Posts Tagged ‘Inventory Management’

There is a formula used in the industry that tries and calculate a optimum turn rate:

Target Turns = 12 / (Factor x (Order Frequency in Months + .2  x  Lead Time in Months))

• Order Frequency is the the time between placing orders with the vendor in months
• Lead time in months is the average time it takes to receive the order from the vendor
• Factor represents other issues that increase complexity of ordering the product which could include:

1. Required breadth of offering need to stock a full line to be competitive
2. Order minimums and requirements to take discounts
3. Reliability of the vendor meeting lead times and delivery dates backorder etc..
4. Sale or Promotional Stock-ups

As long as these type of considerations are at reasonable levels the factor should be around 1.5. If one or more of the considerations is very extreme, then the factor can work its way up to 2.0.

Inevitable “dead stock” which will not move out due to ongoing demand is being aggressively flushed out of the system.  You can use http://www.deadstocknetwork.comto help move your dead stock and slow moving obsolete goods.

An Example, note that using, a one month order frequency, a half month lead time, and a 2.0 factor, calls for 5.5 turns. This is slightly more than an average of two months supply of every item. (Months supply is simply the reciprocal of turns – or one divided by the turns.) Why do we need more than even an average of one months supply , let alone two, if we are ordering every month?

One of the assumptions is that the dead stock is being aggressively flushed out of the system by various special programs. Generally this stock constitutes from 10% to 40% of the inventory and acts as a lodestone around the neck of the inventory. (e.g. when 25% of the inventory is dead it automatically reduces the turns by 25%, so a potential turn level of 6 drops to 4.5)

Additionally, do not assume that your turns must be low because you are required to stock many items that have very little turnover.  This situation may have some impact, but you should only have a bare minimum of those items. This situation of stocking slow movers does hurt, however, when the vendor minimums by item are high, relative to your sales. e.g. you only move one or two every few months, but the vendor minimum is a carton of fifty. In these cases you should reevaluate the stocking situation. 

The 1.5 factor does allow for some problems that inflate the inventory such as those discussed above if they are not rampant. Additionally, it allows for the extra inventory needed to meet pallet or lot quantities, to take advantage of discounts, and also to meet economic order quantities (EOQ). You should accept a higher factor only if you are truly dealing with additional factors beyond the norm, Rarely should it exceed 2.0.

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