differentiated inventory management webinar

Differentiated Inventory ManagementTomas Wennerstein

March 24, 2015

COPYRIGHT © SYNCRON INTERNATIONAL AB 2013

Syncron is the global leader in aftermarket service optimization

• Dealer Management and

Aftermarket Specialist

– Inventory management

– Price Management

– Analytics

• Customers are multinational

companies

– Active users in more than 100

countries

– R&D intensive, investing >20% of

revenue

Meet the Presenter:

• Inventory Management

Specialist

• 15 years experience of

driving global supply

chain transformation

initiatives

Tomas Wennerstein Inventory Specialist


Differentiation is applied in many areas

• Differentiation and segmentation is applying different strategies/methods for different categorizes of something

• Differentiation is for example embedded in business practice when it comes to:

– Marketing

– Pricing

– Sourcing

Standard Phone Premium Phone


Inventory management often uses only the most simple level of differentiation

Level of Differentiation Applied today Execution quality

Basic Differentiation uses cost and demand (Sales lines, VAU, Cost) parameters to group items and, then, apply rules for breadth and depth decisions. Most Companies OK

Basic Purpose Differentiation uses more than cost and demand parameters, like critical items, to make the breadth and depth decisions. Most Companies Often Poor

Advanced Differentiation same as Basic Differentiation with more granularity for definition of groups and more sophisticated rules Some Companies OK

Strategy-Based Differentiation is similar to Purpose Differentiation but allows better understanding of the ROI for having high availability of certain groups of parts. Few companies OK

• Differentiation can be made based on calculated categories based on historical Demand and Cost of item

• The categories could also based on other item attributes related to the customer and business requirements (Purpose Differentiation)

Figure 1: Most companies are able to execute Basic Differentiation and Basic Purpose Differentiation. However, companies struggle to apply Advanced Differentiation and Strategy-Based Differentiation.


Most companies use Basic Differentiation to categorize parts on either demand and ABC value/Price

• Items are categorized in different groups/segments based on demand, cost, etc

• You apply different rules related to depth and breadth for these groups• Most companies do some kind of Basic Differentiation, the level of

sophistication is however not always that high

# of Calls >$ 100 $101-1000 $1000 <

0-2 Don’t stock Don’t stock Don’t stock

3-5 Don’t stock Don’t stockStock (Rule X for debt decision)

6-10 Stock (Rule X for debt decision)

Stock (Rule X for debt decision)


10+

Figure 2: Rules are set-up based on how frequently the item is purchased and it’s value


Most companies apply Basic Purpose Differentiation by using manual overrides for critical items

>$ 100 $101-1000 $1000 <


3-5 Don’t stock Don’t stock Stock (Rule X for debt decision)

6-10 Stock (Rule X for debt decision) Stock (Rule X for debt decision) Stock (Rule X for debt decision)

# of Calls >$ 100 $101-1000 $1000 <

0-2 Stock 1 Stock 1 Stock 1



Critical Items

• On top of Basic Differentiation, many companies can have specific rules related to depth and breadth for specific parts

• These rules override the outcome from the Basic Differentiation• The rules are applied either as item overrides or as overrides to groups of parts

Default Items

Item A is set to stock

independently

Figure 3: Purpose Differentiation is often applied by manual overrides for a group of items or an individual item.


Advanced Differentiation: Most companies have a big potential in improving the differentiation

• A Service Level Curve shows the increase in cost with every percent of service level

– Indicates best service level for minimum cost

• Very few companies are close tothe optimal Service Level Curve

• How can I come closer to the optimal service curve, getting maximum service for a given investment level?

Figure 4: The curve (picture from Syncron application) shows what target stock values are needed to achieve the chosen global target service level..


Figure 5: Optimized Service level per group of part increases output

Inventory cost by Sales order line

Target Service per Demand/VAU ($)Class

• Get better at Basic Differentiation with more granularity for groups and more sophisticated rules

– What is the cost for maintaining the same service level for an item that has few sales and high Value of Annual Usage (VAU) compared to an item with low VAU and high sales?

