Inventory Parameter

Guideline

November 2019
 Agenda
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Page 2 Inventory Parameter Guideline

Agenda (1/2)

1. Introduction

1.1 Definition, Purpose & Scope

1.2 How to use the Guideline

2. Inventory Parameter Fundamentals and Leading Practices

2.1 Inventory Mechanisms

2.2 Inventory Types

2.3 Supply Chain Mapping

2.4 Supply Chain Segmentation

2.5 Segment Policies

2.5.1 Disposition Types

2.5.2 Safety Stocks / Service Level / Reorder Points

2.5.3 Lot Sizes

2.6 Process Definition

2.6.1 Slow Mover

2.6.2 Phase in / phase out

2.6.3 Pre-planning

2.7 Performance Measurement

Page 3 Inventory Parameter Guideline

Agenda (2/2)

3. Inventory Management Guideline

3.1 Supply Chain Mapping

3.2 Roles & Responsibilities

3.3 IT Systems

3.4 Supply Chain Segmentation

3.5 Segment Policies

3.5.1 Disposition Types

3.5.2 Safety Stocks / Service Level / Reorder Points

3.5.3 Lot Sizes

3.6 Process Definition

3.6.1 Slow Mover

3.6.2 Phase in / phase out

3.6.3 Pre-planning

3.7 Performance Measurement

4. Key Terms

Page 4 Inventory Parameter Guideline

1
Introduction

Page 5 Inventory Parameter Guideline

Contents

1. Introduction

1.1 Definition, Purpose & Scope

1.2 How to use the Guideline

Page 6 Inventory Parameter Guideline

 1.1
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Definition, two lines
Purpose &or
three lines
Scope

Page 7 Inventory Parameter Guideline

1.1 Guideline Definition

How is the Guideline defined?

 The Inventory Parameter Guideline is to be considered as a framework for the definition and documentation of relevant parameters of inventory planning and
specific processes related to inventory management
 For this purpose, the Guideline contains general leading practice approaches on the one hand and templates on the other, with the help of which each entity
can build up an individual Inventory Management Guideline
 This divides the Guideline into two main parts:

 Inventory Parameter Fundamentals and Leading Practices (general / theoretical definitions)

 Inventory Management Guideline (specific examples and templates for documentation)

 This framework serves as a consolidated working basis for all entities

 To further support the elaboration examples of two entities are separately available

Page 8 Inventory Parameter Guideline

1.1 Purpose

What is the intended purpose?

 This Guideline intends to support the definition and documentation of inventory relevant parameter settings across all entities

 The objectives of this Guideline are therefore

 To draw attention to important inventory parameter issues (Leading Practice) and thereby initiate specific maturity assessments of each entity,

 To provide Leading Practice information and thus support individual improvement in the defined areas,

 To provide a template structure that enables a structured development of an entity-specific Inventory Management Guideline,

 To document and provide specific examples (separately).

Page 9 Inventory Parameter Guideline

1.1 Scope

What is the considered scope?

The focus is on the following material groups:
 Raw Material & Merchandise
 Service Parts

In the scope are the following topics:

 Governance processes (Who? What? How?)
 How are the parameters set?
 How is the calculation control process (is overwriting possible?)
 MRP parameter definition / How to calculate / define?
 ABC / XYZ
 Safety Stocks
 Reorder Points
 Lot Sizes
 Service Level
 Slow mover
 Phase-in / phase-out
 Pre-planning
 High level segmentation
 Performance Measurement

Page 10 Inventory Parameter Guideline

1.1 Development Process

How was this guideline developed?

The content was developed on the basis of
 the inventory analysis results of the two pilot entities as well as
 the received Inventory Management documents, which were requested from the Top entities (WCM project definition)
Therefore a 5-step approach was followed during the development:
1. Guideline structure: Development of a preliminary guideline chapter structure according to leading practice
2. Input collection phase: Request for detailed input documents concerning inventory management from the Top entities
3. Skype meetings:
a. Presentation of the goals of the design project phase to the inventory pilot entities
b. Presentation, discussion and alignment concerning guideline structure with the inventory pilot entities
4. Consolidation and workshop preparation:
a. Review of the inventory documents received
b. Preparation of the pre-workshop inventory parameter guideline
5. Workshop:
a. Combined workshop with both pilot entities to present and discuss the guideline
b. Discussion of specific examples

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 1.2
Section
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Page 12 Inventory Parameter Guideline

1.2 How to use this guide

3 Step Approach

1 Work through the main section 1 "Inventory Parameter Fundamentals and Leading Practices"

Evaluate your current status with regard to the different sections and therefore estimate your degree of maturity for each topic
2 A high degree of maturity means that processes are documented for all topics (including responsibilities) and lived in the daily life

Use the templates from the main section 2 “Inventory Management Guideline“ to close the identified gaps by definition and
3 documentation and implement the respective topics

Page 13 Inventory Parameter Guideline

2
Inventory
Parameter
Fundamentals and
Leading Practices

Page 14 Inventory Parameter Guideline

Contents

2. Inventory Parameter Fundamentals and Leading Practices

2.1 Inventory Mechanisms

2.2 Inventory Types

2.3 Supply Chain Mapping

2.4 Supply Chain Segmentation

2.5 Segment Policies

2.5.1 Disposition Types

2.5.2 Safety Stocks / Service Level / Reorder Points

2.5.3 Lot Sizes

2.6 Process Definition

2.6.1 Slow Mover

2.6.2 Phase in / phase out

2.6.3 Pre-planning

2.7 Performance Measurement

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 2.1
Section divider over
Inventory two lines or
Mechanisms
three lines

Page 16 Inventory Parameter Guideline

2.1 Why one-size-fits all does not work in inventory management

Inventory management is becoming ever more relevant to enterprises

Time
because of challenges such as geopolitical events, trade wars,
technological transformation, customer expectations for product
inventory and more.
To get around these disruptions, you can try to buffer these
vulnerabilities and risks through – Capacity, lead time or Variability
Inventories. Capacity Inventory

Most companies tend to building-up of inventories. But this can impact cash flows. To solve these challenges, enterprises
must carefully balance their cash requirements against the right levels of inventory to not be stranded with too little
inventory or way too much.
Whereas the management of accounts receivable/payable are driven by primarily working capital management,
inventories comprise of complex drivers across various company functions and processes.
The structure of inventory is amorphic; it comes in many shapes, sizes, colors, and can be in varying stages of
completion. Therefore, it is important to understand the purposes of inventory before adjusting them. The main
objectives in inventory management are typically:
• protecting against variations,
• the decoupling of supply and demand,
• anticipating future developments and
• providing a service to internal and external clients.

Page 17 Inventory Parameter Guideline

2.1 Exemplary description (not client specific)
Inventories directly and indirectly influence operating results
Sales

Gross total sales

Fixed costs Return discounts

Net sales -
+ Damaged product discounts Warehousing costs
Variable costs Discounts
Remanufactured product
discounts + Transportation costs
Capital costs

3rd Party Logistics costs

Logistics costs + Processing costs
Internal

+ Additional operating costs

3rd Party MFG

Manufacturing costs +
Gross margin Internal Manufacturing labor
Variable costs +

Inventories
- Logistics labor
EBIT before capital costs
Direct labor +
Material consumed costs

Material costs + Write-offs costs

EBIT after capital costs - RM procurement

Fixed costs costs
+
Building rent

WACC
Indirect labor

Capital costs
R&D costs

Fixed assets
Energy costs
Receivables + Inventory
Operating assets + + Receivables
Manufacturing overhead

Inventory
Current assets - + Raw material

Cash Payables Semi-finished goods

Others Finished goods

Page 18 Inventory Parameter Guideline

2.1 Besides parameter settings, there are further levers for inventory optimization

Optimization of local demand planning

Optimized planning
per location Introduction of APS (Advanced Planning &Scheduling)

SC Planning
Processes Planning across the network (global, regional, local) & integration of suppliers and customers in the
Optimized planning planning process
across whole
supply chain Executive Sales & Operations Planning

In scope
Frequent adjustment on remainder of stock, excess-, and strategic inventory, cycle stocks
Optimization of
inventory
processes Optimization of supply ordering parameters
Inventory
Parameters
IT – enabled Simplified / automated setting of inventory parameter
Inventory
Management Increased transparency regarding inventory parameters
Levers for
Inventory Timely reaction to new customer requirements
Optimization Customer
orientation / Change to non-stocking inventory methods (JIT)
segmentation
Service level alignment to customer (segments)
Supply Chain
Execution
Processes Introduction of KANBAN principles and Lean SCM

Optimization of unnecessary buffer time in processes

Process
optimization
Reduced cycle time in production and storage

Replenishment lead time reduction

Intensive use of consignment stocks / VMI

Warehouse
optimization Consolidation of warehouse and return shipments

Network
Frequent review of logistics requirements

Logistics Network Hub concept / 3PL involvement / GR optimization

Optimization
Reduction of total procurement / logistics set-up costs

Page 19 Inventory Parameter Guideline

 2.2
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Inventory two lines or
Types
three lines

Page 20 Inventory Parameter Guideline

2.2 Forms of inventory exist throughout the Supply Chain

 At what level do we set inventory performance targets?

