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"Retailers have to reduce
inventory investment while improving in-stock positions, increase customer service while reducing labor costs, and decrease operation costs while expanding to multiple channels.
Microsoft Dynamics retail solutions are designed to handle the complex business of retail from point-of-sale to back office and through to the warehouse and the corporate office."
Source : Microsoft
Effective Inventory Analysis
Inventory Analysis is also known as:
Inventory manangement,
Inventory control,
Inventory planning,
Inventory tracking,
Inventory solution,
Inventory process,
Inventry performance,
Inventory analysis,
Inventory Turnover Ratio,
Inventory Turnover,
inventoy optimization,
Stock Analysis,
Inventory stock.
Compliments of Microsoft Business Solutions
Helping Distributors Maximize
Business Potential Through Education and World-Class Technology
From
Microsoft Business Solutions
Our goal is to help distributors reach their
maximum business potential by delivering connected solutions designed to meet
unique business processes through trusted partnerships and ongoing service.
This report is the sixth in a series of white papers designed to help
forward-thinking distributors increase efficiency, customer service and
profitability with smart inventory management strategies based on tried and
proven methods and best practices.
The author, Jon Schreibfeder, draws from
decades of experience helping more than 1,000 distributors achieve better
inventory management. A popular speaker at distribution conferences, Mr.
Schreibfeder has literally "written the book" on this topic, with Achieving
Effective Inventory Management now in its second edition.
As a leading
provider of specialized distribution and business management systems, Microsoft
Business Solutions is pleased to sponsor this series. We are committed to
serving the success of companies in the distribution industry through education
and world-class technology.
Effective Inventory Analysis
Inventory is
the largest and probably the most important asset of many distributors. More
money is probably tied up in inventory than in buildings or equipment. And
inventory is usually less "liquid" than accounts receivable. That is, it is
harder to turn inventory back into cash to pay employees and expenses. If
distributors do not have this money invested in the right amount of the right
products, they cannot provide the service to customers necessary to be
successful. It is crucial that every distributor develops and uses a
comprehensive set of tools that allows them to closely monitor the
performance of their investment in inventory. In this document we will discuss
several simple measurements that will help ensure that you are maximizing the
profitability and productivity of your investment in inventory.
Customer
Service Level
The customer service level measures how often you have the
items you've committed to stock when your customers want them. It is the most
important measurement because if you do not have what your customers want, when
they want it, they will probably look for it elsewhere. The customer service
level is calculated with the following formula:
Number of line items for
stocked products shipped complete by the promise date
Total number of line
items for stocked products ordered
Notice that we measure line items shipped
complete. That is, when the entire quantity ordered is delivered by the date
promised to the customer. If the customer orders ten pieces, and you ship ten
pieces, you get credit towards the customer service level. But if a customer
orders 25 pieces, and you only ship 24 pieces before the promise date, you get
no credit. Why no "partial credit" for shipping 24 out of 25 pieces?
- If
the customer wanted 24 pieces, he or she would have ordered 24 pieces. They want
25! The customer has to find that last one somewhere else. Probably at your
competitor's warehouse down the street.
- Even if your customer doesn't
immediately need all 25 pieces and can wait for you to receive more in a
replenishment shipment, your failure to have all 25 pieces in stock causes
them to experience the cost of processing two stock receipts (and your
warehouse to absorb the cost of filling two orders for the single transaction).
When calculating your customer service level, we only include sales of stocked
items that are filled using warehouse inventory. We don't include sales of
other kinds of products such as:
Special Order Items
- Items that you do
stock, but are specially ordered to fill specific customer requirements.
Director "drop" shipments
- Material sent directly from a vendor to your
customer.
Shipments of these types of items do not reflect how well you stock
material to meet your customers' immediate needs. Distributors who include
special order items and direct shipments when calculating a customer service
level tend to overstate how well they are serving their customers from
warehouse inventory.
Sure, you would probably like to be able to fill 100% of
customer requests for stock items out of your warehouse inventory. But this is
often not practical. To understand why, let's look at a graph that compares
the number of customer orders for a popular stock item against the quantity
ordered on each order:
A lot more safety stock needed for relatively few orders for
large quantities
Number of orders for an Item
Quantity Ordered
on an Individual Order
The quantity on most orders falls within a
certain quantity range
For example, the quantity ordered of a specific stocked item falls between 50
and 150 pieces. But you might have a few orders for more than 500 pieces. Do
you want to always have enough inventory on hand to fill these few orders for an
unusually large quantity? You probably can't afford to maintain enough stock
to fill unusually large sales of every stock item. That's why most distributors
are satisfied with a 95% customer service level. That is, 95% of the time
they have the entire quantity requested of a stock item.
