Inventory Optimization

www.mincom Whitepaper

Copyright
Copyright © 8 Mincom Limited All rights reserved.

Legal disclaimer
Information in this document is provided for information purposes only and does not constitute a warranty of any kind nor does it amend or expand any existing warranty that Mincom may have with a customer. The information in this document is subject to change without notice.

Executive Summary
Million dollar savings are available to asset intensive organizations with large inventories by employing statistical processes to inventory optimization. This white paper identifies and details the processes and techniques for successful inventory optimization and provides the ground rules for asset intensive organizations to move towards an optimal supply function. The white paper provides an overview of the tools and solutions available to ensure that inventory stock levels are adjusted and continually readjusted to their optimal settings. The adoption of a best-of-breed inventory optimization solution will provide substantial business benefit by freeing up working capital held unnecessarily in inventory, while preventing stock-outs that result in equipment downtime. This enables asset intensive organizations to achieve higher levels of efficiency and productivity across the supply and maintenance functions.

3

............................................................………….......................................….............................................. 6 The ROP/ROQ Method …………………………………………………………………….......................................... 9 The Annual Holding Cost ……………………………………………………………………………............ 3 Introduction.........................................……………............… 13 How to Determine the Stockout Cost ........................................………................ 9 When to order ......................... 20 Conclusion ............... 15 Guiding Principles ....... 20 Accountability ………………………………………………………………………………………....................................................... 6 The Min/Max Method …………………………………………………………………………………............. 18 Lead Time Analysis …………………………………………………………………………………................................ 17 Catalog Cleansing …………………………………………………………………………...……...................................………................……................... 8 How Much to Order – The Reorder Quantity.......................................................................... 11 Lead Time Usage …………………………………………………………………………….................. 9 The Annual Purchasing Cost ……………………………………………………………………...............the Reorder Point or Min ……………............... 21 About Mincom............................................................................. 22 4 ......................... 6 Gut Feel is Expensive.......................... 7 Inventory Managers need to be empowered ………………………………………………………7 Crystal Balls are Hard to Source..........................................................................................…………………………………..................... 14 Assessing the Criticality of Materials in the Warehouse ……………………………………… 14 Avoiding Stockout Situations ……………………………………………………………………… 14 Effective Management of Daily Stockout Costs ………………………………………………… 15 Opportunities ………………………………………………………………………………………….......Contents Executive Summary...................................................................................... 18 Criticality Analysis …………………………………………………………………………………… 18 Usage Forecasting …………………………………………………………………………………… 19 Usage Profiling ……………………………………………………………………………. 20 Automation ……………………………………………………………………………………......………… 19 Displayed Calculations ………………………………………………………………..................................................................................... 5 Fundamentals ................... 17 Classification of Inventory …………………………………………………………………………......................................... 11 Safety Stock …………………………………………………………………………………………… 12 Overshoot Allowance ……………………………………………………………………………........

5 . this means that the goals of supply and maintenance are in conflict regarding inventory holdings. In many respects. Supply managers must seek to hold the minimum inventory possible. while meeting the service levels required by maintenance to ensure essential plant and equipment is maintained to maximize productive uptime. want to hold the minimum stock levels that they can. Inventory optimization is a process by which million dollar savings can be achieved by freeing up working capital unnecessarily held in inventory. and in particular the CFO. This fundamental conflict frequently results in an inflated inventory that still leaves maintenance staff feeling unsure that there is really sufficient stock being held of critical equipment spares. At the same time supply. while at the same time ensuring that the stock levels that are carried truly reflect the importance of each item to maintaining production. in order to minimize capital tied up in inventory. Maintenance staff are anxious to avoid stockouts of critical materials that might prolong a shutdown. What is needed is a unique approach to resolving this problem.Introduction Managing inventory in asset and maintenance intensive organizations presents particular challenges. one that brings together the needs of maintenance and supply and gets them to work together for a common solution.