 How is each form of inventory performing relative to defined targets?

Where Inventory Resides

Aggregate Form
Customers

Finished
Product Finished product
WHs – DCs
Inventory

WIP

In-transit
Inventory

Manufacturers
Plants
Raw
Material

Contract
Service Raw material WHs
Parts
Suppliers

Effective inventory management requires an understanding of the position of each form of inventory relative to established targets.

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2.2 Levers for inventory optimization by forms of Inventory (1/2)

Elements affecting inventory

Raw Materials (RM) Economic order quantities (EOQs)

Raw Materials purchasing lot sizes

Quality of raw material

Stock level Work in Process (WIP)

Replenishment parameters (e.g. safety stock, lead time)

Forecast accuracy

Finished Goods (FG)

* Please note that this is not an exhaustive list but a sample of key
hypotheses

Page 22 Inventory Parameter Guideline

 2.2 Levers for inventory optimization by forms of Inventory (2/2)

Elements affecting inventory

Service Parts Economic order quantities (EOQs)

Raw Materials purchasing lot sizes

Replenishment parameters (e.g. safety stock, lead time)

Stock level Work in Process (WIP)

Forecast accuracy

* Please note that this is not an exhaustive list but a sample of key hypotheses

Page 23 Inventory Parameter Guideline

2.2 Types of inventory serve different purposes

How well do we understand what amount of material is actually required to support the business?

Aggregate Form Types

Surplus/
Finished Quality
Product

Strategic
Inventory

WIP Pre-Build/
Seasonal
Inventory
Pipeline/
Raw In Transit
Material Maximum
Cycle Target

Service Minimum
Parts
Safety

The next level of understanding requires insight to the position of the types of inventory relative to each form

Page 24 Inventory Parameter Guideline

2.2 Inventory types and their purpose

I. Surplus / Quality Stock

Represents obsolete stock which cannot be consumed or used anymore.
This can be due to poor quality, end-of-life, shelf-life, or consumer returns
II. Strategic Stock
Strategic inventory is often kept on-hand to maintain product availability,
continuity of production, to achieve a cost response price, or competitive
advantage
Thus, some manufacturers try to buffer its price variability through
strategic purchases
II. Pre-Build / Seasonal Stock
Inventory I. Surplus Stock II. III. Pre- IV. V. Cycle Stock VI. Safety Stock
Pre-build stock is built up to cover capacity restrictions upstream Strategic Build Pipeline
Stock Stock Stock
Seasonal inventory is considered temporary inventory, and is usually predictable due to recurring events
III. Pipeline / In-Transit Stock
Represents the inventory on order / in transit
IV. Cycle Stock
Cycle stock is used to satisfy the (propagated) mean demand
Typically, lead times and lot sizes drive operational inventory which applies to production and transportation processes
VI. Safety Stock
Safety stock is often used to buffer uncertainty on the demand side (e.g. unpredictable consumption variations) and lead times (e.g. truck break downs) for
supply to provide a specific service level
Thus, safety stocks are strongly impacted by all types of process variances such as the poor delivery performance of suppliers, lead time and yield
variations in manufacturing, and forecast errors in demand planning

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 2.3
Section divider
Supply over two
Chain lines or
Mapping
three lines

Page 26 Inventory Parameter Guideline

2.3 Supply Chain Mapping

The creation of a supply chain map should be used as a starting point to get a cross-functional
overview including specific challenges

The individual supply chain shows

 all relevant functions, plants, warehouses etc.
 from procurement to distribution
 including information and physical flows,
 IT systems and
 pain points along the supply chain.

The goal is to obtain a comprehensive, i.e. cross-functional, representation of the supply chain that
reflects the perspectives of all stakeholders and reveals the (inventory) challenges

Page 27 Inventory Parameter Guideline

2.3 Create the supply chain map (1/7)

Illus
What does the set-up of a specific supply chain look like and what are the major influencing factors? t rati
ve

Definition and Start

Analysis of control Analysis of Analysis of physical logistics Definition of customer
analysis of
parameters internal processes and plant structure segments from
supplier segments here

Forecast
OEE
accuracy

Plan Source Plan Make Plan Deliver

Commodity
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity
Segment 2
group 2
Target
Service level
inventory
e.g. OTIF
coverages

Lead time Lead time Lead time

I Inventories

Page 28 Inventory Parameter Guideline

2.3 Create the supply chain map (2/7)

Illus
Which segmentation approaches are used and what are the impacts on the supply chain? t rati
ve

Material segmentation Production segmentation Forecast segmentation Customer segmentation

 Strategic materials  MTO: Make-to-order  By market  A-Customer
 Bottleneck materials  MTS: Make-to-stock  By customer  B-Customer
 Standard materials  Decoupling point e.g. finish to  By product group  C-Customer
 ABC materials order for packaging

Forecast
OEE
accuracy

Plan Source Plan Make Plan Deliver

Commodity
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity Customer segmentation
 Premium service level Segment 2
group 2
Target
 Medium service level Service level
inventory
 Standard service level e.g. OTIF
coverages

Lead time Lead time Lead time

I Inventories

Page 29 Inventory Parameter Guideline

2.3 Create the supply chain map (3/7)

Illus
Heat maps: Which processes can be identified as improvement areas? t rati
ve

Demand management and Order Management

planning  High order processing times in
 Poor forecast accuracy Service

Forecast
OEE
accuracy

Plan Source Plan Make Plan Deliver

Commodity
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity Inventory management
Segment 2
group 2
Target  High inventory coverage Service level
inventory
e.g. OTIF
coverages

Lead time Lead time Customer segmentation Lead time

 Poor service level for premium

customers

Improvement
I Inventories
Area

Page 30 Inventory Parameter Guideline

2.3 Create the supply chain map (4/7)

Illus
Hypothesis: Which hypothesis are true and what are the root causes? t rati
ve

Forecast
OEE
accuracy

Plan Source Plan Make Plan Deliver

Commodity
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity
group 2
Inventory management Segment 2
Target  High inventory coverage Service level
inventory
e.g. OTIF
coverages

Lead time Lead time Lead time

Exemplary hypothesis for inventory driver:

1) Significant level of slow movers due to insufficient Slow Mover management

2) Lack of material segmentation leads to high safety stocks
3) High level of safety stock is driven by poor forecast accuracy on SKU-Level

Improvement
I Inventories
Area

Page 31 Inventory Parameter Guideline

2.3 Create the supply chain map (5/7)

Illus
Roles and responsibilities: How efficient is the operating model? t rati
ve

Forecast
OEE
accuracy

Plan Source Plan Make Plan Deliver

Commodity
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity
Segment 2
group 2 Inventory
Target Productio
inventory Manage- Finance Service level
n e.g. OTIF
coverages ment

Target stock
R/A C I
definition
Lead time Slow Mover Lead time Lead time
R C A
management

Annual
R/A I C
stocktaking

In many cases, roles and responsibilities, interfaces and related incentive schemes are not in line with the end-to-end supply chain
Improvement
I Inventories
Area

Page 32 Inventory Parameter Guideline

2.3 Create the supply chain map (6/7)

Illus
Performance: How is the current supply chain performance against targets? t rati
ve

Key performance indicators (KPIs)

 Cost: manufacturing costs, scrap rate
 Cash: inventory on hand, throughput time
 Service: delivery performance, order fulfillment
rate
Forecast
OEE
Examples accuracy

Plan Source Plan Make Plan Deliver

Commodity
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity
Segment 2
group 2
Target
Service level
inventory
e.g. OTIF
coverages

Examples

Lead time Process performance

Lead time indicators (PPIs) Lead time
 Process-quality: number of orders processed
 Process-throughput-time: build to schedule

Improvement
I Inventories
Area

Page 33 Inventory Parameter Guideline

2.3 Create the supply chain map (7/7)

Illus
Improvement areas: How to leverage potentials? t rati
ve

C
Forecast
OEE
accuracy

Plan Source Plan Make Plan Deliver

Commodity Supplier segmentation: ABC analysis Forecast review: FC accuracy
Segment 1
group 1

