Stock: The products you sell and items required to manufacture the products you manufacturer.

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1 I N V E N T O R Y C O N T R O L C H E A T S H E E T stuff vs. stock Stock: The products you sell and items required to manufacture the products you manufacturer. Stuff: Everything else. HITS: Annual hits represents the number of times each product was ordered by customers, transferred or used in an assembly during the past 12 months, regardless of quantity. Cost of Goods Sold/Cost of Goods Used in Production: This measures the dollars moving through inventory. This is key for determining inventory turnover and what products should be stocked in each location. Units Sold/Used in Production: Items with a high number of units sold might require a bulk storage location as well as a bin normally used to fill orders. Gross Margin: Encourage the sale of the items that generate the highest profit. Rank Your Inventory: Items are ranked on a cumulative basis. We recommend the following ranking categories. Rank % A The first 80% B The next 15% C The next 4% D The next 1% X No activity Evaluating HITS (Example on following page): The two ranks that best assist in the analysis of separating stock from stuff are Cost of Goods Sold and Hits. The items that rank D or X should be analyzed to determine if they should be included in stock. Some considerations are: Is the item a repair item for a profitable or essential part Is the item used to serve a highly profitable customer If there is no good business reason to stock these items they should be classified as stuff and removed from your normal stock for that particular location.

2 HITS Ranking Example: Product HITS Cumulative Hits Cumulative % Rank 1.44 Floppy % A 10/100 Adapt % A 28.8 Modem % A 2way Radio % A % B 56k External Modem % B 56k Internal Modem % B 56k Internal/Sound % B 56k Modem % B 56k Modem Card % B 8.4GB Hard Drive % C ACS48 Skr % C Cabinet % C Cable/FT % C Cable % C Cable % D Cable % D Cable % D Cable % D Cable % X Cartridge % X bin locations Justification for assigning and using bin locations: Locating stock in the warehouse is one of the largest causes for wasted time in a distribution or manufacturing organization. Assigning items to a bin location reduces the risk of losing items and increases productivity of warehouse staff. Lost inventory in a warehouse is a major cause of over stocking inventory. Bin Types: Fixed Bins: Fixed bin systems are the most common of the warehouse bin methods. Under this method products are always stored in the same location. If an item is out of stock, its bin remains empty. Multiple items may be stored in the same bin. Fixed bins may be a location on the warehouse floor, a shelf location or a box on a shelf. Random Bins: In a warehouse that utilizes random bins incoming shipments are stored in any empty bin. This is normally used for goods that are palletized. As soon as stock maintained in a specific location is exhausted, the random bin becomes available for receipt of any item stocked in the warehouse. The advantage of this system is that it requires less warehouse space. Generally only one

3 item is stored in a random bin. The disadvantage of this system is an increased management function in that inventory quantities must be tracked at the bin level. Bin Types (Continued): Holding Bins: Holding bins are reserved for items that are not available for sale. These are locations which may be reserved for items which require quality control inspection, repackaging or return to a supplier. Bin Locations Summary: Once again ranking inventory can assist in organizing your warehouse. The most common method of organizing the warehouse is to store similar items together. For example, electrical components are grouped into one section. However, a more effective method may be to locate items by hits. For example, those items with the highest hits are stored closest to the shipping and receiving area. The following drawing illustrates this method. protect Your Inventory Common Causes of Shrinkage: Employee Theft Customer Theft Items are misplaced in the warehouse Item are damaged in the warehouse Methods to Avoid Shrinkage: Restrict access to inventory to only warehouse staff Do not allow access to: Salespeople Customers Manufacturing Employees Pay employees well Maintain an organized and clean warehouse If someone is caught stealing terminate them immediately

4 transactions Record All Materials leaving the warehouse: Disallow the practice of paperless exchange (swapping out similar items without recording the transaction). All inventory issued to a salesperson for sample purposes must accompany a sales order with the sales person as a customer. When the inventory is returned the sales order is deleted. Establish a policy that cannot be broken: NO MATERIAL LEAVES THE WAREHOUSE WITHOUT RECORDING THE TRANSACTION Violators of this policy face immediate termination Process Transactions In a Timely Manner: If a pick ticket is printed fill the order It is common to establish an order cut off time. Pick tickets for orders placed or requested after 3:00 pm are printed the following day. Stock Receipts should be put away and recorded within 24 hours of receipt Process Customer returns the day the material comes back maintain stock accuracy Planning: Set Dates to notify employees of the count A clean and organized warehouse facilitates more accurate counts Determine a count method Count Cards Pre-numbered Count cards are placed at each inventory location with the item number. They generally have two or three tear off sections, one for the first count and one for a second and/or audit count. All cards must be accounted for prior to ending the count. Count Sheets 8 ½ X 11 sheets listing all items and their locations. Count sheets include a column for one or two counts and an audit column. Bar Code Assisted Count cards are replaced with bar coded labels. The item is scanned and a count is entered into a hand held computer. Conducting the Count: Complete all shipping & receiving prior to the count Divide count teams into counting areas by location or types of items Count all items at least once Audit counts as they are being counted Have a data entry person entering the physical counts as they come in Recount all discrepancies greater than 5% of the computer stock quantity

