{"id":7667,"date":"2019-06-25T09:20:07","date_gmt":"2019-06-25T16:20:07","guid":{"rendered":"https:\/\/blog-prod.qad.com\/blog\/?p=7667"},"modified":"2020-11-06T11:31:54","modified_gmt":"2020-11-06T19:31:54","slug":"metrics-that-matter-inventory-effectiveness","status":"publish","type":"post","link":"https:\/\/www.qad.com\/blog\/2019\/06\/metrics-that-matter-inventory-effectiveness","title":{"rendered":"Metrics that Matter: Inventory Effectiveness"},"content":{"rendered":"<p>[vc_row][vc_column][vc_single_image image=&#8221;7668&#8243; img_size=&#8221;full&#8221;][vc_column_text]<span style=\"font-weight: 400;\">The effective use of a manufacturer&#8217;s inventory investment is an important determinant of the company&#8217;s success. Excess and obsolete inventory is a drain on resources, as is excessive safety stock. Stockouts affect customer satisfaction and revenue, and the frequent need to expedite orders adds to costs and highlights problems lurking in the system.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Managing an Inventory Investment<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Inventory effectiveness measures the process that delivers the right part to the right place at the right time, while minimizing investment and meeting customer requirements. Managing inventory effectively is a delicate balancing act, affected by lead times, <\/span><a href=\"https:\/\/www.qad.com\/blog\/2018\/12\/metrics-matter-supply-chain-effectiveness\/\"><span style=\"font-weight: 400;\">supply chain efficiency<\/span><\/a><span style=\"font-weight: 400;\">, demand variability, product complexity, product life cycles, warehouse space and practices, among other variables.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">It is critical to monitor inventory effectiveness using five key metrics: Expedited orders, inventory turns, obsolete inventory, safety stock and stockouts. We already covered <\/span><a href=\"https:\/\/www.qad.com\/blog\/2018\/09\/metrics-matter-backorders\/\"><span style=\"font-weight: 400;\">stockouts and backorders<\/span><\/a><span style=\"font-weight: 400;\"> in a previous post, so in this post we&#8217;ll focus on the remaining four.<\/span><\/p>\n<ul>\n<li><b>Expedited Orders:<span style=\"font-weight: 400;\"> This represents the number of orders expedited in a given period. Whether you measure purchase orders or customer orders-and you should do both-high numbers indicate problems in your inventory planning and flow.<\/span><\/b><\/li>\n<li><strong>Inventory Turns:<\/strong><span style=\"font-weight: 400;\"> This represents the number of times a company sells and replaces its stock of goods during a given period. Calculate it by dividing the cost of goods sold by the average inventory value. Many organizations publish turns data by industry or SIC code to help gauge where you stand against others in your industry.<\/span><\/li>\n<li><strong>Obsolete Inventory:<\/strong><span style=\"font-weight: 400;\"> The value of obsolete, inactive or slow-moving inventory. It can be measured either as a dollar value or a percent of total inventory. <\/span><\/li>\n<li><strong>Safety Stock:<\/strong><span style=\"font-weight: 400;\"> This is an extra level of inventory held to reduce the risk of stockouts. Many companies just estimate safety stock levels, which may or may not be effective. There are numerous formulas for calculating safety stock depending on an item&#8217;s usage pattern, but the simplest one is to multiply the average daily demand by average lead time.<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Using Metrics to Measure the Health of the Business<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Companies use these metrics to minimize their investment in inventory without adversely affecting customer service levels. The absolute measure is less informative than the trend in the metrics.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For example, rising obsolete inventory may point to problems in managing new product introductions and the retirement of old products. Failure to balance the intro date of new products against the inventory on hand and usage for components that will no longer be needed shows that the new product introduction process may need refinement. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">A company may choose to introduce a new product while old stock and components are still high, but the company should be aware of the cost of this decision and balance that against the benefits of early market entry. Obsolete inventory may also indicate poor electronic communication network (ECN) and corrective action and preventive action (CAPA) processes, so if the number is trending upward, investigate both areas before changing any process.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">The number of expedited orders is also an important trend that can indicate emerging business issues. The rise may be because of a deterioration in forecast accuracy, a problem in the supply chain or an internal order process issue. Watch the trends and dig deep to find the causes.