Procurement Construction Production Delivery

I I I I
Raw Central
materials warehouse
Commodity
Segment 2
group 2
Target
Service level
inventory
e.g. OTIF
coverages

Lead time Lead time Lead time

Production segmentation: Variability analysis

Within this kaizen session, we strive for a joint discussion on the way forward on how to improve considering the topics discussed
previously
Improvement
I Inventories
Area

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 2.4
Section divider
Supply over two lines or
Chain
three lines
Segmentation

Page 35 Inventory Parameter Guideline

2.4 ABC Classification

Analysis / Classification Example: Analysis description:

 The ABC Pareto analysis determines which Material IDs (Material/ Plant combination)
account for the highest/lowest consumption value in the overall portfolio
 80% of consumption value are considered as A,
 15% as B,
 5% as C-items
C-materials

 Accordingly, an ABC classification is provided for each material, whereas each curve
represents a Material Group

Example observation / interpretation:

 The majority of Material Groups shows long-tails of C-parts. This observation is very
typical for equipment engineering but also opens up initial questions about possibilities to
rationalize portfolio
 All of the products within the portfolio need
 to be planned (which causes effort and process cost)
 to be stocked (which binds working capital and causes inventory holding cost)

Page 36 Inventory Parameter Guideline

2.4 XYZ Classification

Analysis / Classification Example: Analysis description:

The XYZ consumption analysis creates transparency with regards to
 Frequency of usage for a Material / Plant combination
Z-materials
X-axis:
 1 = Material has been consumed in 100%/each month of the analysis scope,
 0,1 = Material has been consumed in 10% of the months of the analysis scope
 Variability of demand
Highly sporadic Y-axis:
materials  Var. coefficient (VC) < 0.5 = X,
 VC 0.5 – 1 = Y,
 VC > 1 = Z

Example observation / interpretation:

 We see highly variable demand patterns for the products in the portfolio which underlines
Y-materials
the high complexity and variance of the machines assembled
X-materials  For materials with very stable demand patterns, existing planning resp. purchasing
strategies could be reconsidered (e.g. MTS + PTS)
 Furthermore, the introduction or refinement of statistical forecasting models should be
Frequently used materials taken into consideration
with stable consumption

Page 37 Inventory Parameter Guideline

2.4 The results of the ABC and XYZ analyses are summarized in the 9-
Box
ABC Analysis 9-Box

C-materials

A-High

Volume B-Med
XYZ Analysis

C-Low

X-Low Y-Med Z-High

Variability

Page 38 Inventory Parameter Guideline

2.4 Slow Mover Classification

Analysis / Classification Example: Analysis description:

 The Inventory Coverage Analysis investigates how long it takes for the average inventory
(raw materials, supplies, finished goods, merchandise) to be entirely consumed based on
Avg. inv. value of fast the historical consumption
movers
 The time buckets to determine the time/coverage for consuming inventories are based on
the average inventory value
 Consumption quantities taken into consideration were taken from the Movements dataset
– all movement types considered

Avg. inv. value of slow

& non-movers

Example observation / interpretation:

 We observe that the majority of the average inventory value is not represented by fast-
movers which may be due to low degree of standardization of the machine portfolio
 Nearly 13% (9,3 mEUR) of the average inventory value does not show any consumption
over the in scope period, which may partly be due to introduction of new machines and
build-up of strategic stock but might also indicate a high risk of mid- to long-term stock
obsolescence

Page 39 Inventory Parameter Guideline

2.3 Aging Classification

Analysis / Classification Example: Analysis description:

 Inventory Aging determines the age of inventory, i.e. how long the inventory has remained
on stock
 The Aging Waterfall classifies Materials according to their age
 The age of specific stocks can be calculated (approximately) using the date of the last
consumption

Example observation / interpretation:

 Approximately 13,6 m€ of the current inventory is older than a year
 Based on the high variability of demand, sporadic consumption due to uniqueness of
machines, potential high lot sizes or in some cases cancelled orders aging of materials is
hard to avoid
 However,
 through better specification of demand and therefore better predictability of
consumption as well as
 potential re-negotiations with suppliers on lot sizes
 the age of inventory can be positively influenced and prevented

Value of inventory
older than 1 year

Page 40 Inventory Parameter Guideline

2.4 Summary
Classification – Formulas & Criteria

ABC Analysis XYZ Anaylsis – Variability / Frequency

ABC analysis - categorization method for identifying materials with a significant Variability analysis (x-axis) – method to display the variability of each material-
share in consumption. plant-combination
A-materials: represent 80% of the highest consumption value/inventory value of
material
B-materials: represent 15% of the following consumption value/inventory value
X-materials: steady consumption with moderate variation - VC less than 0,5
of material
Y-materials: more variation of consumption (e.g. seasonal effect or trend) – VC
C-materials: represent 5% of the following consumption value/inventory value of
between 0,5 and 1
material
Z-materials: Highly variable consumption pattern – VC greater than 1
Note: Multi-dimensional ABC analysis for consumption value based on material
and product group assignment can be necessary
Frequency analysis (y-axis) –

Coverage / Aging
Coverage represents the average number of days goods remain in inventory (calculated on a relative period of 1).
before being stock-out (assumption no supply)
Low frequency: less than 0,3
Mid frequency: between 0,3 and 0,7
Aging represents number of days between today and last consumption date. High frequency: higher than 0,7 (nearly each month)

Note: Both KPI are based on material/plant combination

Page 41 Inventory Parameter Guideline

2.4 Segmentation Criteria

A classical ABC/XYZ analysis is always a good start – nevertheless, further segmentation criteria need to be developed and defined together with the
business stakeholders

Criteria Values

Commodity Yes No

Functional Criticality Critical Not critical

Lot Size Small Medium Large Variable

Production/Quality High (Easy to achieve) Medium Low (Challenging)

Lead Times Short Medium Long

Sales Frequency < 30% 30 – 70% > 70%

Sales Development “Star” “Cash Cow” “Question Mark” “Poor Dog”

Product Lifecycle New Growth Mature Phase-Out

Page 42 Inventory Parameter Guideline

2.4 Exemplary Supply Chain Segments
Clearly defined objectives are the basis for deriving segment policies

Class I II III IV

Character High quantities, flow principle High variance and complexity Very small quantities Volatile demand pattern (projects)
ABC / XYZ per product segment

X Y Z X Y Z X Y Z X Y Z
A A A A
B B B B
C C C C
Basic Type Basic Type Basic Type Basic Type

 Demand rather high and stable  Volatile demand  Low quantities  High to medium quantities
 Forecasting possible  Medium quantities  Client accepts delivery times  Basically project business
Properties

 Highest sales value

Speed of Reaction Speed of Reaction Speed of Reaction Speed of Reaction

Flexibility Reliability Flexibility Reliability Flexibility Reliability Flexibility Reliability

Objectives

SC Cost Inventory SC Cost Inventory SC Cost Inventory SC Cost Inventory

Page 43 Inventory Parameter Guideline

 2.5
Section divider over
Segment two lines or
Policies
three lines

Page 44 Inventory Parameter Guideline

2.5 Supply Chain Segmentation
Basics
Sample policy decisions:

 Make-to-Stock / Purchase-to-Stock  Make-to-Stock / Purchase-to-Stock

 Carry safety stock  Low inventory
 Smaller batches  Single batch on stock
 Frequent order / build cycles  No safety stock

A-High

Volume B-Med

C-Low

X-Low Y-Med Z-High

 Make-to-Stock / Purchase-to-Stock / Forecast  Make-to-Order / Purchase-to-Order
 No safety stock or only on critical items Variability  No safety stock
 Larger batches  Rationalize items
 Less frequent order / build cycles  New item identification

Page 45 Inventory Parameter Guideline

2.5 Definition of clear policies for each of the defined material segments

Consider the following 3 chapters to define rules for each segment

1 Disposition Types

2 Safety Stock / Service Level / Reorder Point

3 Lot Sizes

 For each material segment disposition type, safety stock strategy and lot size model need to be defined
 The policy of each segment can be considered as a specific combination out of these three areas

Page 46 Inventory Parameter Guideline

 2.5.1
Section divider over
Disposition two lines or
Types
three lines

Page 47 Inventory Parameter Guideline

2.5.1 Disposition Types

Consumption-driven Deterministic
 Deterministic planning methods take the current requirements from sales orders and
forecasts into account and compare them with the stock level and receipt elements
(production orders, ...),
 to plan a required quantity after net requirements have been determined according
to the lot-sizing method.
 This planning is executed multi-level across BOM levels (MRP logic)
 In consumption-based methods, the material requirements are
determined on the basis of historical consumption quantities
 Consumption-driven methods are independent of current demand or
forecast, they respond only to inventory changes
 In the reorder point procedure, a purchase order is always triggered
when the warehouse stock reaches or falls below a defined level
(reorder point)
 In order cycle procedures, purchase orders are created in pre-defined
order cycles with fixed or variable order quantities

