Introduction to Inventory Replenishment Davisware 514 Market Loop West Dundee, IL 60118 Phone: (847) 426-6000 Fax: (847) 426-6027 Contents are the exclusive property of Davisware. Copyright 2011. All Rights Reserved.
2 Davisware GlobalEdge Inventory Replenishment Table of Contents Terminology & Key Attributes... 4 Warehouse... 5 Replenishment Path... 6 Average Usage Rate (UR)... 7 Specific Rules... 8 The most important takeaway about Average Usage Rate is this:... 9 Seasonal Items... 10 Lead Time... 11 Reorder Method... 12 Min Qty & Max Qty... 13 Order Point... 14 Safety Stock... 15 Economic Order Qty (EOQ)... 16 New Order Point Formula with Safety Stock Factored In:... 17 The EOQ calculation consists of 4 variables:... 18 More Info for Good inventory Control... 19 Calculating the Cost of Carrying Inventory... 20 Unit Cost... 21 Economic Order Qty (EOQ)... 22 Class... 23 Class... 24 Class... 25 Class... 26 Implementing the proper Reorder Method... 27 Replenishment Controls... 28 Reorder Method 1: Min/Max... 29 Proper Setup... 30 Min / Max values... 31 Reorder Method 2: Order Point... 32 Proper Setup of RM2 - Order Point Part... 33 Lead time... 34 Seasonal Items... 35
3 Davisware GlobalEdge Inventory Replenishment Inventory Replenishment Menu... 36 Myth vs. Fact:... 37 Conditions that should cause history disqualification:... 38 Effective EOQ... 39 Adjusting EOQ... 40 Reorder Method 5: Class Method... 41 Class Analysis Report... 42 Class Method Formula... 43 Expected Turn Rate... 44 Example:... 45 Recommended Replenishment Report... 46 Pyramid... 47 Replenishment Report... 48 Sample Company... 49 Replenishment Report for Main Warehouses... 50
4 Davisware GlobalEdge Inventory Replenishment Terminology & Key Attributes Warehouse Replenishment Path Average Usage Rate Seasonal Lead Time Reorder Method Min Qty, Max Qty Order Point Safety Stock Economic Order Qty (EOQ) R Factor K Factor Unit Cost Class
5 Davisware GlobalEdge Inventory Replenishment Warehouse 2 Types of Warehouses: Main Warehouses All Others (remote warehouses, tech trucks, GoBoxes, etc) Very important because this determines the type of reorder method you will use as well as the way the parts flow through on transactions. Main Warehouses replenish their inventory direct from vendors. Whereas remote warehouses, trucks, & GoBoxes are generally replenished from a main warehouse. Main warehouses use pick slips in GE whereas non-main warehouses do not.
6 Davisware GlobalEdge Inventory Replenishment Replenishment Path You have 2 options to choose from: Vendor One of your Main Warehouses You have 2 options to choose from: Vendor One of your Main Warehouses
7 Davisware GlobalEdge Inventory Replenishment Average Usage Rate (UR) Consists of 2 stats that GE Keeps: Sales Usage Average Usage Rate is usually figured on 4-6 months of data. The specific months that are used are determined when running the recalc program. For non seasonal items, it s generally the most recent 4-6 months.
8 Davisware GlobalEdge Inventory Replenishment Specific Rules The specific rules for what is considered a Sale Vs Usage is based on the type of transaction- Orders, Service Orders or Transfer Sheets. You can find these rules explained on the Item Inquiry Totals tab.
9 Davisware GlobalEdge Inventory Replenishment The most important takeaway about Average Usage Rate is this: The goal of the sales and usage stat is NOT to record every transaction of a part through the warehouse. It is to record ONLY those transactions that would be considered typical in nature. Because the average usage rate is integral in the calculation of how many units to stock and when to reorder, it s important to base those decisions on transactions that are likely to repeat, not the exceptions.
