If a downturn hits it is often all we can do to cut and cut quickly. This is often crude and can hurt the business. Our customers want to keep their old machines running rather than outlay capital to replace them. But we often cut most savagely the more exotic items that people need to keep their old machines running, and reduce our gross margins as well. Equally as business conditions improve we are often to slow to react to lengthening lead times and get caught without inventory just as our customers want to grow again. So what happens as the business climate changes?

Downturn Upturn Customers repair old machines Customers replace machines Move to breakdown maintenance Return to preventive maintenance Deliveries expected immediately Parts ordered ahead of time OEM and construction sales collapse Forward orders for construction and factory use rebuild Supplier lead times reduce and reliability often improves Lead times tend to increase and supply reliability erodes Interest rates reduce Higher interest rates Credit squeezes working capital – every $ must stretch Credit more freely available but perhaps not as fast as you want Mindset: Survival and risk averse Growth and share opportunities Need greater product range but usually less depth Can sometimes reduce range but also need more inventory depth

The bad news is that you have to translate all these changes in business conditions down to ‘days cover’ and other overly simplistic assumptions about how to manage your stock levels. Well no, the good news is that you can manage these complex factors so they you can tune your inventory investment and purchasing decisions to stay ahead of the business cycles. micq-if can help you set policies and then has the flexibility to help translate your objectives into inventory levels that make sense in the business environment in which you are and will be operating. It can help you balance the breadth and depth of product you are holding, given the needs of your customers, the capabilities of your suppliers and your supply chain, and the profitability, service level and Return on Assets objectives that you have.

Right range for the right time …

In the normal course of business you will probably have: 

• Some items that are sold in reasonable volume, but a lot more that are sold or used relatively infrequently for breakdowns and repairs.
• Some products that might be very expensive that are ordered well in advance by customers so you don’t need to carry stock.

Your processes and systems are hopefully balancing the need for service levels, profitability and return on assets and getting the inventory range and depth decisions fairly right. You are comfortable with your inventory levels and the number of emergency orders when you do not carry the stock.

In a downturn…

If times become a bit tougher how do you react? Customers want immediate delivery. They don’t carry stock but want their equipment repaired immediately. They need you to carry the range of product they might need. Can you afford to stock every part they might need? Well no, but you can certainly stock a lot more if you:

• don’t waste your inventory investment by stocking 1, 3 or 5 if customers use stock in 2s and 4s.
• avoid over-stocking each item, and stretch your dollars further
• match your inventory, so that parts used together are stocked together

As conditions recover …

When the economy picks up, customer behaviours will change too. They will do more preventive maintenance as they begin to hit capacity constraints again, even if they are just trying to avoid an extra shift. They will then give you time to supply their maintenance parts, time to allow you to move the stock from higher up the supply chain. When others are building inventories you can be using your inventory investment more wisely.
micq-if can help you adjust ordering and carrying costs, service level targets and customer order lead time profiles, profitability and return on assets targets. micq-if can help improve your ability to anticipate and respond to business changes. Why not stay ahead of the rest?

Important to have the information to manage

A downturn needn’t be all doom and gloom. It can be the time when it would be nice if you were able to quickly tell your planning and purchasing systems that lead times will be shorter, and supplier reliability is likely to improve, along with lower interest rates, and reduced ordering costs. A downturn can be a time to improve the resilience, capability and competitiveness of your business, by quickly adjusting to the new circumstances.

When conditions improve, there can be missed opportunities if you don’t have the right tools to again support you. Supplier lead times will start to creep out again. There will likely be shortages for some products, and interest rates will start to rise again. It will be important to anticipate longer lead times and pressures on suppliers, especially when rebuilding safety stock. It is too late to order extra safety stock when you are ‘surprised’ by supply problems. Safety stock needs to be ordered in advance. What tools have you got to ensure that you manage the emerging issues and opportunites proactively. micq-if can help you stay ahead and in charge.

Kits and Matched Items Compared

One solution to ensuring you have the right inventory can be the use of Kits. Kitting is normally supported by most ERP and Inventory Management Systems. You specify a ‘bill of material’ and you can prepare forecasts and supply plans for all the required components. However, particularly if kits are held in inventory in their assembled form they can be particularly inflexible. You can easily end up cannibalising your kit inventory in order to supply stock and your inventory integrity suffers. It also takes time and effort to maintain the bills of material for all the kits.