Definition of appropriate disposition type per material necessary

Page 48 Inventory Parameter Guideline

2.5.1 Consumption-driven Disposition
Order Cycle (periodic review), reorder point & mixed approach

Based on the ABC / XYZ segmentation when consumption-driven policies should be applied these ordering policies with
calculated lot sizes or periods could be applied
 From the basic dimensions order quantity, order cycle, fix and variable, six basic policies
derive for ordering materials and products
 Basically, we differentiate between order cycle and order point policies

Order Point / t s
Order Quantity Order Cycle System Reorder Point System Fix / Variable (Mix)

Q = order quantity (fix) (t, q)-policy (s, q)-policy T, s, q-policy

S = target inventory (variable) (t, S)-policy (s, S)-policy T, s, S-policy

Legend
t = order cycle q = Order
s = reorder level quantity
S = Target T = Control cycle
inventory

Page 49 Inventory Parameter Guideline

 2.5.2
Section divider
Safety over /two
Stock lines or
Service
three lines / Reorder Point
Level

Page 50 Inventory Parameter Guideline

2.5.2 Why is safety stock necessary and what does it depend on?

Cycle stock as the main part of inventory

Buffer for risk minimalization to protect from stock outs caused by
 satisfices the average demand uncertainties in supply and demand
 calculated by supply cycles and lot-size
 the restock frequency has direct effects on the inventory level Optimal buffer level depends on:
(e.g. volume of a day vs a week or month)

1. Customer service levels

2. Supply variability
3. Demand variability
4. Review cycle
5. Lead time
6. Production lot size
Average Cycle stock
Inventory

demand
Supply cycles
+ supply lot-size

In transit

Buffer / safety stock

Time

Page 51 Inventory Parameter Guideline

2.5.2 Basic Inventory Policies

Inventory Explanations:

 Goods received (e.g. from orders or production triggered

by a reordering point) replenish the stock and create a so
called cycle stock
Cycle stock
Order  Safety stocks cover uncertainty from demand variations
Goods
during the lead time, lead time variations and process
Received instabilities. It is dependent on a service level, the lead
time and variations of demand & lead time
 The  inventory is ½ cycle stock and the safety stock
 Inventory

Reorder point
Demand variation
in the lead time

Safety stock

Lead time

Lead time
variation

Page 52 Inventory Parameter Guideline

2.5.2 Safety stock calculations

General Safety Stock formula

Most Common Safety Stock formula

APICS Safety Stock formula

2❑
Safety Stock = service level factor× √ leadtime×MADdemand +averagedemand ×MADleadtime 2 2

According to model assumptions no application for materials with sporadic demand

Page 53 Inventory Parameter Guideline

2.5.2 Service Levels

Service Level: Probability to fulfill a customer order

Alpha Service Level Beta Service Level

 Probability that inventory is sufficient to fulfill orders  Percentage of requirements that can be fulfilled within a given
period
 Measure whether order could be delivered but does not consider
their volume  Measures the volume but does not reflect the orders

The Service Level is integrated into the Safety Stock formula via the Service Level Factor

Page 54 Inventory Parameter Guideline

2.5.2 Service Level Factor z-Alpha
The Service Level is integrated in the safety stock via the standard deviation
Legend Service Level / Service Level Factor
 = Average demand 100%

 = Standard deviation
 =

z-Factor

-3σ -2σ -σ μ σ 2σ 3σ
Assumption: Standard normal distribution

Target Service Level Z-Factor

77% 0.7388
80% 0.8416
84.13% 1.0000
90% 1.2816
92% 1.4051
95% 1.6449
98% 2.0537
99% 2.3263

-3 σ -2 σ -σ μ σ 2σ 3σ

The service level factor z is the inverse distribution function of the standard normal distribution

Page 55 Inventory Parameter Guideline

2.5.2 Service Level Factor z-Beta

Formulas: Explanations:

 – Expected value of shortages (units per order cycle)

(1)
 D – Demand

 FR – Fill Rate / Beta Service Level

(2)  Standard deviation of demand over the lead time

 f(D) – Standard normal probability density function

 Q – Lot size / order quantity / demand during replenishment time (depending

on your replenishment strategy)
Approximation (3)

 The beta service level factor depends on demand (average and standard
deviation) and is therefore different for each material
 Quantity-based approach

Source: Silver et al. (1998), cited from Tibben-Lembke (2009), p. 3  Tibben- Lembke, Ronald (2009): Setting Safety Stock Using a Fill Rate. Documents: University of Nevada, Reno. Online available via http://business.unr.edu/faculty/ronlembke/463/FillRate.pdf

Page 56 Inventory Parameter Guideline

2.5.2 Calculation of the Reorder Point

Formula:

𝑅𝑂𝑃=𝑎𝑣𝑒𝑟𝑎𝑔𝑒𝑙𝑒𝑎𝑑𝑡𝑖𝑚𝑒𝑥𝑎𝑣𝑒𝑟𝑎𝑔𝑒𝑑𝑒𝑚𝑎𝑛𝑑+𝑠𝑎𝑓𝑒𝑡𝑦𝑠𝑡𝑜𝑐𝑘
Model assumptions

 Constant demand level

 Quantifiable lead time

 The reorder point can be calculated if the safety stock is available as an input variable
 According to model assumptions no application for materials with sporadic demand

Page 57 Inventory Parameter Guideline

 2.5.3
Section
Lot divider
Sizes over two lines or
three lines

Page 58 Inventory Parameter Guideline

2.5.3 Lot Size Basics

Order Size Order size could be set in several

Order-up-to ways:
Level
Inventory

1. Production lot size, or

On Hand

2. Min/Max thresholds, or

3. Order-up-to target, or

4. Economic Order Qty (EOQ), or

Reorder Point
Demand 5. Rule of thumb / manual setting!
over
Lead Time
Safety Stock
Lead
Time Review Cycle

Order Order Time

Placed Received

Inventory policy levers need to be tailored to specific business needs

Page 59 Inventory Parameter Guideline

2.5.3 Calculation of Economic Order Quantities
Andler
Total Costs:
Costs
per pcs.
d q
K ( q) = f ∗ + c ∗
q 2
Total Costs

Variables:
 K: Total Costs
Inventory Carrying Costs
 f: Fixed costs per Order
 d: Average Demand per Period
 q: Order Quantity
 c: Inventory Carrying Costs per Piece per Period Order Costs

Economic Order Quantity Order Quantity

Model assumptions
 Constant demand  Linear increase of inventory costs Inventory
 In full order delivery according to order quantity Level

 Fixed costs per order (independent

 Infinitely fast stock replenishment Order
Quantity
of order size)

Time

 Economic Order Quantities are calculated by balancing fixed costs per order (e.g. change over costs in production or min transportation costs in purchasing) and inventory cost
 According to model assumptions no application for materials with sporadic demand

Page 60 Inventory Parameter Guideline

2.5.3 Lot Sizes for Materials with sporadic demand

For materials with sporadic demand, special considerations should be made when determining the order lot size

 What is the minimum order size of production / suppliers?