10 Davisware GlobalEdge Inventory Replenishment Seasonal Items An item is seasonal when 80% or more of its annual usage falls within 6 consecutive months. GE labels these items like this- S04, where the S indicates seasonal and 4 indicates the month that begins the seasonal period. An item is considered VERY seasonal when 80% or more of its annual usage falls within 3 consecutive months. GE labels these items like this- V04, where the S indicates very seasonal.
11 Davisware GlobalEdge Inventory Replenishment Lead Time Lead time is the average amount of time from the point the PO is created until the parts are received. GE expresses this as a decimal qty with 1 representing 1 month. A part that takes 5 days to get on average would have a lead time of 5 / 30 =.166 rounded to.17
12 Davisware GlobalEdge Inventory Replenishment Reorder Method There are 4 options: (1) Min/Max (2) Order point (5) Class Reorder (4) Nonstock The reorder method is defined at the item warehouse level.
13 Davisware GlobalEdge Inventory Replenishment Min Qty & Max Qty Min & Max Qty are used with reorder method 1 in GE. Max Qty = qty to replenish back up to Min Qty = trigger to reorder These values are manually set usually. However we now have a couple of tools in GE to assist you in setting them based on sales & usage.
14 Davisware GlobalEdge Inventory Replenishment Order Point An Order point is used with reorder method 2 in GE. The order point is similar to the Min Qty in that it s the trigger at which the system will prompt you to replenish. Order point = UR x LT The order point is automatically calculated in GE Example: Item has avg usage 10/month and.23 lead time Order Point = 10 x.23 = 2.3, round to 2. So at the point that you have 2 units on your shelf, you have approx 7 days worth of inventory, which is the avg amt of time it takes to get re-supplied by your vendor.
15 Davisware GlobalEdge Inventory Replenishment Safety Stock Safety stock forms a pad of material to take care of reasonable variations in usage or lead time from the averages anticipated. It s expressed as a % of your Order Point. Because of the fact that half the time you use it and half the time you don t, on the average, it s always on the shelf! The safety allowance, whatever the qty, becomes a fixed asset. It turns 0 times. Therefore don t add more safety than is necessary. Gordon Graham Complex formulas exist to help calculate what you should keep as safety stock but it s commonly accepted to start with 50%
16 Davisware GlobalEdge Inventory Replenishment Economic Order Qty (EOQ) EOQ is used only with Reorder Method 2. It represents the most economical qty to purchase when it s time to replenish.
17 Davisware GlobalEdge Inventory Replenishment New Order Point Formula with Safety Stock Factored In: Usage Rate X Lead Time + Safety Stock Using the same example from before: Item has avg usage of 10/month,.23 lead time and you wish to keep 50% safety stock Order Point = 10 x.23 = 2.3 (2) + 1 = 3 Safety Stock = 2 x.5 = 1
18 Davisware GlobalEdge Inventory Replenishment The EOQ calculation consists of 4 variables: R Factor- The cost of going through the replenishment cycle, figured down to an incremental unit basis. We will use $5 K Factor- Cost of carrying inventory. Calculated as the amount the average unit accumulated during the time you had it on the shelf. We will use 28% Usage Rate- Average monthly usage Unit Cost- Amount you pay the vendor for the item.
19 Davisware GlobalEdge Inventory Replenishment More Info for Good inventory Control
20 Davisware GlobalEdge Inventory Replenishment Calculating the Cost of Carrying Inventory
21 Davisware GlobalEdge Inventory Replenishment Unit Cost What you pay the vendor. In GE language, we always refer to this as cost. Whereas Price is what you charge your customer.
22 Davisware GlobalEdge Inventory Replenishment Economic Order Qty (EOQ)
23 Davisware GlobalEdge Inventory Replenishment Class Item Class is used only with reorder method 5 in GE. Class is a method of classifying inventory, similar to the old A-B-C method of inventory. A items were those with lots of money moving through inventory in a year, B s were the next group with less money involved and C s were numerous but collectively accounted for few dollars moving through inventory, and D s were the dogs- dead inventory.