Matched items are a very different concept. Matched items can be recognised directly from the patterns in your customer orders. What is being bought together in Brisbane will often be the same as what is needed in Auckland or Singapore. The same or a similar combination of parts and accessories is often needed in each case. But not every time. Maybe two of three parts are the same but the third is perhaps bigger or to a different standard. Sometimes there is a mix and match situation with perhaps one common part and maybe ten alternatives that go with it.

Kitting can be a solution some of the time, however analysis from one situation with over sixty stores and thousands of products highlights that:

Only 6% of items which were identified as members of matched item sets had overlaps sufficient to even consider the possibility of kitting.  Matched Items can typically support over ten times the products that a conventional Kit capability can reasonably manage.

and …

of the top 35,000 items sold, 10% were in matched item sets but the items in the matched item sets represented some 30% of sales – important to get the range right.

How can inventory be matched and managed?

micq-if can help you recognise and track matched item sets by analysing the patterns available from your customers’ orders. micq-if will bring significant patterns to your attention. With a small amount of effort you can review and set matched items for your entire sales network, because after all, the stapler will use the same staples irrespective of where it is sold, the photography enthusiasts will want similar combination of lenses across the country and machines will still wear out and need to be repaired in similar ways irrespective of where they are used. Matched items represent a far more flexible approach to managing a range of products, one which can utilise your inventory investment far more efficiently and deliver improved service levels.

The Perils of Overly Simple Approaches

Many ERP packages employ some very simple techniques to handle what are unfortunately very complex issues. For example:

Days (or Months) of Cover
Many packages ask ‘Well how long will I have to protect myself against sales or supply variability?’ They come up with strategies like … ‘If I have 30 days of stock then I should be safe.’ Unfortunately 30 days of product translates to no stock at all typically for a product that is sold perhaps at 0.25 units per month. If it sells at 0.6 per month, then you might stock one, but this then ignores the fact the item is sold in twos.

Comprehensive Solutions are needed
Realistically it would be virtually impossible to consider all the factors that micq-if takes into account when preparing a supply plan. Things like:
  

… and there are more factors like optimisation factors, excesses or deficits in downstream warehouses, supplier reliability, forward and back orders, display stock, costs (product, ordering, carrying), product popularity and risk profiles, shelf life, excess elsewhere in the network, changes in expected arrival of incoming supply, supplier and local holidays … all up, rather more than you can reasonably take into consideration with a simple ‘in the head’ or ‘days of cover’ type calculation. Rather than making overly simplistic assumptions, micq-if recognises that supply planning is often difficult and complex. micq-if can integrate the different factors, and help you arrive at a much more considered position on what your safety stock and supply plan position should be. This allows you to spend less time on individual supply transactions and more time on setting the overall policies and parameters which control the way your supply plans operate.
 

Forecasting is not necessarily that easy … but it can be made easier

micq-if can help you improve your forecasting capability through approaches that include:
 

• detecting and analysing seasonality even when seasons start at different times from one year till the next, often because it rained earlier or later, or was unseasonably warm in one year
• recognising where there are step changes in demand (it would have been nicer if sales told you about the loss of those customers earlier though)
• highlighting via a simple review score and colour coded warning system to help you focus on where perhaps the system might have struggled to come up with a ‘right enough’ answer. This can be presented where you are reviewing the forecasts that are potentially relevant to imminently important purchase order recommendations, or else highlighted when the purchase order recommendations are placed in front of you – sort of “I think that this recommendation is right but you might just want to check the forecast.”

Forecasting is not the only factor to fix

However forecast sales is not the only factor that must be adequately estimated. micq-if also considers factors such as: 

• the quantities in which products are commonly sold and with low volume products that may be even more of important factor than the forecast
• the variability of supply lead times might be more of a factor than demand variability and micq-if can help monitor and manage this very effectively too.

Is it worth getting the forecasts all right? In the case of higher volume products with some history the effort is probably not that great and the value may be high, especially for a seasonal product. If seasonal products represent just 10% of your range they will often generate 20% of your revenue and maybe more of your inventory risk.

