Dr. Ed Marien Says:
|
The
ideal goal is to determine
strategies that result
in no SLOBS. However,
excess inventories in
and of themselves are
not bad when considering
strategic business initiatives,
such as new product introductions
with possible surges in
sales.
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For
electronics and many other manufacturers
with rapid lifecycle products,
managing end-of-life (EOL) inventories
effectively can have a huge
impact on supply chain costs
and company and product line
profitability.
In
Part 1 of this series, we looked
at some of the key issues and
opportunities, and introduced
the concept of Progressive Inventory
Disposition (PID), an analytic
model that uses a more granular
approach to costing over the
life of the product, and that
fully considers the time value
of cash flows associated with
invested cash and cash sales
flows when making inventory
decisions. (See Inventory
Management: Improve Product
Lifecycle Profitability with
End-of-Life Progressive Inventory
Disposition (Part 1).
In
part 2, we provide explore in
more detail what the drivers
of inventory levels in high
tech, electronics and many other
discrete manufacturing companies,
and present a model for costing
inventory.
Why
Excess and Obsolete Inventories?
Thresholds of Opportunities!
Before
exploring an improved process
for managing EOL Slow Moving
and Obsolete (SLOBS inventories),
let us explore the question:
why are excess inventories generated?
The
ideal goal is to determine strategies
that result in no SLOBS.
However, excess inventories
in and of themselves are not
bad when considering strategic
business initiatives, such as
new product introductions with
possible surges in sales.
Seasonality is a major contributing
factor for consumer electronics
products. Many firms are
trying to build to order or
build to demand on a short term
basis; however, most products
are still made to stock or made
for postponed modification for
sale. Economic inventory
lot sizes must be coordinated
to overall Product Lifecycle
(PLC) profitability. The
trick is to do good forecasting
over the PLC, but forecasting
is difficult when trying to
factor in forces and factors
that can occur and 70% forecast
accuracy stubbornly remains
the norm for high tech
manufacturers.
The tradeoff is higher inventory
carrying costs by building inventories
versus lost sales due to unavailability.
Lack
of coordinated decision-making
by all functions in the firm
may lead to excess inventories.
External agreements as to expected
sales with customers plus supplier
constraints on product supply
availability and services add
another dimension of complexity
in attempting to forecast sales.
In forecasting demand, managers
must deal with all types of
inventories which lead to much
complexity in minimizing associated
cash flows. See Table
1 below as to the many types
of inventories most firms have
to manage.
Table
1.—Types of Inventories
Leading to Possible Excesses
Working |
Stocks
to cover best-guess
forecasted levels of
sales. |
Safety |
Stocks
to cover uncertainties
regarding higher than
targeted levels of sales |
Seasonal |
Inventory
build-ups to cover seasonal
surges in sales |
Promotional
Events |
Inventory
build-ups to cover marketing
spikes in sales |
Volume
Discount Incentives |
Seller
price breaks providing
incentives to buyers
to increase order sizes—can
be product or transportation
volume breaks |
Scrap |
Inventories
deemed unsaleable either
new or returns |
Raw
materials |
Inventories
to be converted into
usable components or
products |
Components |
Inventories
to support OEM manufacturing
or for replacement parts |
Consignment |
Inventories
positioned by suppliers
into customer facilities
for use in production
or for resale |
VMI/SMI/SAMI |
Vendor
Managed Inventories/Supplier
Managed Inventories/Supplier
Assistance in Managing
Inventories in which
the supplier plays a
major role in keeping
customers in stock.
Inventories are usually
consigned until products
are sold or used in
production |
Supplier
Inventories unpaid and
in A/P |
Supplier
inventories provided
to customers with w*which
sales occur by customers,
cash collected before
suppliers are paid |
SC
Channel Trade Member
Inventories |
Inventories
of products in trade
channels made visible
to suppliers which often
must be cleared before
introducing new product
upgrades |
Returned
goods |
Recalls,
damages, overages, reworks,
repairs, upgrades, products
not-meeting-specifications
that are positioned
in customer facilities,
third-party systems,
and/or supplier facilities
for recouperage |
Inter-facility,
intra-company transfers |
Products
being moved between
facilities via transportation
and logistics modes
within the same company
or organization |
SC
Intransit transfers
between trading parties |
Products
being moved between
SC trading party facilities
via transportation and
logistics modes and
under various SC legal
trading party relationships |
Remote
Private and Outsourced
Finished Goods Inventory
Accumulation and Deployment
Centers |
Products
stored in remote, market
based facilities for
expedited delivery to
customers for use or
resale or to capture
inventories that are
rejected by customers
for various reasons.