Number of Stockouts
Some distributors have trouble accurately measuring their customer service
level. An alternative is to monitor both the number and length of stock outs,
particularly of fast moving "A" ranked products. After all, if you do not have a
product in stock, it cannot be immediately supplied to a customer. And "A"
ranked products are those that are requested most often by customers.
The
reason we track both the number of times a product is out of stock and the
length of each stockout is that each measurement can identify a different
problem. If the number of stockouts is high, you are continually receiving
shipments of the product but the quantity is quickly used or sold. Your
buyers are not ordering enough of the product on each replenishment order! On
the other hand if you are out of an item for an extended length of time, the
problem is probably associated with a longer than anticipated lead time from the
supplier. Your buyers need to work to improve the reliability of their source of
supply.
Inventory Turnover
Inventory turnover measures the number of times
we sell or "turn" our average inventory investment. In other words it determines
the number of "opportunities to earn a profit" you experience each year from
your investment in stock inventory. Inventory turnover is calculated by
dividing annual cost of goods sold from stock sales over the past 12 months by
the average inventory value over the same 12 months:
Cost of Goods Sold
From Stock Sales Over the Past 12 Months
Average Inventory Value Over the
Past 12 Months
As with the customer service level, non-stock sales and direct
shipments are excluded from the cost of goods sold figure in the numerator of
the equation. These special sales are not filled from inventory and including
them in the calculation would exaggerate turnover. We use the cost of good
sold over the past 12 months to avoid distortions in turnover throughout the
year. If we used "annualized" year to date figures (i.e., year to date
figures projected for the entire year) and the first several months were the
"slow" period of the year, we would underestimate inventory turnover. On the
other hand if the first several months comprised the popular season, turnover
would be overestimated during these months. Using the cost of goods sold over
a "rolling" 12 months eliminates this effect of seasonality in our calculation.
The average inventory value in the denominator of the turnover equation is
the calculated by taking the average of the ending inventory value over each of
the past 12 months.
The "cost basis" used to calculate the cost of goods
sold and inventory value is usually average cost, but replacement or standard
cost can be also be applied. By using the same 12 months history and cost
basis in the numerator and denominator of the turnover equation, we obtain an
accurate measurement that can be used to track improvement in inventory
performance over time.
Customer service level and stockout analysis reveal
how well you are meeting your customers expectations. That is how often you have
what they need or want available for immediate delivery. Turnover is
different. It is a gauge of profitability. Let's look at an example: Suppose you
sold $10,000 worth of a product in the past 12 months and the average value of
the inventory of the product was $1000. The result is 10 inventory turns
($10,000 ÷ $1,000), or 10 opportunities to earn a profit from the $1,000 average
inventory investment. But should you always strive to maximize your inventory
turnover or opportunities to earn a profit? Not necessarily. You also have to
consider your profitability of each of these opportunities. An analysis that
combines turnover with profitability is the "turn-earn index".
Turn Earn Index
If a distributor enjoys high profit margins, he can be
very successful with low inventory turnover. Many surplus wholesalers justify
keeping items in their warehouses for years because they bought material at a
very low cost and will eventually sell some of it at a premium price. On the
other hand some distributors have very low profit margins. In order to survive
they have to have a high rate of inventory turnover.
The turn-earn index
combines gross margin and turnover. It is calculated by multiplying inventory
turnover by gross margin percentage:
Turn-Earn Index = Turnover * Gross
Margin
For example, if a distributor has an average gross margin of 25% and
experiences six inventory turns he has a turn-earn index of 150:
6 Turns *
25% Gross Margin = 150 Turn Earn Index
A distributor with an average 10 %
gross margin has to turn her inventory 15 times to achieve the same turn-earn
index:
15 Turns * 10% Gross Margin = 150 Turn Earn Index
But if a
distributor has a relatively high gross margin of 50%, he only needs three
inventory turns to attain the same turn-earn index:
3 Turns * 50% Gross
Margin = 150 Turn Earn Index
Most distributors try to have an overall
turn-earn index of at least 120. That is turning inventory over three times with
a 40% gross margin or
four times with a 30% gross margin.