For a lower turnover product, the forecast may be less important than properly understanding other aspects of retail demand … and for those products, other features of micq-if and their effective use will be more important in creating value. micq-if can provide you with a comprehensive and integrated set of capabilities. Importantly it is not a ‘one size fits all’ system. It will adapt to the product, forecast, supply and supply chain situation … and apply the appropriate tools to help you make better purchasing and inventory management decisions.
 

The Challenges of a Large Product Range

Managing tens of thousands of products across a network, even just a thousand or more in a branch can raise many challenges. The overheads of product management will defeat you if you do not have the right tools in place. If you have many branches and warehouses, the subtleties of regional variations can escape you because there is simply not the ‘bandwidth’ to deal with the complexity.

Strategies and Tools to Help you Manage

micq-if can help you manage a large range of products through strategies, disciplines and tools. You can match items in your inventory using retail sales history analysis, only stocking the quantities in which customers buy. You can effectively replenish and conduct purchasing reviews ‘every day’. You can reduce your investment in high turnover items where demand and supply is stable, and fill in the gaps in your range in ways that can help you improve service and reduce inventory. micq-if can do the hard work of trading off service levels, return on assets, profitability, product range and depth … and you can stay in charge of the overall approach by setting the policies appropriate to the business climate and your objectives.

Purchasing Reviews Every Day? No way! Certainly not with today’s tools!

‘Of course you can’t review every product every day.’ So you try to manage the workload and organise reviews via approaches like buyer groups. Purchasing officers are assigned a set of ‘buyer groups’ and then work to a calendar, so that perhaps every week they review the most popular products but then review the less popular ones, perhaps only once a month.

This can lead to perverse effects like:

• surges in receipting activity linked back to the original monthly ordering events. This can lead to delays in moving and managing stock.
• increased safety and cycle stock requirements. Reviewing once a month may well reduce order volumes by half but they may also raise inventory levels by 50% too.
• reduced service levels and higher emergency order costs

Yes! You can review every day!

micq-if can help you manage more regular reviews (even daily) with strategies like:

• monitoring inventory levels and sales and predicting when you will need to resupply – like a pro-active reorder point.
• purchase order, supply plan and forecast scores to help guide you to areas which really need review

Taking advantage of these capabilities can give you the opportunity to improve purchasing productivity and service levels and reduce inventory at the same time.

The default review frequency in micq-if is actually Daily. This DOES NOT MEAN that you will be being asked to review purchase order recommendations for every item for every warehouse every day. Rather it means that the system will have the opportunity to make appropriate recommendations should they be needed.
 

What is the ‘cost’ of shipping ‘air’ versus the cost of carrying stock earlier than needed?

On the face of it, the decision can be reasonably simple. Evaluate the carrying cost of the stock that you have to bring forward to fill or partially fill the container and compare that with the savings in freight you can expect.

However is that the complete question?

But that then begs the question, when is the next container expected to ship? And how full will that be? And if it is full with bulky items is it better to keep your options open and ship some bulky items sooner? If you over-order now which products should you order and in what quantities? Does your supplier have a minimum order value? A set of discount breaks? Are you consolidating multiple suppliers into the one container? If you ship it now what effect might that have later?
Fortunately micq-if can help you balance all these decisions and the benefits could easily amount to thousands of dollars.

I must remember to get that order in …

Purchasing Officers know that they have to remember Chinese New Year and the Italian Summer Holidays. If they don’t then it may be several weeks or a month before there is another ordering opportunity. So they have to maintain records and remember to adjust orders when needed.

What is being recommending for ordering today?

With micq-if it can be much simpler. The holiday is recorded against the supplier. When the daily supply planning calculations are done they can consider any interruptions, and not only to your suppliers, but also to your own operations. And micq-if will also take account of the forecast and supplier lead time variability pertaining to the holiday period(s), so it will dynamically adjust the safety and the replenishment stock quantities … and you don’t need separate follow up and reminder systems.

Incentives for Bad Habits

While minimum orders and order quantity and value breaks can often be justified in terms of supplier cost management, rebates often have slightly different motivations. They can cause you to buy too much of something you don’t really need right now and then pay for it over time after the ‘high’ of the rebate wears off.

Winning by their Rules

If vendors offer you rebates for achieving certain targets, play by their rules by all means, but you can play so that you maximise your upside and minimise your downside. micq-if can help spread your over-ordering risks so that you minimise your longer term risk of creating excess stock, while gaining the full value from the rebate offered.
 