– By targeting different service levels on a more granular level, you will be able to maintain a total higher service level at a lower cost

– To accomplish this level of differentiation, you need support for optimization

# of Calls A1 A2 B1 B2 C1 C2

0-3Do not Stock

Do not Stock

Do not Stock

Do not Stock

Do not Stock

Do not Stock

4$500-$5000 Stock Stock Stock Stock Stock

5-19 Stock Stock Stock Stock Stock Stock

20< Stock Stock Stock Stock Stock $1

# of Calls A1 A2 B1 B2 C1 C2

0-3 0% 0% 0% 0% 0% 0%

4 50% Stock Stock Stock Stock Stock

5-19 Stock Stock Stock Stock Stock 99.7%

20< Stock Stock Stock Stock 99.7% 99.7%

Advanced Differentiation: Enhance the sophistication and get more service for the tied up capital


Advanced Differentiation challenges the assumption that you should use a 12-month horizon as a stocking criteria

• To determine what to stock, how far back should I look for representative statistics?

– In fast-moving industries, like retail, most organizations would use less than 12 months

– Aerospace and similar industries sometimes use 3-4 years

– However most companies use 12 months

• Using a combination of time horizons, better determines what to stock

Figure 6: Successful results of advanced differentiation going from 12 months to 12 and/or 18 months

Stockking Logic based on 12 month history

Stocking Logic based on 12 month history

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om

bin

ati

on

wit

h

Stocking Logic based on 18 month history

# of Calls >$ 100 $101-1000 $1000 <


3-5 Don’t stock Don’t stock Stock (Rule X for debt decision)

6-10 Stock (Rule X for debt decision) Stock (Rule X for debt decision) Stock (Rule X for debt decision)

# of Calls >$ 100 $101-1000 $1000 <


3-4 Don’t stock Don’t stockStock (Rule X for debt decision)

5-10Stock (Rule X for debt decision)



# of Calls >$ 100 $101-1000 $1000 <



7-10Stock (Rule X for debt decision)




Strategic Differentiation: Understand the ROI for having different groups of parts available in stock

• Adjust your inventory strategy and parameters based on the ROI of holding stock

• Example of aspects that can be valid when segmenting you inventory management techniques

• Important to have a Master Data that support the segmentation

― Criticality

― Captive vs. Commercial

― Margin contribution

― Weather and Climate

― Part lifecycle phase

― Unreliable suppliers

― Machine lifecycle phase

― Non-historical demand vs.

demand driven

― Planned vs. unplanned

― Rotable vs. normal

― Short vs. long lead-time


Strategic Differentiation: Dimensions to consider for the different strategies

• Stocked or not stocked

• Criteria for stocked or non-stocked

• Target Service Level

• Extra safety stock

• Alert level for manual review

• Should users be allowed to alter and override

• Influence of historical demand (new parts)


Common Questions Related to Inventory Differentiation

• Is there a business case?

• What differentiation is applicable?

• What is the effort?


Improved Basic Differentiation normally yield 10-25% inventory savings with maintained service level

• Going from Basic Differentiation to Strategy-based Differentiation will improve service where it makes sense for the business as well as decrease inventory cost and administration

• A more exact value can only be found by:

– Analyzing the data: You will be able to draw relevant conclusions as long as the business has not changed substantially

– Understanding the value contribution of inventory management

• Discuss with Sales and Marketing as well as Product Development


How much effort is required to improve my inventory differentiation?

• Find the relevant segments for your operation

– Understand the value that availability has for the customer – importance of critical items

• If the item is available, customer will purchase. If the item is unavailable, the customer will go to another store.

• Consider whether each item will have an impact on future equipment purchases

– Understand the data and how you can make you segments, It should preferably be supported by Master data and automated

• Incorporate the differentiation in daily inventory management

– System support

– Skills and “know how”

Differentiated Inventory ManagementTomas Wennerstein

March 24, 2015

differentiated inventory management webinar

Software

companies ok differentiation

areas differentiation

kind of basic differentiation

debt decision stock

poor advanced differentiation

cost of item

different rules

cost parameters