Product liability
concerns by suppliers
warrant actions to capture
quickly product in order
to minimize losses.
|
Remote
Inbound Consolidation
Center Invs |
Inbound
RM, Components and Products
for Sales aggregated
in remote facilities
to take advantage of
consolidation opportunities |
3PL
Local Inbound Consolidation
and Assembly Invs |
Third-Party
Consolidation Centers
located close to manufacturing
sites for JIT shuttle
services for delivery
to customer warehouses
or to production lines
for use. |
Excess |
Resulting
inventories due to various
factors in the above
list that may be usable
functionally but deemed
unsaleable by OEM but
still can be used by
market and greatly reduced
prices |
Slow-Moving
and Obsolete (SLOBS) |
Inventories
that the firm decides
are unsaleable due to
competition or when
firms introduce new
technologies and improved
product replacements,
including Engineering
Changes by the firm
|
In
managing inventories, Table
2 lists many of the business
decisions affecting inventory
levels. Decision-making
often is done on a functional
basis with many firms establishing
Supply Chain Planners that oversee
supply chain strategic initiatives
with particular emphasis upon
Sales and Operations Planning
(S&OP) teams fixing broken
front-end inventory planning
and execution. Inventory
visibility within the firm and
across marketing channels and
supply chain networks is crucial
to minimizing supply chain inventories.
This article series focuses
upon the reality that many firms
have not established sound S&OP
and inventory visibility processes
and, accordingly, they lack
strategies for excess SLOBS
inventory management, including
more profitable disposition
and outsourced processes to
make markets for, logistically
move, and to finance EOL excess
inventories.
Table
2.--Why do We have Inventories?
To
support Build-To-Stock
(BTS) forecasted demand |
Working
Inventories and Safety
Stocks for finished
goods that are deemed
saleable as produced |
To
support Build-To-Order
(BTO), Assemble-To-Order
(ATO), Engineer-To-Order
(ETO) usage requirements |
Working
inventories and Safety
Stocks of raw materials
and components to support
custom products |
Take
advantage of Volume
discounts |
To
reduce of costs of components
or finished goods, suppliers
offer volume discounts
to promote larger sales |
Take
Advantage of Seasonal
Discounts |
Promotional
discounts are offered
by suppliers to forward
position products in
trade channels for seasonal
products |
Take
advantage of Dated deals |
Similar
to season discounts
in which products are
sold with lengthy credit
payment terms offered
by suppliers to forward
position products in
trade channels for seasonal
products |
Push
strategies to position
inventories down channels—use
of tiered inventory
deployment |
Strategies
by suppliers to deploy
inventories by marketing
channels, i.e., Internet
B2C direct versus retailer
channels |
“Event”
promotional inventories |
Inventories
produced to support
marketing promotions
that are event driven,
i.e., weekend promotions |
To
move inventories intransit
between facilities—DCs,
retail outlets, Inbound
from suppliers and 3PLs’
facilities |
Not
only are products tied
up in intransit inventories,
but inventories result
to the reliability and
length of lead times
that products are moved
intransit |
To
take responsibility
for Consignment and/or
SMI inventories, either
for sale or use |
Inventories
positioned by suppliers
to support customer
development strategies |
To
support customers who
do not pay for inventories
on a timely basis |
Days-Sales-Outstanding
(DSO) “Order-Cash
A/R Receipt with channel
customers |
To
support manufacturing
relative to RM, Work-In-Process
(WIP), Packaging and
Unitizing components
used in Finished Goods
operations/manufacturing |
Various
inventories to
support manufacturing |
To
support indirect services
relative to office,
MRO, IT and other indirect
services for the firm.
|
Various
inventories in the firm
or in supplier support
supply chain processes |
To
support energy needs |
Processed
to provide power and
energy sources either
directly within the
firm or in conjunction
with SMI. |
A
Granular Approach to Costing
for Good Decision
Making
A
frequently used economic model
for making inventory decisions
is the Economic Order Quantity
(EOQ) model. This model
can give good direction in determining
inventory levels on a short-term
use but has limited applicability
when considering longer time
periods, such as those associated
with PLCs. The EOQ model
does, however, include key cost
elements that provide a basis
in PLC economic modeling.