5 Advantages of Cycle Counting: If properly done, year-end count is unnecessary You don t have to wait 11 months to ensure accuracy 97% accuracy is required to achieve effective inventory management Cycle Counting Methods: Goals: Increase inventory accuracy Ensure all items are counted several times per year Methods: Geographic Method Easy to administer Divide warehouse into areas and count each area once per month Generally results in more counts HITS: Count items by hit ranking Results in fewer counts Suggested Method (See Hit Ranking Above) - A - items counted six times per year - B items counted three times per year - C items counted twice per year - D & X items counted once per year Buyer tools Tools of the Trade: Accurate computer stock quantities Accurate Bill Of Materials Timely Transaction Processing Accurate Manufacturing Scheduling Evaluating the Buyer: Customer Service Level # of line items for stocked products shipped complete by promise date Total number of line items for stocked products ordered Manufacturing Service Level # of line items for stocked products picked complete by required date Total number of line items for stocked products required Desired level for these performance factors is 95%

6 Evaluating the Buyer (continued): Inventory Turnover Cost of goods from stock sales issues and transfers during the past 12 months Average inventory value 6 to 8 turns is considered desirable with gross margins from 20% - 30% Return on Investment # turns * average margin Your target return should be at least 100% Adjusted Margin: Annual Sales Dollars Annual Cost of Goods Sold (Average Inventory Value * Carrying Cost %) Annual Sales Dollars Carrying Cost % is generally 25% - 35% Must be greater than Non-inventory related expense % Or Annual Non-Inventory Related Expenses Total Annual Sales Items will fall into one of three categories: The Good: Inventory that provides a positive return on you investment. The Bad: Inventory that doesn t provide a positive return but contributes to other profitable sales. (Spare parts for other profitable product lines). The Ugly: Inventory that doesn t provide a return on investment and doesn t contribute to profitable sales. (This is stuff and should be liquidated) Educate Employees Include your employees in your Inventory Control plan and make them aware of the costs and benefits. If the company s profit margin is 5%, a respectable margin, the company must sell $2000 worth of material to make up for the loss. ($100/.05) The more efficient the company operates, the more money is available for wages and benefits. Employees are the value of most firms. Most employers would like to pay more, but are limited by the economic reality of the organization. If the company is practicing inventory control, they will track shrinkage.

7 When to Order Factors Usage and Usage Rate Average Lead Time and Safety Allowance Order Cycle Order Point We place an order when our Replenishment Position is below the Order Point. Replenishment Position = On Hand Committed + Currently on Order from Supplier Order Point = (Demand * Projected Lead Time) + Safety Stock Determining Demand Define Inventory Periods Most commonly months Break Down Inventory Period by Working Days Track Usage by Period Break Down usage by Demand per Working Day Usage & Usage Rate Determining Future Demand Past Usage Trend Factors Other Factors We may know that a customer order is coming in that will require us to stock up on certain items Seasonal Considerations Usage Example - July Historical Usage Month Total Usage Business Days Usage per Month June May April March February Weighted Average Usage Month Weight Usage per Day Extension June May April March February TOTAL

8 July projected usage 66.4/10*21=139.4 Considerations in Projecting Demand Unusual usage considerations should be excluded Items with growing demand should use fewer periods for considerations Seasonal items should be compared to in-season periods Projected Lead Time & Safety Stock Evaluate vendor lead times by stock item Weighted average lead times can be useful Order Date Receipt Date Lead Time Weight Extension 6/1/2015 6/12/ /18/2015 6/2/ /1/2015 5/13/ TOTALS 6 75 Lead time in this example is 75/6 = 12.5 Safety Stock Demand is a Projection. If Projection is wrong, you want to have enough safety stock to fill orders or meet manufacturing requirements. Common Safety Stock Formulas Percentage of Lead Time Demand Lead Time * Daily Demand * Percentage Days Supply Daily Demand * Days Supply Order Cycle Takes into consideration vendor terms including: Quantity Dollar Amount Weight Volume Considers all products purchased from the same vendor Defined: The average amount of time in days necessary to sell, transfer or use enough products to achieve the vendor target order requirements Line Point The point where the replenishment position will drop below the order point before we can place another target order with the vendor. Line Point = Order Point + (Daily Demand * Order Cycle) Summary: If an item s replenishment position is above the order point on the day we are placing an order, yet we expect it to fall below its order point prior to placing the next order, we want to include it on the current order.

9 How Much to Order Common Reorder Quantity Methods: Economic Order Quantity Minimum/Maximum Quantities Maximum MRP Buyer Discretion Economic Order Quantity: 2 * (Number of working days in the past 12 months)*(replenishment Cost)*(Demand/Day) Annual Carrying Cost Percentage * Unit Cost Replenishment Cost: Cost to place a line on an order, generally $5.00 to $6.00 per line Annual Carrying Cost Percentage 25% to 35% Minimum/Maximum Quantities Order is flagged when the stock quantity drops below the minimum Quantity ordered is the quantity required to bring the stock quantity to the Maximum Minimum should be the safety stock for the item. The Maximum should allow for the maximum demand over the prior 12 month purchasing cycle. Maximum Whenever the replenishment position falls below the Maximum an order is placed to bring it up to the maximum. Good for items that when you sell one you order one. MRP Use a MRP calculation to look at projected demand and supply to determine how many and when an item should be ordered. Typical in manufacturing environments Buyer Discretion All methods used should be subject to the buyers discretion. Mathematics provide a useful tool for making suggestions, but cannot replace an experienced buyer s knowledge.

10 Determine What Source to Order From Purchasing Sources Vendor Replenishment Warehouse Purchase Pooling Rank Vendors Vendor Performance On Time Delivery # of purchase lines delivered complete by the promise date # of purchase lines ordered Quality # of items returned due to quality or vendor errors # of items purchased Price Quantity Discounts Free Freight Payment Terms The Primary Vendor should maintain the best combination of all the above.

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