24 Davisware GlobalEdge Inventory Replenishment Class There are 13 classes within this system. Class 1-2 make up the old group A. Class 3-4 are finer breakdowns of old group B Class 5-12 establish 8 levels within the old group C Class 13 is the dogs, same as old group D Calculation for Class involves a ranking of items based on this formula- Units sold in a year x unit cost = Throughput Cost
25 Davisware GlobalEdge Inventory Replenishment Class Calculation for Class involves a ranking of items based on this formula- Units sold(yr) x unit cost = Annual Dollar Movement Sequence all items according to dollar movement, highest to lowest Decide where the Dead item breakpoint is to be. Example- Less than $20 Annual Dollar Movement
26 Davisware GlobalEdge Inventory Replenishment Class Class 1 = Top 7.5% Class 2 = Next 7.5% Class 3 = Next 10% Class 4 = Next 10% Class 5 = Next 8% Class 6 = Next 8% Class 7 = Next 8% Class 8 = Next 8% Class 9 = Next 8% Class 10 = Next 8% Class 11 = Next 8% Class 12 = Next 12%
27 Davisware GlobalEdge Inventory Replenishment Implementing the proper Reorder Method
28 Davisware GlobalEdge Inventory Replenishment Replenishment Controls All replenishment controls are found on the Item Warehouse tab in GE
29 Davisware GlobalEdge Inventory Replenishment Reorder Method 1: Min/Max Min/Max should be used for all items in non-main warehouses & some items even in your main warehouse. For example, if an item has very low to no usage, the automated systems of replenishment would not consider it a stock item. In cases where you must carry inventory for the part, regardless of usage, you would want to use RM 1, Min/Max.
30 Davisware GlobalEdge Inventory Replenishment Proper Setup Proper Setup of RM1 - Min/Max Part. Min Qty must always be at least 1 less than Max Qty.
31 Davisware GlobalEdge Inventory Replenishment Min / Max values Min / Max values are usually set by the inventory manager. They can be uploaded into GE using the data import program or set manually. There are however reports & programs in GE that can be used to help set a proper Min/Max level for each part. Set Min Max Report Min Max Analysis Report Update Min/Max with Inv Qty
32 Davisware GlobalEdge Inventory Replenishment Reorder Method 2: Order Point The order point method is an automated method of replenishment. It can be used for items in your main warehouse(s). The order point method is a good method that relies on proven formulas for determining when to buy and how much to buy. Like all formulas though, inaccurate variables will skew your results.
33 Davisware GlobalEdge Inventory Replenishment Proper Setup of RM2 - Order Point Part
34 Davisware GlobalEdge Inventory Replenishment Lead time Lead time can be manually loaded for each item warehouse record or it can be set in GE by running the Lead Time Calculation program.
35 Davisware GlobalEdge Inventory Replenishment Seasonal Items If you have seasonal sales, then use the Seasonal Items program to identify those parts that are (S)seasonal and (V)very seasonal.
36 Davisware GlobalEdge Inventory Replenishment Inventory Replenishment Menu Average Monthly Usage Rate, Order Point and EOQ are all set by running the Monthly Replenishment Recalc report, found on the Inventory Replenishment Menu. *If you do have seasonal items, be sure to specify the months you want to use to calculate average usage.
37 Davisware GlobalEdge Inventory Replenishment Myth vs. Fact: Myth: Using an automated method of replenishment means I can walk away and just let the computer do all the work in figuring out what I need to order. Fact: 20 to 25 Percent of the Stock Items Need Human-Set Controls Gordon Graham How can that be???
38 Davisware GlobalEdge Inventory Replenishment Conditions that should cause history disqualification: 1. Unusual sales or transfers in a month, including one time sales or withdrawals, promotional periods, etc. 2. Stockouts that last as long as 2 weeks during a month. 3. Items with only a single customer or where one customer dominates the sales. 4. Items with very low sales per year. When these conditions are present, the last 6 months can be very misleading as a guide for what to expect in the future. You must make sure to flag unusual transactions and/or modify the sales/usage for the month when necessary.
