR – This Targets tool displays the Inventory Reduction and the Contribution to Gross Profit resulting from a change in the Inventory Quality Ratio.  You can see the inventory reduction and increased profits that you can expect from increasing the IQR percentage.

Inventory Reduction Estimate – This Targets tool displays the dollar value of inventory that you can reduce. You enter the percent of reduction you think you can achieve for each IQR Class and the tool will calculate the total dollar value of that reduction.

Profit Contribution from Improved Turns – This function calculates the Inventory Reduction and the Contribution to Gross Profit resulting from an increase in Inventory Turns. This menu item is particularly useful in setting realistic improvement objectives and programs if your company is accustomed to working with inventory turns.  (It should be noted that Inventory Quality Ratio is a more meaningful indication of your inventory performance.)

Combined these and the other Target functions of IQR allow managers to set realistic inventory reduction and increased profit plans based on facts and data.

So that’s the Plan step in the IQR inventory reduction methodology using the Plan,Do,Check,Act cycle. Next time I’ll describe the Do phase in the cycle.