 What is the size of the handling units?
 When defining the lot size by referring to the average consumption, the respective
coverage should be checked and challenged. If the coverage is too large, a different
approach should be considered

Page 61 Inventory Parameter Guideline

 2.6
Section dividerDefinition
Process over two lines or
three lines

Page 62 Inventory Parameter Guideline

2.6 Definition of Inventory Processes

Consider the following 3 chapters to define leading practice processes in terms of inventory management

1 Slow Mover

2 Phase-in / phase-out

3 Pre-planning

Clear definition and documentation of process steps including corresponding roles and responsibilities is the prerequisite for efficient
inventory management

Page 63 Inventory Parameter Guideline

 2.6.1
Section
Slowdivider
Moverover two lines or
three lines

Page 64 Inventory Parameter Guideline

2.6.1 Identification of Slow Mover

Analysis / Classification Example: Analysis description:

 The Inventory Coverage Analysis investigates how long it takes for
Avg. inv. value of the average inventory (raw materials, supplies, finished goods,
fast movers merchandise) to be entirely consumed based on the historical
consumption
 The time buckets to determine the time/coverage for consuming
inventories are based on the average inventory value
 Consumption quantities taken into consideration were taken from the
Movements dataset – all movement types considered
Avg. inv. value of
slow & non-movers

Example observation / interpretation:

 We observe that the majority of the average inventory value is not
represented by fast-movers which may be due to low degree of
standardization of the machine portfolio
 Nearly 13% (9,3 mEUR) of the average inventory value does not
show any consumption over the months in scope, which may partly
be due to introduction of new machines and build-up of strategic
stock but might also indicate a high risk of mid- to long-term stock
obsolescence

Page 65 Inventory Parameter Guideline

2.6.1 Determining the focus areas

A four step approach helps you determining on

which materials to focus on

Step 1: Slow moving materials

Select materials with coverage greater than a defined threshold

Step 2: Focus on important products

e.g. 80% on total slow mover values

Step 3: Focus on plants with high value

Distribution of the slow mover values over plants

Step 4: Focus on materials

Value concentration over material numbers
Scope to be reviewed

Page 66 Inventory Parameter Guideline

2.6.1 To Be Standard Slow Mover Process

Overview

Start
Data preparation & distribution

Inventory
Framework:
Methods &
Tools

Action tracking

Global WCM Organization

Regional/ local / entity / plant

Page 67 Inventory Parameter Guideline

2.6.1 Standard Slow Mover Process - Roles and Responsibilities

Roles and responsibilities

Exe
Process step mp
lary
Role 1 Role 2 Role 3 Role 4 temp
late

Data preparation
& distribution

Analysis

Action & target

Action tracking

Monitoring &
global steering

Page 68 Inventory Parameter Guideline

 2.6.2
Section divider
Phase in /over two lines
phase out or
three lines

Page 69 Inventory Parameter Guideline

2.6.2 Phase-in of Materials

What needs to be considered for the phase-in of a new material?

Phase-in of a new material

Check, if the new material yes Take existing parameter

number was previously listed definitions, e.g. for
under another number segmentation criteria

Clarify, how to define the

segmentation criteria:
 Automatic
no  Manual

Are there similar (substituted)

materials you can refer to
when defining the
parameters?

Page 70 Inventory Parameter Guideline

2.6.2 Processes for Phase-out Control

Leading Practice for material phase-out controlling

 Is there a successor for a phase-out material?
 If yes:
 Flagging phase-out material / successor material in the material master or as well in the BOM
 Transfer of secondary requirements to successor item(s) within MRP via phase-out control
 Successor material inherits segmentation indicator and parameters
 Planning the transition to the successor material and controlling until deletion of the phase-out material
 If no:
 Flagging phase-out material / successor material in the material master or as well in the BOM
 Planning of sales and controlling until deletion of the phase-out material

The phase-out control process involves the Product Management, R&D, Quality, Purchasing, Production, Supply
Chain, Distribution, Sales and Master Data Management functions

Page 71 Inventory Parameter Guideline

2.6.2 Example Phase-out Process

Check availability of
new materials

Check technical
documents

Product is to be Release phase-out Realize planned

Prepare phase-out Plan phase-out Monitor realization
phased out request measures

Check advertising
situation
 What phase out
criteria do you
use?
 For which materials
are they
applicable? … Product is blocked

Nr. Process Roles Description

The process for material phase-out controlling is described in detail, including the associated roles for representation in PLM and SAP ERP

Page 72 Inventory Parameter Guideline

2.6.2 Phase-out Criteria

Examples

 No demand within last 3 years

 Technical more advanced / new product available
 Strategic phase-out due to portfolio optimization

Page 73 Inventory Parameter Guideline

2.6.2 Status Management for Phase-out in SAP ERP

Leading Practice for phase-out status management

 Multiple phase-out status in SAP are «leading practice»

 Engineering indicates phase-out
 Utilization of remaining stock – no further orders
 No further material movements possible
 Deletion flag is set

 Organizational regulation necessary

 Reliable process via workflow in the leading status management system (SAP ERP)

Page 74 Inventory Parameter Guideline

 2.6.3
Section divider over two lines or
Pre-planning
three lines

Page 75 Inventory Parameter Guideline

2.6.3 Lead Time Gap

Procurement Engineering Manufacturing Delivery

Logistics lead time

Customer’s order cycle

Order lead time

Time between order receipt and delivery date
Lead time gap

2 ways to close / reduce the lead time gap:

 Shorten and maintain the lead time
 The maintenance of lead times in the material master is of high importance
 Negotiations or co-operations with the goal of reducing the supplier lead time should be pursued
 Increase the transparency concerning demand and therefore increase the forecast accuracy

 Decisions with a lead time shorter than the order lead time can be made on an order basis
 Decisions with a longer lead time must be planned in advance
 Due to the lead time gap for specific materials there is a need for the creation of forecasts

Page 76 Inventory Parameter Guideline

2.6.3 Leading Practice Planning Approach

1 2 3 4 5
Sourcing of historical Creation of statistical Review & enrichment
Review of the forecast Consolidation
data forecast of the forecast

Demand Planner Demand Planner Demand Planner Sales Area Manager Demand Planner
Key Account Manager

Forecasting & Demand Planning

6 7
Creation and review of
Monthly S&OP meeting
the network plan

Network Planner Demand Planner

Network Planner

Network & Production Planning Sales & Operations Planning

Page 77 Inventory Parameter Guideline

2.6.3 Forecast Accuracy (MAPE) – (1/2)

Introduction
Forecast accuracy is one of the key measures that underpin the Demand process. A measure of how close actual demand is to forecasted quantity. Understanding and
predicting customer demand is vital to avoid stock-outs and maintain adequate inventory levels. Every industry has different levels of forecast accuracy it can achieve.
There are several ways to calculate forecast accuracy, a popular method of Mean Absolute Percentage Error is used here.

Input requirements Workings and example output

At SKU level, obtain: 1. For the y-axis, calculate the
1. Monthly number of units forecasted absolute (modulus) difference
for all SKUs.
Forecast Accuracy
by specific period (e.g., 1 week, 3 45,000 120%
months, etc.) before actual demand. Absolute (Abs) difference =
The specific period is called a frozen (Actual demand – Forecasted 40,000
forecast or forecast lag demand) 100%
2. In a new column calculate 35,000
2. Actual number of units demanded
forecast accuracy.
Note: Forecast accuracy = 1 – (Abs 30,000 80%
Target

Forecast Accuracy
► Forecast accuracy can also be done difference/Actual demand)
25,000 80%
by product category which would

Quantity
3. Create pivot mapping forecast Average 60%
provide a more detailed analysis. At accuracy value against months
a high level, a low forecast accuracy 20,000 64%
of a product could be compensated 4. Axis on left hand side shows
quantities reflecting on the 15,000 40%
by a high forecast accuracy of
another product. This would not be difference between Forecast and
Actual quantities. Axis on the 10,000
noticed on the graph
right hand side shows forecast 20%
► Forecast accuracy can be by accuracy in % terms 5,000
segmentation (e.g., by product
category) Note: 0 0%
In this adjacent example Forecast

er

Av er
ch

r
ne

st

e
y

ay
ry

ly
ril

be
be
ar

ag
and Actual quantities have also

Ju

Se gu

ob

b
Ap
ua

ar

Ju
nu

em

em
em

er
M

Au
br

ct
been plotted but this is not a must

Ja

ec
Fe

pt

ov
Forecast Actual F.Acc

D
N
Page 78 Inventory Parameter Guideline
2.6.3 Forecast Accuracy (MAPE) – (2/2)

Interpretation

Forecast Accuracy General Comments

45,000 Comment on the forecast accuracy Comment on the target, 120%
e.g., 1.A drop in forecast accuracy could indicate an
evolution, e.g., Forecast accuracy forecast accuracy has been below unexpected increase in actual demand
40,000 improved by 65% points in 12 target for 9 months of the year 2.Forecast accuracy depends on what forecast-lag is
months 100% selected for analysis (e.g., In Lag-2 we compare
35,000 actual demand against the 2 month prior forecast).
Typically, multiple forecast revisions are created.
Target The right lag to choose depends on the lead time of
30,000 80%

Forecast Accuracy
80% the supply chain. A shorter lag should mean better
forecast accuracy as we can predict better closer to
25,000 Average
time
Quantity

64% 60%
20,000 For this specific chart:
3.The drop in forecast accuracy between March and
15,000 40% April could indicate a new product introduction that
sold more
10,000 4.A steady increase in forecast accuracy in the last 4
20% months could be explained by the improved S&OP
5,000 process
5.Its important to recognize any ‘positive bias’ or
0 0% ‘negative bias’. E.g., if the actual demand is
y ril t r r r r consistently lower than forecast, it represents a
ar ar
y ch ay ne ly us be be be be ag
e
u u ar Ap M Ju Ju g o r positive bias (i.e., over forecasting). In this case the
Ja
n br M Au em ct em em e
Fe e pt O ov ec Av forecasting has a negative bias
S N D
6.The average forecast accuracy is 64%, showing an
Forecast Actual F.Acc opportunity to improve by 16% to reach the target
80%

Page 79 Inventory Parameter Guideline

2.6.3 Forecast Bias – (1/2)

Introduction
The Forecast Bias (FB) indicates if there is a consistent deviation between actual demand and forecasted demand. Therefore, a significant Bias indicates a
structural error in calculating the Forecast. On the one hand, the parameters in the forecasting model may be incorrectly estimated; on the other hand, the model
itself may be incorrect.