Daily monitoring and management of excess

Realistically it is impossible to make forecasts perfect and you can never carry enough stock to cover every eventuality. You will lose customers from time to time. New products will take off faster than you anticipated. Poor disciplines also may lead to staff over-ordering. When they need two, they order ten. The price was difficult to resist. You will from time to time have pockets of excess stock.

micq-if recognises this certainty. Every night it can check the stock holding for every warehouse holding the product. This can be compared with the forecast and forward order need for that stock. Where new stock is to be ordered externally it can evaluate whether that is the most appropriate decision by considering:

• the relative cost of purchasing versus raising an order to ‘move the excess’.
• the transport costs from one warehouse to another, and
• the cost of continuing to carry the stock in the location that has the excess.

This can all be being checked while you sleep. Hundreds of business cases can be raised and evaluated. If they are worth doing, next morning you will have recommendations to move the excess rather than order externally, if that is the most appropriate decision.
 

Even modest levels of Complexity: An Opportunity rather than a problem

Managing complexity is part of most distribution businesses. How well you manage that complexity often influences the level of profitability you can achieve. But what happens when the business is greatly simplified to just importing a few containers a month? Well there often are still more than enough variables for you to encounter significant challenges in managing your business. You still have to answer many questions.

micq-if can help you juggle all the different decisions that in reality need to be made. If you think about all the decisions that need to be made and need to be made often under time and cost pressure, there are often significant benefits to be had. micq-if can help you make the BIG decisions rather than being weighed down by all the little day to day ones. So you can focus on managing and growing your business rather than just managing each transaction and hoping it will all turn out right in the end.
 

The Case(s) for Change

In spite of the fact cash might be a bit tight right now the case for change might still be fairly compelling, including:

Individually all the potential benefit areas might appear a bit small at first glance.  But add them up.  5% here and 5% there can add up to large benefits fairly quickly.

You might be able to ‘supercharge’ your existing ERP system?

You may well be happy with most aspects of your ERP system. After all, your branch staff are all trained. The system processes orders and invoices very effectively. Your investment has been mainly a good one.

You can greatly extend your capabilities by ‘bolting on’ micq-if, a bit like adding a supercharger to an existing motor vehicle. You can protect and leverage your existing ERP systems investment (I.T., processes, staff knowledge, culture). micq-if can use your sales history and handle your planning to produce better mins and maxes and purchase order recommendations which can be fed back into your original ERP system. The branch staff will like not having to waste as much time following up emergency orders. You can realise the potential benefits of improved inventory utilisation and profitability. You may well be able to reposition your organisation in terms of customer service, satisfaction, reputation … and gross margin opportunity.

micq-if can potentially help you deliver benefits across many areas. Importantly it can help you choose where you can save and where perhaps you should invest. Ultimately the choices however are up to you

Unlike many packages which adopt simple inventory management practices like ‘days’ or ‘months of stock’, micq-if employs an array of approaches which handle the complexity of real supply chain issues. micq-if can be tuned via a series of policies. You decide how you want to manage your supply chain and your product range and micq-if can handle the millions of detailed decisions that flow from the policies and rules that you set.

micq-if can help you potentially achieve benefits like:

	Reduced inventories – up to 80% reductions have been known in some situations, but micq-if is just as likely to increase inventories by 20-30% in other cases – it helps you decide where to save and where to invest.
	Reduced emergency orders (less airbags, less time taken to track emergencies and handle customer anxieties)
	Improved productivity in areas ranging from purchasing to warehousing to sales
	Improved service reputation and maybe higher margins as a result
	Rapid identification and handling of any stock deficits (or excesses) enabling you to keep your supply chain ‘in tune’ with customer needs and supplier capabilities, even as the business climate is changing
	Optimisation of container ordering and rebate management, helping you make the right choices and win against outside rules and constraints
	micq-if represents a new level of capability in Advanced Inventory Management, that might well be able to help you deliver benefits that you never thought possible until now.

There is no escaping the need for disciplines and cultural change

micq-if can help you follow important disciplines and achieve cultural change

	helps you track any overrides, including the responsible person, the reason and for how long any override should remain in force
	highlights where you need to focus your forecasting and supply plan reviews, and where you can just let the system run your supply chain on auto-pilot
	tracks activities and changes so you can focus on where training, process change and other interventions might be necessary, and

And if you are disciplined …