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The laws of inventory management say that cost and service are in opposition to each other. To increase availability (service) requires more inventory holding (cost) and conversely. So how did a company achieve inventory down £3 million and parts availability up from 87% to 96%?
The Situation
A provider of automotive service parts to the truck and van parts aftermarket needed to replace its core mainframe systems to cut costs and enable business growth.
The bespoke software suite was 20 years old and at full capacity. It was running on an obsolete operating system with only two known users in the world - the company was one and the faciilities management provider of its mainframe systems was the other. The mainframe systems were complex. The knowledge and skills required to maintain it were no longer with the company.
The company managed a product range of 160,000 different part numbers and held inventory valued at £38 million. It shipped parts to a network of 450 UK dealers during the night and supplied a variety of overseas customers across the world. The parts operation ran 24 hours per day, 365 days per year.
Due to the size and complexity of the task, the company embarked on a £6 million core systems replacement project in 3 phases. The first phase would involve replacing the mainframe based demand forecasting and inventory management system with a modern software package interfaced back into the mainframe. This needed to be completed quickly to afford time for the inventory to reduce and thus release cash to be invested in later phases of the project.
The Problem
The company did not have the appropriate experience and knowledge at that time to undertake such a change. The requirements for the new system needed to be defined. A project plan was required. The project team with the relevant skills did not exist. A budget did exist but the company needed confidence that this was sufficient to complete the task. The company recognised that the staff would need re-training to operate the new system but would the business processes and organisation need to change as well to realise the full benefits on offer?
Specialists with prior experience of undertaking a project of this type in a parts business of this type were required.
The Solution
After defining the business requirements for the new demand forecasting and inventory management system, a software package selection process was undertaken. An initial ‘long list’ of 10-12 software packages was scored against the defined requirements and the top three packages put on the ‘short list’. Each package vendor was visited again and, in addition to more detailed questions, their software was tested with real business data from the company to demonstrate its suitability for the task. From this, a preferred package supplier was chosen. But that was just the easy bit.
The mainframe system had treated every part number the same, even those without a demand for months or years. As is typical of many aftermarket parts businesses, the pareto curve was severe. Only 10,000 of the 160,000 parts were demanded every month. The next 50,000 were demanded only occasionally and the slowest 100,000 had not been demanded during the last 12 months but the company had an obligation to continue to offer them for sale to its customers “just in case”. As is usual, it was never the same 100,000 parts from one year to the next!
During a conference room pilot on a limited but representative range of parts, it was confirmed that the previous mainframe system had been proposing too much inventory for the faster moving parts and too little inventory for the slower moving parts. This was because the mainframe system used a safety stock calculation based on “weeks of inventory” rather than a customer service driven calculation based on the “standard deviation of forecast errors”. As the aim was to reduce inventory, any re-balancing of the stock needed to be undertaken gradually to avoid cash flow difficulties.
Using a modification of ABC analysis, the product range was therefore stratified using a variety of criteria such as demand frequency and item value to create groups. Each group could then be afforded the most appropriate demand forecasting and inventory planning parameters for its situation. Parameters could be changed gradually as cash and stock run-down allowed.
The existing business process was modified and the role of demand/inventory planner de-coupled from that of supply scheduler to ensure that the forward looking role of forecasting future demand and planning the inventory position to meet it was not in conflict with the backward looking role of the supply base satisfying the requirement as it had in the past. Communications between the two roles were however essential, especially for inventory optimisation, and were much enhanced by the ‘healthy tension’ now created between them.
Benefits
The combined effect of these changes and others was to increase the accuracy of the forecast which, in turn, increased the control of the inventory held.
As the surplus stock was used up for faster moving parts, some of the savings were re-invested in medium moving parts inventory. Parts availability across the total product range rose from 87% to 96% and an overal saving of £3 million was achieved in the next 12 months, a reduction of 21% of the moving inventory.
Most of the slow/non-moving parts were also overstocked, due to supplier minimum batch quantities or all-time buys for example, but could not be reduced without a sale or a write-off. However, now armed with more accurate forecasts and inventory plans, the company were better placed to approach their customer base to review the product range obligations and discuss alternative service scenarios for some of these parts.
The new demand forecasting and inventory management system paid for itself within less than 12 months and had already contributed 50% of the total costs of the core system replacement programme. Ongoing savings and business growth from new customers would pay for the rest.
Learning
Inventory management theory talks about the exchange curve between cost on the y-axis and service on the x-axis. As long as your company is operating efficiently, i.e. at some point on the curve, the law of inventory management applies. The trouble is, most companies with a stock management problem are inefficient, that is, they are operating above the exchange curve. In simple terms, they are either overspending for their current level of availability or under-achieving on availablity for their current investment or a combination of the two. Increasing forecast accuracy and inventory control enables a move closer to the ideal exchange curve via a shift to the left and/or downwards.
If you have a need to improve your demand forecasting or inventory management systems, processes or organisation then Servispart Consulting may be able to help. Contact us... now for a confidential, no-obligation discussion regarding your business situation and how we might support you.
Keywords
core system replacement demand forecasting inventory management inventory reduction parts availability increase forecast accuracy pareto analysis software package selection slow moving parts management by exception ABC analysis inventory optimisation exchange curve
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