Input requirementsWorkings and example output

At SKU level, obtain: 1.Bias Formula:
1. Monthly number of
units forecasted by FB
specific period (e.g., 1
week, 3 months, etc.) 2.Plan timeframe: e.g. t-1M, t-3M, t-6M
before actual demand. (M = Month)
The specific period is 3.Divide the sum of all the differences
called a frozen forecast between the actual demand and the
or forecast lag forecasted demand in a specific time
2. Actual number of units period (e.g. 6 months), by the sum of
demanded the actual demand in this time
period
4.Aggregation: Different options, e.g.
material, product group, overall
5.Forecast Accuracy and Bias can be
displayed in combination along two
axes

Page 80 Inventory Parameter Guideline

2.6.3 Forecast Bias – (2/2)

Interpretation

General Comments
1.A Forecasting Bias (FB) indicates a structural
error in calculating the Forecasting Accuracy (FA)
2.A positive/negative FB leads to a too high/low
forecast, hence a low FA:
 Investigate for potential Sales & Operations
Planning process improvements
 If positive FB - review incentive system for sales

For this specific chart:

1.Each bubble represents a Material
2.The y-axis represents the Forecasting Bias and
can be either positive or negative
3.The x-axis represents the scale of Forecasting
Accuracy
4.The chart shows a triangle indicating that the
Bias becomes smaller when the Forecasting
Accuracy increases (and vice versa)

Page 81 Inventory Parameter Guideline

 2.7
Section divider over two lines or
Performance
three lines
Measurement

Page 82 Inventory Parameter Guideline

 2.7 Days Inventory Outstanding – DIO (1/2)
Introduction
DIO is an efficiency metric used to measure the average number of days a company holds inventory before selling it (inventory turns). This ratio
is industry specific and can be used to compare against other entities / plants / competitors and over time. A declining ratio over time can
indicate that a company / entity is able to sell inventory at a quicker pace. An increasing ratio, generally a negative indicator, suggests a
company / entity held on to its outstanding inventory for a longer rate than usual.

Input requirements Workings and example output

Days Inventory Outstanding (DIO)
1. Closing inventory values over 1. For the y-axis, calculate for 140

the past months/years in each of the last years DIO as: 120
scope DIO = [Closing Inventory 100
2. COGS (Cost Of Goods Sold) value]/[Cost Of Goods Sold] x 80
over the past months/years in 365

Days
60
scope 2. Use plant / entity names to
40
Note: form x-axis
20
► These two sets of information 3. Establish a pivot table
can generally be found in the mapping entity / plant names 0
Plant 1 Plant 2
companies annual reports against their last years DIO
Month 1 Year 2 Year 3 Year 4 Year 5
► DIO is usually calculated values
based on COGS, but in the 120

event that COGS is not 100

available, sales can be used 80

Note: The creation of a simple 60

Days
► Standard DIO calculation time series without 40
proposed; variances in benchmarking may also be 20
calculation equation might be appropriate 0
observed Jan Feb Mar Apr Jun JulSeries1
Aug Sep Oct Nov Dec

Page 83 Inventory Parameter Guideline

2.7 Days Inventory Outstanding – DIO (1/2)

Interpretation

For this specific chart

Days Inventory Outstanding (DIO)
1. Entity 2 has the highest inventory
140 Comment on entity DIO
evolution, e.g., entity has outstanding figure in comparison with the
highest outstanding inventory other entities in Year 3
120 in Year 3 2. Industry trend shows that on average there
has been a steady decrease in DIO over the
three years. The DIO of Entity 2 has
100
increased between Years 2 and 3 in contrast
to the industry trend. Further investigation is
80 recommended
Days

Comment on this performance against 3. The increasing ratio, generally a negative

60 other entities, e.g., best in class Entity indicator, can show that an entity has held
3 has significantly less DIO on to its outstanding inventory for a longer
rate than usual. This could be a sign of
40 holding obsolete stock
4. There is an opportunity for Entity 2 to
20 reduce DIO by 32 days (based on Year 3
figures) compared to the average for the
industry. The opportunity could be extended
0
Plant 1 Plant 2 Plant 3 Plant 4 Plant 5 Plant 6 Average
to reach 80 days when compared to the best
in class, i.e., Entity 3
Year 1 Year 2 Year 3

Page 84 Inventory Parameter Guideline

2.7 MOQ Coverage (1/2)

Introduction
The master data settings are crucial for supply chain stability. The Minimum Order Quantity (MOQ) settings particularly will have a big impact on replenishment
demand volatility. Misaligned MOQs are very likely to result in infrequent high volume replenishments.

Input requirements Workings and example output

At SKU level, obtain: 1. Calculate the average weekly Weeks Cover by MOQ (at SKU level)
1. Historical demand figures in units demand in units per SKU based 7
(at least 12 months) per SKU on the historical demand figures

2. MOQ master data per SKU 2. Calculate the MOQ weeks

6
coverage per SKU by dividing the
MOQ by average demand
5
3. In order to create the x-axis of
the chart, round the calculated

Number of SKUs
values by using the formula 4
(=round())
4. Create a pivot mapping SKUs to 3
the weeks cover
 Row Labels: Rounded weeks
2
 Values: Count of SKUs
5. Calculate the weighted average 1
of weeks cover

0
4 5 6 7 8 9 10 11 12 13 15 31

Weeks cover

Page 85 Inventory Parameter Guideline

2.7 MOQ Coverage (2/2)

Interpretation

Weeks Cover by MOQ (at SKU level) General Comments

1. MOQs are used to drive production volumes
7
Comment on high levels of 2. High levels of cover drive large batch
cover as high MOQs will lead to infrequent production runs
6 issues in the supply chain

For this specific chart

5
3. Weighted average MOQ for the SKUs
Number of SKUs

4
represents 10.1 weeks cover
4. For SKUs with high levels of cover issues or
3 delays in production mean
► Corrections may not be possible for >4
2 weeks
► High levels of inventory needed
1
5. Recommendation to investigate further and
to reduce current MOQ settings
0
4 5 6 7 8 9 10 11 12 13 15 31

Weeks cover

Page 86 Inventory Parameter Guideline

2.7 Coverage / Slow Mover (1/2)

Introduction
Inventory coverage analysis is useful to scope out inventory reduction opportunity focusing on slow/non-movers. This is used to plot the value of inventory
grouped by DIO value in user defined bands. Visually displays the aggregate amount of inventory which has a good inventory management process, e.g., DIO in
3-6 months band, and the amount of slow moving or obsolete inventory which requires better inventory management.

Input requirements Workings and example output

1. Calculate inventory coverage by
At SKU level obtain: using the current inventory Inventory Coverage
quantity, divided by the 45
1. Monthly sales forecast quantity
for one full financial year (if sales historical sales quantity for one
year 40
forecast is not present then use
historical sales) 2. Segment coverage values by 35
using nested IF function to

Inventory Values (m€)

2. Latest month inventory holding
quantity allocate SKUs into various 30
24.0m€
buckets (a nested IF is an IF
3. Standard cost/price of unit item function within another IF) 25

3. Multiply inventory quantity by 20 41.0m€

standard cost to derive value
4. Set up pivot to sum values at 15
6.0m€
various bucket to form waterfall
chart 10
4.0m€
5. Use bucket labels to form the x- 5
7.0m€
axis
0
Total In- < 3 months 3-6 6-9 > 9 months Non movers
ventory months months

Page 87 Inventory Parameter Guideline

2.7 Coverage / Slow Mover (2/2)

Interpretation
General Comments

Inventory Coverage 1. Non-movers are inventory which do not have any

sales forecast/history – therefore coverage is ‘infinity’.
Ex
am These are SKUs which should be immediately acted
45 pl
e upon to remove obsolete inventory
Comment on coverage in 3-6 and
6-9 month buckets as examples of 2. Align with your definition of slow mover – e.g., Is this
40
good inventory management referring to SKUs with more than 9 months of
inventory?
35
3. Notice that there are two methods for coverage
calculation:
30 Comment on high level of
Inventory Values (m€)

24.0m€ a) Inventory divided by sum of sales (simpler to

DIO/inventory coverage –
calculate), or
25 beware of stock-out
b) Using a nested IF function (provides a closer
20 41.0m€ comparison at a monthly level taking sales
variations into account)
15 Specifically for this chart (exemplary
6.0m€ interpretation for a specific industry):
10 4. A high proportion 24m€ of the total 41m€ inventory
4.0m€
has coverage of < 3 months. On one hand this can be
5 considered good as the company is not trapping cash
7.0m€ in inventory. On the other hand this could pose a risk
of stock-outs and therefore lost sales.
0
Total Inventory < 3 months 3 - 6 months 6 - 9 months > 9 months Non movers 5. 10m€ (6m€ + 4m€) or more than 25% of the total
inventory value is in either 3-6 months or 6-9 month
buckets. This is an area where good inventory
management practices have been adopted

Page 88 Inventory Parameter Guideline

2.7 Inventory Radar (1/2)

Introduction
This method of analysis is used to test if the company / entity has slow or non-moving inventory which therefore increases working capital. It helps to
visualise the state of inventory holdings of the company at a SKU level, by breaking down the scatter chart into sections.