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Inventory turns can identify whether changes in inventory management processes are effective, but they also serve as an important benchmark against competitors and similar companies. Never just choose a number arbitrarily as a target, since optimum levels vary between industries. Look at what the best companies in your industry achieve and then shoot for something similar. <\/span><\/p>\n<p><span style=\"font-weight: 400;\">By definition, safety stock is inventory you never plan to use, so it makes sense to minimize it as much as possible without compromising customer service levels. Safety stock can be minimal for items that are easy to acquire but may be higher for sole-sourced or custom items. Anything critical to your brand reputation or production process may require higher levels of safety stock. You may want to keep safety stock for extremely high-cost items low. The point is, one size doesn&#8217;t fit all when it comes to safety stock.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Best Practices for Inventory Effectiveness<\/span><\/h2>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Monitor forecast accuracy and work to improve accuracy wherever possible<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use consignment inventory or vendor managed inventory for critical items<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Cycle count to identify any stockroom or warehouse process problems<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use safety stock optimization techniques to minimize the investment<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use bar coding or RF devices to improve inventory transaction accuracy<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use available-to-promise (ATP) to ensure promise dates are realistic on customer orders<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Monitor supplier performance to ensure purchased item deliveries are consistent<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Implement cross docking procedures <\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Design products and processes to enable postponement of the point when inventory must be committed<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use lean manufacturing and Just in Time to reduce inventory<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Use effective CAPA and Engineering Change procedures to minimize obsolete inventory<\/span><\/li>\n<\/ul>\n<h2><span style=\"font-weight: 400;\">Tracking, Managing, and Choosing Metrics<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Using these metrics will help to minimize the investment in obsolete inventory, freeing up capital for investment in more productive endeavors without adversely affecting customer service levels or stock outs. The simplest way to track and manage these metrics is with the Action Centers found in <\/span><b>QAD Adaptive ERP<\/b><span style=\"font-weight: 400;\">: <\/span><a href=\"https:\/\/documentlibrary.qad.com\/help\/webui\/sanmiguel\/en-US\/QAD%20Online%20Help\/PredefinedACMaintenanceManager.html#wwID0EFEFO\"><span style=\"font-weight: 400;\">Operations Action Center<\/span><\/a><span style=\"font-weight: 400;\">, <\/span><a href=\"https:\/\/documentlibrary.qad.com\/help\/webui\/sanmiguel\/en-US\/QAD%20Online%20Help\/PredefinedACMaintenanceManager.html#wwID0EGHHO\"><span style=\"font-weight: 400;\">Maintenance Manager Action Center<\/span><\/a><span style=\"font-weight: 400;\"> or <\/span><a href=\"https:\/\/www.qad.com\/solutions\/manufacturing-erp\/data-sheet\/qad-enterprise-asset-management\"><span style=\"font-weight: 400;\">QAD Enterprise Asset Management<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<p><i><span style=\"font-weight: 400;\">What challenges are you finding most significant when it comes to inventory effectiveness? Let us know in the comments section below.<\/span><\/i>[\/vc_column_text][\/vc_column][\/vc_row][vc_row][vc_column][\/vc_column][\/vc_row]<\/p>\n","protected":false},"excerpt":{"rendered":"<p>[vc_row][vc_column][vc_single_image image=&#8221;7668&#8243; img_size=&#8221;full&#8221;][vc_column_text]The effective use of a manufacturer&#8217;s inventory investment is an important determinant of the company&#8217;s success. Excess and obsolete inventory is a drain on resources, as is excessive safety stock. Stockouts affect customer satisfaction and revenue, and the frequent need to expedite orders adds to costs and highlights problems lurking in the system. [&hellip;]<\/p>\n","protected":false},"author":13,"featured_media":7668,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[182,199],"tags":[731,348,815,309,814,816,264,817,819,818],"class_list":["post-7667","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured","category-manufacturing-trends","tag-action-centers","tag-best-practices","tag-expedited-orders","tag-inventory","tag-inventory-effectiveness","tag-inventory-turns","tag-metrics","tag-obsolete-inventory","tag-qad-adaptive-erp","tag-safety-stock"],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.9 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Metrics that Matter: Inventory Effectiveness | QAD Blog<\/title>\n<meta name=\"description\" content=\"Inventory effectiveness measures the part delivery process, while minimizing investment and meeting customer 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