Differentiated Inventory Management Tomas Wennerstein – MD, Syncron Inc. Stockholm, 8 January, 2013
May 26, 2015
Differentiated
Inventory Management Tomas Wennerstein – MD, Syncron Inc.
Stockholm, 8 January, 2013
Page 2 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Main Themes of the Presentation
• A segmented approach is default within price and campaign management etc.,
but why not when it comes to Inventory Management?
• What dimensions are relevant to segment the inventory management approach
on and what are the benefits?
• Repairable parts requires a different inventory management process vs. non-
repairable
Page 3 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Differentiation is Applied in Many Areas
• Everybody understands the value of
Differentiation
• Differentiation is embedded in business practice
when it comes to:
– Marketing
– Pricing
– Sourcing
Page 4 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Different Levels of Inventory Differentiation
• Basic differentiation CostDemand (Sales lines, VAU, Cost)
• Basic Purpose differentiation and Manual overrides.
• Advanced differentiation CostDemand
• Strategy based differentiation
Scope: Inventory Management for After Market parts. Many SKUs in many stocking locations requires dynamic rules that are automatically applied.
DO Quality
Page 5 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Today - What Do Most Companies Do?
• Basic “CostDemand”
differentiation:
– Demand, ABC (VAU),
Picks/Calls/Sales, Cost
A B C $ 0-100 $ 101-1000 $ 1000-
1 Rule X Rule Y Rule Z 1 Rule V Rule W Rule U
2 Rule XX … … OR 2 Rule VV … …
3 … … … 3 … … …
4 or more … … … 4 or more … … …
PICKS
VAU
PICKS
COST
Page 6 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Today - What Do Most Companies Do?
• Basic “CostDemand”
differentiation:
– Demand, ABC (VAU),
Picks/Calls/Sales, Cost
• Basic Purpose differentiation and
Manual overrides
Rule YY
Part A
Non Critical Items Critical Items
A B C A B C
1 Rule X Rule Y Rule Z 1 Rule X Rule Y Rule Z
2 Rule XX … … 2 Rule XX … …
3 … … … 3 … … …
4 or more … … … 4 or more … … …
PICKS
VAU
PICKS
VAU
Non Critical Items Critical Items
A B C A B C
1 Rule X Rule Y Rule Z 1 Rule X Rule Y Rule Z
2 Rule XX … … 2 Rule XX … …
3 … … … 3 … … …
4 or more … … … 4 or more … … …
PICKS
VAU
PICKS
VAU
Page 7 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
• Get better at managing the
”CostDemand” differentiation
– What is the cost for
maintaining the same agreed
service level for a part that has
few sales and high VAU
compared to LOW VAU and
high sales?
Inventory cost / Sales order line
A1 A2 B1 B2 C1 C2
1
2
3
4 ?
5-6
7-9
10-19
20 or more ?
PICKS
VAU
Page 8 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
• Get better at managing the
”CostDemand” differentiation
– What is the cost for
maintaining the same agreed
service level for a part that has
few sales and high VAU
compared to LOW VAU and
high sales?
Inventory cost / Sales order line
A1 A2 B1 B2 C1 C2
1
2
3
4 500-5000
5-6
7-9
10-19
20 or more 1
PICKS
VAU
Page 9 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
• Get better at managing the
”CostDemand” differentiation
– What is the cost for
maintaining the same agreed
service level for a part that has
few sales and high VAU
compared to LOW VAU and
high sales?
• By targeting different Service Level
on a more granular level, you will
be able to maintain a Total Higher
Service Level at a lower cost
Inventory cost / Sales order line
A1 A2 B1 B2 C1 C2
1
2
3
4 500-5000
5-6
7-9
10-19
20 or more 1
PICKS
VAU
Target Service per DEMAND/VAU class
A1 A2 B1 B2 C1 C2
1 0% 0% 0% 0% 0% 0%
2 0% 0% 0% 0% 0% 0%
3 0% 0% 0% 0% 0% 0%
4 50%
5-6
7-9
10-19 99.7%
20 or more 99.7% 99.7%
PICKS
VAU
Page 10 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
• Challenge the 12 month horizon as a
stocking criteria
– What says that 12 months is optimal?
– In Fast moving Retail no one would
use 12 months
– Aerospace and similar industries
sometimes use 3-4 years
Page 11 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
• Challenge the 12 month horizon as a
stocking criteria
– What says that 12 months is optimal?
– In Fast moving Retail no one would
use 12 months
– Aerospace and similar industries
sometimes use 3-4 years
Successful results from going from 12 months to 12 and/or 18 months
Target Service per DEMAND/VAU class
A1 A2 B1 B2 C1 C2
1 0% 0% 0% 0% 0% 0%
2 0% 0% 0% 0% 0% 0%
3 0% 0% 0% 0% 0% 0%
4
5-6
7-9
10-19 99.7%
20 or more 99.7% 99.7%
PICKS VAU
Target Service per DEMAND/VAU class
A1 A2 B1 B2 C1 C2
1 0% 0% 0% 0% 0% 0%
2 0% 0% 0% 0% 0% 0%
3 0% 0% 0% 0% 0% 0%
4
5-6
7-9
10-19 99.7%
20 or more 99.7% 99.7%
PICKS VAU
Target Service per DEMAND/VAU class
A1 A2 B1 B2 C1 C2
1 0% 0% 0% 0% 0% 0%
2 0% 0% 0% 0% 0% 0%
3 0% 0% 0% 0% 0% 0%
4
5-6
7-9
10-19 99.7%
20 or more 99.7% 99.7%
PICKS VAU
Page 12 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Strategic Differentiation
• Understand the ROI on different parts as they are stocked in Inventory and
adjust your inventory strategy and consequently your Inventory Parameters
• Example of groups that could be valid when segmenting you inventory
management techniques
– Criticality
– Captive vs Commercial
– Margin contribution
– Weather and Climate related
– Part Life cycle phase
– Unreliable suppliers
– Machine Life cycle phase
– Machine belonging
– Non historical demand driven
items vs. demand driven
– Planned vs. unplanned
– Rotables vs. normal
– Short vs. long lead-time
Page 13 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Strategic Differentiation
• Dimensions to consider for the different
strategies
– Stocked or not stocked
– Criteria for stocked or non stocked
– Target Service Level
– Alert level for manual review
– How much should historical demand
influence the inventory management
(new parts)
– New methods
Page 14 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Common Questions Related to Inventory Differentiation
• Is there a business case for me?
• What differentiation is applicable?
• What is the effort?
Page 15 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Business Case and Relevant Differentiation
• Smarter basic differentiation normally yield 10-25% inventory savings at a
maintained overall service level.
• Adding other values such as differentiated service and techniques for different
segments will add value as well as facilitate less administration.
• A more exact value can only be found by:
– Analyzing the data, you will be able to draw relevant conclusion as long as
the business has not changed substantially.
– Understanding the value contribution of Inventory Management and discuss
with Sales and Marketing as well as Product Development.
Page 16 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
What is the Effort to Become Better at Differentiating?
Two aspects to consider are:
• Finding the relevant segments for the operation
– Understand the value that availability adds for customers and profit for the
different segments
– Understand the data and how you can make your segments
• Incorporate the differentiation in daily inventory management
– System support
– Skills and “know how”
Page 17 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Questions
How many would say that they that are doing differentiation to
its full potential? 1
Page 18 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Questions
What segments do you differentiate on today and what has
prompted that? 2
Page 19 COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Questions
Where do you see the biggest challenge in incorporating more
Differentiation in your inventory management? 3