These costs include: Production
cost per unit which includes
costs for purchased materials,
inbound transportation and logistics
costs of supplier fulfillment,
the inventory carrying charge,
the cost of administering an
order plus periodic demand.
The
objective is to balance ordering
costs with the costs of holding
or carrying inventories.
Problems arise as to:
- fixed
vs. variable costs—not
all costs are variable as
identified in the EOQ model
- demand
typically is represented in
curve, such as in a traditional
PLC form to be discussed
- ordering
costs are not all variable
- the
inventory carrying charge
can be as low as the cost
of money to including the
items shown in Table 3.
In
representing the costs in Table
1 as part of an overall percentage,
the assumption is made that
these costs vary with the cost
of producing items based upon
a variable cost. Plus
all of the costs may not vary
by unit of production but vary
by other means, such as by pallet
loads. One last point
is that carrying costs as defined
in the literature often include
an obsolescence factor, but
not delineated as identified
in Table 3. Therefore,
a more granular approach to
costing is recommended in which
these individual cost elements
and other costs are represented.
Table
3.—Composition of Costs
of Carrying Inventories
Basis for Inventory Carrying
Charge Percentage
Cost
of Money |
Financial
costs of capital as
determined by corporate
treasurers |
Insurance |
Product,
Property and Personal
Liability |
Taxes |
Possible
State Corporate Income
Taxes and Local Personal
and Real Property |
Warehousing |
In
and out handling costs
plus possibly outside
storage costs if warehousing
space unavailable |
Product
Intra-Company Facility
Transfers |
Transportation
and logistics costs
to move products from
plants to warehouses
and for inter-facility
transfers of products
to markets of higher
demand |
Excess
& Obsolescence (E&O)
—Write Downs |
Price
erosion as demand subsides,
competition increases
or new generations of
products are introduced |
E&O—Channel
Inventory Returns |
Returns
are processed to be
used internally by manufacturing
firms or to be sold
externally to Broker
markets—costs
for reverse logistics
plus lost sales |
E&O—
Trade
penalties and promotional
costs |
Penalties
that retailers and other
customers assess for
costs on non-compliance
or those incurred in
displaying products. |
E&O—Recouperage |
Costs
to sort thru products
for putting product
back into inventory
for sale, for donations,
for salvage and for
scrap |
E&O
Disposition of Saleable
Products |
Marketing
and Sales Costs associated
with E&O Disposition
of outdated but usable
and saleable products |
E&O—salvage
|
Costs
associated with the
salvage of materials
for reuse or recycling |
E&O—scrap |
Products
sold to scrap dealers
to salvage resources |
In
Part 3 of this series, we’ll
provide an improved analytic
framework, and present a brief
case study that shows the impact
of this thinking on one manufacturer’s
bottom line.
Edward
J. Marien, Ph.D:
As emeritus professor, University
of Wisconsin-Madison School
of Business Executive Education,
Ed provides instructional activities
at the UW and customized programs
for individual firms in a wide
array of vertical industries.
He has assisted manufacturers,
distributors and third-party
logistics services providers
in developing and implementing
business, T&L and SCM strategies
to improve service, reduce costs,
and increase asset utilization.
John
C. Kenny:
Prior to his appointment in
2004 as FreeFlow’s President,
John spent 28 years in senior
global operations positions
in Sales, Manufacturing and
Supply Chain in both high technology
and consumer products industries.
John has held senior operations
executive positions with 3Com,
Hewlett-Packard, Apollo Computer,
Joseph E. Seagram & Sons,
Inc. and Standard Brands Inc.
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