Input requirements Workings and example output

At SKU level obtain: 1. For the y-axis, calculate the InventoryRadar
Inventory Radar
1. Monthly sales quantity by average inventory holdings by
DIO = 195 DIO = 97
SKU volume per SKU 10,000

2. Monthly closing inventory 2. Multiply average monthly closing 9,000

quantity by SKU inventory by standard cost (or

Average inventory volume (units)

8,000
price) per SKU
3. Standard cost or price of DIO = 53
unit item 3. For the x-axis, sum the total 7,000
sales volume by SKU 6,000
4. Obtain annual sales value as:
5,000
Annual sales value = Sales
volume by standard cost (or Increasing DIO
4,000
price) per SKU DIO = 24
3,000
5. Gradient of the chart as:
Days Inventory Outstanding = 2,000
Average Inventory value/annual
1,000
sales value
0
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000
Individual SKU Annual sales volume (units)

Page 89 Inventory Parameter Guideline

2.7 Inventory Radar (2/2)

Interpretation

Comment on the SKUs on the Inventory Radar General Comments

vertical axis. These are non- Inventory Radar 1. DIO figures differ between industries, e.g., For FMCG
movers industry 90 days of inventory may be ‘slow’, whilst for
DIO = 195 DIO = 97 heavy industry slow inventory can be >360 days
10,000
2. Therefore, seek agreement to define what does slow
9,000 and non-mover mean in your industry – use these
definitions as section bands on the chart
Average inventory volume (units)

8,000 3. This chart is particularly useful if you can call-out

DIO = 53 specific SKUs
7,000
4. The low inventory holding area needs careful study to
determine if any SKU is a high priority/strategic item
6,000 to ensure sufficient stock levels are maintained

5,000 For this specific chart:

Increasing DIO 5. Concerning the large number of SKUs in the ‘> DIO
4,000 97’ area, we recommend to review the SKUs
DIO = 24 individually to understand the reasons for slow
3,000 movement
Comment on SKUs in the low
6. Similarly a large number of SKUs are non-movers, i.e.,
2,000 inventory holding area as this are on the y-axis. This categorisation identifies where
poses a risk of stock-out if not potential obsolete items exist. There is an opportunity
1,000 properly managed of disposing of these obsolete items which will lead to
reduction in costs
0
0 10,000 20,000 30,000 40,000 50,000 60,000 70,000 80,000 90,000 100,000
Individual SKU Annual sales volume (units)

Page 90 Inventory Parameter Guideline

2.7 9-Box (1/2)

Introduction
9-box modelling can be used to establish strategies for different inventory segments with respect to inventory segmentation (ABC) and demand variability.
(1) – Evaluate inventory segmentation (ABC), (2) – Assess demand variability by each inventory segment, and (3) – Identify targeted-opportunities & develop a strategy
around each one. By assigning KPIs to the individual segments in the 9-box, the performance of the individual segments and the associated policies can be measured.

Input requirements Workings and example output

At SKU level obtain: 1. As Input:
1. Consumption / Sales data of a defined ► Summarize consumption /
period (e.g. last 12 months) sales and inventory KPIs into
the 9-box model
2. Current or average inventory value
(e.g. last 12 months) 2. Fine-tune settings based your
entity specific settings:
3. DIO values
► Define the service level per
4. Other KPIs / performance measures if
segment you want to achieve
required
– this will determine the level
Note: of safety stock
Depending on the actual scenario,
► Determine your segment
inputs and calculation might differ
specific strategies, e.g.
MTO/MTS/MTF/PTO/PTS/PTF

Page 91 Inventory Parameter Guideline

2.7 In order to address typical symptoms there are a few starting points to consider

Starting point… …to address typical symptoms with effective short-term measures …made transparent via dedicated analyses

Il l
us
Inventory parameter diagnostic tr
a
e tiv
Lead time deviation between master High levels of “dead stock” in relation Excessive safety stock without
data and for raw materials to average stock levels business reason

Adjust
settings Reduce maintained master data lead
Reduce maintained re-order points
Reduce maintained safety stock and
within master data (consumption driven
time in master data service level in master data
materials)

Inventory build-up due to final call-offs High amount of blocked stock 9-box segmentation
High amount of slow/non-moving items
based on frame contract compared to peers (internal/external)

Stop replenishment & production as well as

Purchase only allowed via C-level approval Release blocked stock as operational
push of operational activities, e.g. sales
in case of no operational need activity
promotions

High as-is coverage for low MOQ High coverage for stable Identified non movers or obsolete
coverage items with no long lead time demand items stock without further use
Change
operational
Stop replenishment & production.
activities Furthermore limiting order size to avoid
Stop replenishment & production (aligned
Scrapping and depreciation Inventory coverage assessment
with production capacity management)
again high coverage

High stock levels for strategic

High stock level of dedicated PTO/MTO Changes in demand patterns due to
inventory without
items without linked orders launch / phase-out
operational need

Stop replenishment & production; Change from automatic to manual

Purchase only allowed via C-level approval
consumption of existing stock disposition

Symptom & Measur

Finding e

Page 92 Inventory Parameter Guideline

3
Inventory
Management
Guideline

Page 93 Inventory Parameter Guideline

Contents

3. Inventory Management Guideline

3.1 Supply Chain Mapping

3.2 Roles & Responsibilities

3.3 IT Systems

3.4 Supply Chain Segmentation

3.5 Segment Policies

3.5.1 Disposition Types

3.5.2 Safety Stocks / Service Level / Reorder Points

3.5.3 Lot Sizes

3.6 Process Definition

3.6.1 Slow Mover

3.6.2 Phase in / phase out

3.6.3 Pre-planning

3.7 Performance Measurement

Page 94 Inventory Parameter Guideline

How to work with this main section?

A Insert existing policies in the respective sections

If necessary develop new contents to answer the template questions

B Note: Always start with a simple approach and improve continuously

By doing this you will structure and enhance your individual Inventory Parameter Guideline

For all chapters: During elaboration think about split between Service and Supply Chain / Production departments if necessary and use
this guideline for each department separately

Page 95 Inventory Parameter Guideline

 3.1
Section divider
Supply over two lines or
Chain
three lines

Page 96 Inventory Parameter Guideline

3.1 Map your supply chain

3 Steps

1 Schedule a physical meeting with representatives from all supply chain functions

Map your individual supply chain downstream showing all relevant functions, plants, warehouses etc. from procurement to
2 distribution including information and physical flows + IT systems

3 Discuss and draw pain points along your supply chain using the template on the next slide

The goal is to obtain a comprehensive, i.e. cross-functional, representation of the supply chain that reflects the perspectives of all stakeholders and
reveals the (inventory) challenges

Page 97 Inventory Parameter Guideline

3.1 Supply Chain Mapping – Template

Suppliers Procurement Construction Production, Assembly & Quality Logistics Sales Customers
Ada
pt s
truc
ture
acc
o
cha rding t
• tbc Monthly Plant performance report Equipment

rac o
• tbc • tbc teri your Segment 1
stic ent
s ity
Report Dealer s
Segment 2pec
• tbc Plant 1
I ifi c
direct
Sales Entity
Segment 3

• tbc Segment 4
Category Manager
I …
Production Assembly Quality

Inbound Outbound

Supplier I
Service
Plant 2 • tbc Service Plant 1
Tolling I
I Spare Parts
• tbc
• tbc
F&E Field Service

