As the New Year begins, today’s challenging business climate is forcing managers to look for simple, yet effective ways to reduce waste and improve productivity to increase profitability and service. Finished goods, production materials and service parts inventory planning are prime candidates. With thousands of items to manage, sometimes at multiple locations, the lack of scientific automated tools has made the job almost impossible leaving companies with too many of the wrong items and not enough of the critical ones. The result is unnecessary inventory expense, while suffering service-limiting stock-outs.
Manual efforts to improve this situation fail, because of the time-intensive nature of the problem. A large number of items, each with special considerations, quickly bog down someone trying to improve planning and purchases. What about your key performance indicators (KPI’s)? Are they being achieved and in-sync with the current business environment? Learn more.
Current Common Practice – manual setting of min, max, and safety stock
Typical replenishment planning is controlled with a min/max; re-order point, and re-order quantity approach and run in a spreadsheet. Holding stock on the shelf in anticipation of demand and to meet contractual obligations is necessary for many organizations, especially service and mission-critical distribution.
First, let’s define what is generally meant by min, max, and safety stock.
The minimum stock level is the reorder point. It is a level below which inventory should never drop without placing an order. The maximum stock level is the maximum level of inventory desired to be maintained. It typically consists of the minimum stock plus that amount of stock which is normally used between orders plus safety stock. The safety stock is a reserve of stock to protect against stock-outs due to delivery delays, product shortages at the supplier level, or when demand is unexpectedly higher.
The drawbacks to this process are many:
- it is complex, time consuming, and inexact. Often “gut-feel” is used to set the values
- inventory data may exist in multiple information systems and spreadsheets. This makes it difficult to work with in a routine manner for all items or to get a coordinated view of how a part is being managed across the company.
- it is usually set manually on a global basis and therefore, users rarely apply a reliable scientific or statistical methodology. Using an Average Monthly Usage misses the demand swings and is too slow to show a trend. Under-buying or overbuying result.
- it does not take into account demand variability, service levels, etc.
- it is not dynamic – business conditions constantly change, sometimes daily, but min\max levels are often set and stay unchanged for a year or more
- with hundreds or thousands of items to set levels, the process can be flawed as it is difficult to give every item equal attention
As a result, stock-outs occur frequently (lost sales cause lost revenues, dissatisfied customers which can lead to lost customers) and overstock (excess inventory) is common which waste company cash
A Better or Improved Process – automatic, scientific setting of replenishment triggers
The combination of a good forecast and a good optimization method is the key to making the most of your inventory investment, Valogix does both and it does it easily.
You do not have to be a statistician to benefit from the power of advanced planning – the system does it for you. The first step, demand planning, is a powerful automated system. It establishes a rolling 12-month demand projection for every item that you want to plan*. The next step involves optimizing the inventory by setting optimal stocking levels. Valogix’s unique approach to solving this complex problem generates what Valogix calls a ‘Stocking Quantity (SQ)’. Learn More.
Valogix Stocking Quantity or SQ, defined as the quantity of stock recommended to meet expected and unexpected demand over the planning horizon, may be considered a stock up to quantity. The SQ calculation is a proven statistical approach determining the optimal amount of an item to stock on the shelf.
Valogix optimization and SQ consider the wild cards in planning e.g. how random the demand of an item is (i.e. standard deviation) and service level objectives, and it does it for each item, leaving nothing to chance.
- it is a proven statistical method
- it is dynamic, changing automatically as business conditions change – manual intervention is not required. This saves time, money, and effort.
- it takes into account many variables insuring the right coverage without over-or under- investing
- it is an optimal quantity which means you save money without sacrificing service
- it replaces the need for manually setting min, max, and safety stock for items planned.
* Different Stocking Codes allow you to load all items into Valogix Planner, but forecast and/or plan only those you want or need to. https://valogix.com/advanced-planning-provides-high-roi/