Gross Margin
Return on Investment (GMROI)
A similar measurement to the turn-earn index is
gross margin return on investment (GMROI). The GMROI represents the amount of
gross profit earned for every dollar of the average inventory investment. It
is calculated by dividing gross profit dollars by the average inventory
investment:
Gross Margin $
Average Inventory Investment
Note that
though the turn-earn index and GMROI both measure profitability against
inventory investment, they are two different metrics. Compare the turn-earn
index and GMROI for an item with the following characteristics:
Annual Sales
Annual Cost of Goods Sold
Annual Gross Profit
Average Inventory Value
The turn-earn index is not better
than the GMROI (or visa versa). These measurements just use different scales,
like Fahrenheit and centigrade temperatures. Be sure not to confuse one with
another. GMROI will always be greater than an equivalent turn-earn index. Our
minimum turn-earn index goal of 120 is equivalent to a GMROI of 160.
There
are literally hundreds of measurements to evaluate inventory. A distributor can
drown in the analysis reports produced by many computer systems. The customer
service level/stockout analysis, inventory turnover, and turn-earn index/GMROI
provide clear concise examinations of thecurrent state of this large,
critical investment. Each can be applied to a single item, specific product
line, the entire stock of a warehouse or adistributor's entire inventory.
They also can be used to measure the improvement in inventory performance over
time. Without meaningful analysis, can you tell if you are making progress?
Turn-Earn Index
Gross Margin
Annual Turnover
GMROI
Gross Profit $
Average Inventory Value
Leap Ahead with Microsoft Business Solutions for the Distribution Industry!
Microsoft Business Solutions offers an integrated set of specialized
distribution and business management systems that are specifically designed
to meet the needs of the distribution industry. You'll find deep functionality
in our solutions such as inventory, order and purchasing management, sales
forecasting, e-commerce and warehouse management. These distribution-focused
modules integrate smoothly with dozens of business management systems to meet
the diverse needs of your business, including accounting, customer relationship
management (CRM), human resources/payroll, supply chain management,
distribution and more.
It's all designed to help you improve profitability by
streamlining and connecting every step of your operations ' from inventory and
sales order management through forecasting and financial reporting. And it
comes packed with tools to help dramatically reduce costs, eliminate
time-consuming processes and allow 24/7 access to information across your entire
organization.
With Microsoft Business Solutions for the distribution
industry, you can build a total enterprise solution that's simple and
affordable. It will empower you to:
- Make smarter, faster business
decisions
- Improve employee and business productivity
- Gain a
competitive advantage
It's a Safe Choice ' It's Microsoft.
You can rely on
Microsoft to provide the foundation and resources to support your company's
important goals. With more than 200,000 customers worldwide, Microsoft
Business Solutions is a proven performer in thousands of distribution-focused
companies.
With Microsoft Business Solutions, you no longer have to be a
large organization to enjoy the big-league advantages of powerful
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your needs. We can do this by leveraging a range of proven, world-class
distribution management systems.
Backed by the finest support services in
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technology. They share a common code set and connect easily into the
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and fully customizable, Microsoft Business Solutions products deliver
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You don't have to wait to get a head start!
With the Microsoft Capital program, you may already qualify to have your
complete distribution solution financed. There's a certified Microsoft
Business Solutions partner near you ' ready to customize your solution to meet
your unique requirements.
Call toll-free for more information on how
Microsoft Business Solutions can move your business to the head of the pack:
888-477-7989, option 1.
Microsoft Business Solutions for the
distribution industry connect easily with the Microsoft platform ' a highly
versatile environment that scales to meet nearly any business software protocol.
From Windows®'based applications to specific industry programs, Microsoft
integrates seamlessly with your existing and future enterprise systems,
providing solid and reliable performance.
WINNING STRATEGIES FOR THE DISTRIBUTION INDUSTRY
Microsoft Business
Solutions
One Lone Tree Road
Fargo, ND 58104-3911
E-Mail:
mgpinfo@microsoft.com
Phone: (888) 477-7989
Fax: (701) 281-6868
By Jon Schreibfeder
WINNING STRATEGIES FOR THE DISTRIBUTION INDUSTRY
Contents
- Effective Inventory Analysis
- Customer Service Level
- Number of Stockouts
- Inventory Turnover
- Turn Earn Index
- Gross
Margin Return on Investment (GMROI)