• tbc Strategic
Repairs
Procurement

• tbc
I
Service Plant 2
Plant 3
I

IT systems IT systems IT systems

• tbc
• tbc

I Inventories Issues / challenges

Page 98 Inventory Parameter Guideline

 3.2
Section divider
Roles over two lines or
& Responsibilities
three lines

Page 99 Inventory Parameter Guideline

3.2 Describe your inventory related roles & responsibilities

1 Use the RACI template on the next slide to describe the roles and responsibilities per process

2 Develop and document detailed role descriptions (strategic & operational) with respective responsibilities

Page 100 Inventory Parameter Guideline

3.2 RACI Template

Roles Rep
lace
Processes / Process Steps pro exam
ces
ses ple

Change Material Master Data in case of segment change

Request exception for a material

Record exception in MRP Monitor

Review stock levels

Review & Update segmentation rules

R = Responsible; A = Accountable; C = Consulted; I = Informed

Page 101 Inventory Parameter Guideline

3.2 Template Role Descriptions

Role Description

Page 102 Inventory Parameter Guideline

3.2 Exemplary Role Description – Inventory Analyst

The scope of tasks of the Inventory Analyst essentially includes the following topics:

 Preparation of decision-ready documents for the inventory management process

 Further development of SC segmentation incl. inventory parameters and deduction of recommended actions

 Support in the continuous development of inventory controlling and definition of segment-specific target definitions

 Requirements for new or further inventory reports to be developed

 Creation of analyzes based on inventory reports and data provided

 Preparation and monitoring of defined key figures and deduction of recommendations in case of critical deviations

 Monitoring of the planning-relevant master data quality and making it plausible (e.g.: Scheduling parameter, SC segmentation
indicator)

Page 103 Inventory Parameter Guideline

 3.3
Section divider over two lines or
IT Systems
three lines

Page 104 Inventory Parameter Guideline

3.3 Draw your inventory related IT landscape

Answer the questions to visualize your IT landscape relevant for inventory management

 Which IT systems exist?

 How are the systems related?

 Which system is used for planning?

 Which reports / dashboards are maintained?

 What are the data sources for (different) reporting measures?

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 3.4
Section divider
Supply over two lines or
Chain
three lines
Segmentation

Page 106 Inventory Parameter Guideline

3.4 Which segments do you define? (1/2)

How do you classify ABC materials?

What are respective thresholds?

How do you classify XYZ materials? Z-materials

What are respective thresholds? Y-materials

X-materials

Page 107 Inventory Parameter Guideline

3.4 Which segments do you define? (2/2)

What further segmentation criteria do you use and how are they defined?

What is the reason for the use of each of the segmentation criteria?

What segmentation criteria not considered so far could be helpful for you?

Page 108 Inventory Parameter Guideline

 3.5
Section divider over
Segment two lines or
Policies
three lines

Page 109 Inventory Parameter Guideline

3.5 What are the planning strategies for the supply chain segments do you consider?
(1/2)
What objectives do you have for each of your segments?

What policies do you have for each of your segments?

Page 110 Inventory Parameter Guideline

3.5 What are the planning strategies for the supply chain segments do you consider?
(2/2)
What policies do you follow across the 9Box?

A-High

Volume B-Med

C-Low

X-Low Y-Med Z-High

Variability

Page 111 Inventory Parameter Guideline

3.5 Summary – fill in to summarize the outputs of the following
sections Ada
acc pt str
ord uct
i u
Purchase to order Purchase to stock ntit ng to re
ePush
c ha y s y ou
rac pecific r
teri
stic
Stable (AX) Variable (AZ) Stable (AX) Variable (AZ) s

MRP strategy

MRP type

Lot size procedure

Lot size

Lot size calculation

Safety stock

Reorder point

Page 112 Inventory Parameter Guideline

 3.5.1
Section divider over
Disposition two lines or
Types
three lines

Page 113 Inventory Parameter Guideline

3.5.1 Disposition Types

Which disposition type do you apply to which material segment?

Page 114 Inventory Parameter Guideline

 3.5.2
Section divider
Safety over two
Stocks lines or
/ Service
three lines / Reorder Points
Level

Page 115 Inventory Parameter Guideline

3.5.2 Safety Stocks / Service Level / Reorder Point (1/2)

How do you calculate safety stocks? Which formula(s) do you use?

What approach is applicable for which materials / segments?

What Service Level do you consider for which materials / segments?

Page 116 Inventory Parameter Guideline

3.5.2 Safety Stocks / Service Level / Reorder Point (2/2)

How do you calculate / determine reorder points?

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 3.5.3
Section
Lot divider
Sizes over two lines or
three lines

Page 118 Inventory Parameter Guideline

3.5.3 Lot Sizes

How do you calculate lot sizes?

How are respective parameters defined?

Which calculation approach is being used for which materials / segments?

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 3.6
Section dividerDefinition
Process over two lines or
three lines

Page 120 Inventory Parameter Guideline

 3.6.1
Section
Slowdivider
Moverover two lines or
three lines

Page 121 Inventory Parameter Guideline

3.6.1 Slow Mover

How is your Slow Mover Process defined?

What improvement potentials can you identify looking at your process and comparing it with the standard process from
the theory section?

Use the template on the next slide to document the roles and responsibilities per process step.

Page 122 Inventory Parameter Guideline

3.6.1 Standard Slow Mover Process - Roles and Responsibilities

Roles and responsibilities Ada

pt p
Process step to y rocess
Role 1 Role 2 Role 3 oRole
ur s 4step
pec s
ific accor
pro d
ces ing
s
Data preparation
& distribution

Analysis

Action & target

Action tracking

Monitoring &
global steering

Page 123 Inventory Parameter Guideline

 3.6.2
Section divider /over
Phase-in two lines or
Phase-out of
three lines
Materials

Page 124 Inventory Parameter Guideline

3.6.2 Phase-in Process

How is your phase-in process defined?

How do you define inventory parameters for new materials?

Page 125 Inventory Parameter Guideline

3.6.2 Phase-out Process

Which phase-out status do you use in your ERP system?

What phase-out criteria do you use?

Page 126 Inventory Parameter Guideline

3.6.2 Phase-out Process

How is your phase-out process defined?

Insert all related process steps with respective responsibilities in the RACI template on the next slide.

Page 127 Inventory Parameter Guideline

3.6.2 RACI Template

Roles
Processes

R = Responsible; A = Accountable; C = Consulted; I = Informed

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 3.6.3
Section divider over two lines or
Pre-planning
three lines

Page 129 Inventory Parameter Guideline

3.6.3 Pre-planning (1/3)

How is your planning / forecasting process defined and what is in scope?

Use the RACI template to document roles and responsibilities.

How can you improve your process according to the leading practice process in the section “Inventory Parameter
Fundamentals and Leading Practice”?

Page 130 Inventory Parameter Guideline

3.6.3 Pre-Planning (2/3) – RACI Template

Roles
Processes

R = Responsible; A = Accountable; C = Consulted; I = Informed

Page 131 Inventory Parameter Guideline

3.6.3 Pre-planning (3/3)

How do you measure your forecasting accuracy?

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 3.7
Section divider over two lines or
Performance
three lines
Measurement

Page 133 Inventory Parameter Guideline

3.7 Performance Measurement

Which KPIs / analyses do you use for inventory performance measurement and why?

Which additional KPIs / analyses could be useful for your entity / plant?

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4
Key Terms

Page 135 Inventory Parameter Guideline

Key Terms

Key Term High-level Description

Disposition type The type of disposition indicates, if disposition is consumption-driven or deterministic.

Economic Order Quantity (EOQ) Basic model with specific assumptions to calculate optimal order lot sizes.
Model

Forecasting Forecasting of future demands using statistical models.

Inventory Aging The inventory age indicates the time a material is on stock.

Lot Size Quantity of a specific production / purchasing lot.

Make-to-Stock / Purchase-to-Stock Production / Purchasing strategy without triggering production / purchasing orders according to received customer orders.

Phase-in / Phase-out process Process for Materials to be phased-in, e.g. due to next product generation and Materials to be phased-out, e.g. due to portfolio rationalization.

Safety Stock Safety stock is often used to buffer uncertainty on the demand side and lead times for supply to provide a specific service level.

Service Level The Service Level is to be understood as the probability to fulfill a customer order.

Slow Mover Materials on stock with a high coverage.

Supply Chain Mapping Visualization of the end-to-end supply chain highlighting stakeholders and respective challenges.

Supply Chain Segmentation Classification of materials to assign specific inventory policies and therefore handle the supply chain complexity.

Page 136 Inventory Parameter Guideline