39 Davisware GlobalEdge Inventory Replenishment Effective EOQ Here are the conditions for a stock item that should be present for EOQ to be effective: 1. The price paid to the supplier does not vary when you buy more of this one item. 2. The usage rate of the item is higher than ½ unit per month. You move at least 1 unit every other month. 3. The suppliers lowest permissible purchasing qty on the item is reasonable for you to attain it does not represent 3 or 4 times the calculated EOQ
40 Davisware GlobalEdge Inventory Replenishment Adjusting EOQ When the supplier has a required package qty then it becomes necessary to adjust your EOQ value. 1. Round the EOQ answer off to the nearest standard pack size. Go up if the calculated qty is more than halfway to the next multiple and down if it isn t. 2. Round the EOQ answer up to at least 2 weeks supply if it s lower than that. 20 or more turns per year are good enough.
41 Davisware GlobalEdge Inventory Replenishment Reorder Method 5: Class Method The class method is a simplified version of Reorder Method 2. Although EOQ s do a good job they also violate one important rule: If a calculation is too tough for an average person to duplicate by hand, it may lead to trouble. The classification method approximates the results you d get with EOQ. You can expect slightly less turns on your inventory with the Class method but it s still a very effective tool for managing your inventory. EOQ offers very precise turnover results on each item. It will recommend 1.3 months supply or 3 weeks or 4.8 months supply. Whereas with the Class method you buy exactly 1 month s supply, 2 month s supply, six, twelve, etc. On average, EOQ develops about one more turn per year than the class method.
42 Davisware GlobalEdge Inventory Replenishment Class Analysis Report To classify your items you run the Class Analysis Report. It s recommended to run this once a quarter
43 Davisware GlobalEdge Inventory Replenishment Class Method Formula The class method still relies on the order point calculation to determine what qty to trigger replenishment. When it s time to buy though, here is the formula it uses to determine how much you should order: Class X Monthly Usage Rate
44 Davisware GlobalEdge Inventory Replenishment Expected Turn Rate The expected turn rate to expect on each class can be found on the following table: Class Months Supply 1 1 12 2 2 6 3 3 4 4 4 3 5 5 2.4 6 6 2 7 7 1.7 8 8 1.5 9 9 1.3 10 10 1.2 11 11 1.1 12 12 1 Turns to Expect
45 Davisware GlobalEdge Inventory Replenishment Example: Suppose you have a class 5 item that has an average monthly usage of 10. That s 120 per year. Based on the class formula: 5 x 10 = 50 You will be prompted to order 50 when it s time to buy. Class 5 is expected to get 2.4 turns per year. Therefore 50 x 2.4 = 120 Let s suppose however you made a decision that you never wanted to stock more than 1 months supply on your items. By changing your turn rate in the inventory control for class 5 from 2.4 to 12, we can now plug the new values in using the GE formula. 12 / turn rate x usage rate or 12/ 12 x 10 = 10, exactly a 1 month supply.
46 Davisware GlobalEdge Inventory Replenishment Recommended Replenishment Report It s finally time to replenish your warehouse! The Recommended Replenishment Report scans Potential qty in the warehouse to see what items need to be replenished. Potential Qty= Qty on hand + Incoming PO/Transfers Unfilled Demand (orders, SO s, transfers)
47 Davisware GlobalEdge Inventory Replenishment Pyramid The order that you replenish your warehouses is very important. Start at the lowest level of the pyramid and run replenishment for those warehouses first to create your transfer sheets. Then proceed up the pyramid until you get to the top, which is when you will replenish your main warehouse and create your purchase orders. It s critical to do it in this fashion. Demand in lower warehouses will impact potential on the warehouses above them. Main Warehouse Branch Warehouses Trucks, Remote Warehouses, & GoBoxes
48 Davisware GlobalEdge Inventory Replenishment Replenishment Report Replenishment Report settings for trucks, remote warehouses, and GoBoxes
49 Davisware GlobalEdge Inventory Replenishment Sample Company
50 Davisware GlobalEdge Inventory Replenishment Replenishment Report for Main Warehouses The fields below the Action Reference are SPECIAL USE fields only.