This would then cause the ROQ to be broken and an order would be placed for 12. the ERP system will order to a nominated maximum value from whatever the stock on hand value happens to be after falling below the minimum value. If the Stock on Hand (SOH) was initially sitting at 15 but an issue of stock occurred of 8. that would cause the SOH to drop to 7.) 6 . (Note that the terms Min and ROQ are synonymous. Suppose the ROQ = 12 and the ROP = 10. If the SOH was initially sitting at 15 but an issue of stock occurred of 8 that would then drop the SOH to 7. e.Fundamentals A fundamental role of an Enterprise Resource Planning or Enterprise Asset Management (referred to hereafter as ERP) system is to provide the means of replenishing a stock item when the stock on hand has fallen below a nominated minimum value.g. Suppose the Maximum (Max) = 20 and the Minimum (Min) = 10. the ERP system will order a nominated quantity after the ROP has been broken.g. generally known as the Min/Max method or the Reorder Point (ROP)/Reorder Quantity (ROQ) method. The replenishment process follows one of 2 methods. This would then cause the Min to be broken and an order would be placed for 20 – 7 = 13 The ROP/ROQ Method Using this method. The Min/Max Method Using this method. e.

In the vast majority of cases the Min/Max or ROP/ROQ is arbitrarily set based on the gut feel of the person who originally added the item to the corporate catalog. changing a Min/Max combination from an arbitrary level such as 10/20 to something in the order of 5/10 results in no change whatsoever to the service level achieved over many replenishment cycles but will hugely reduce the value of capital tied up in inventory. Inventory Managers need to be empowered Traditional inventory optimization efforts. Inventory managers are torn between the desire of the commercial manager to keep the resources tied up in inventory to a minimum and the urgings of maintenance managers to increase stock levels because they are unsure whether the levels held are sufficient to avoid stockouts that may result in expensive plant unavailability. inventory managers need a tool to allow them to apply their knowledge across a great many items. and to do so even once a year is a highly labor-intensive and prohibitively expensive task. but the sheer volume of items involved limits his/her ability to make a difference to only a small percentage of items. the reduction in capital tied up in inventory has amounted to millions of dollars. An inventory manager may well understand the principles involved in setting stock levels. Faced with such a perplexing challenge and conflicting demands. setting these inventory parameters to the optimal levels and continually readjusting these levels as circumstances change over time. What is needed is a tool that will regularly analyze the key parameters of each individual stock item and readjust the stock levels according to agreed guidelines that reflect the company’s way of doing business. In every case where inventory levels have been readjusted in this way over a large number of stock items. have been a manual process. 7 . Generally this decision is influenced by a desire never to stockout rather than the goal of achieving a realistic balance between the cost of holding the item and the value of the item to the business. quickly and effectively. where conducted at all. The current skills shortage caused by the mining boom only adds to the difficulties in a manual approach. In most cases.Gut Feel is Expensive What is lacking in all ERP systems is the means of calculating optimal inventory for each item based on accurate historical data.

we must apply statistical forecasting algorithms to past usage in order to estimate next month’s usage. as all the algorithms described above must be run on every item in the warehouse.000 line items in 20 minutes.Revised edition .Copyright 1997 printed in the USA. Essentially. with corresponding bills of material. this process involves running a number of well known forecasting algorithms and choosing the one with the best fit between the forecast history and the actual history. Focus Forecasting .Crystal Balls are Hard to Source Stocking level decisions are heavily influenced by expectations of future usage. there are many items held in the warehouse(s) for which overhaul schedules.NET technology running on a typical single processor PC at 1 – 2 GHz with ~ 1gB of available memory can process approximately 100. A crystal ball would be great if one existed. The algorithms used include the following: Simple Moving Average 12 Month Moving Average 6 Month Moving Average Linear Regression Exponential Regression Single Exponential Smoothing α 0. The concept of focused forecasting1 has been found to be very successful in making estimates of this type.15 Weighted Average Trend Seasonal The focused forecasting approach involves running the suite of all forecasting algorithms and then running a coefficient of variance analysis to determine which algorithm has the best fit with the historical usage profile.3 Single Exponential Smoothing α 0. This results in a complex and intensive calculation process. Library of Congress Catalog Card no 97-91580 0123456789 8 . A software product written in modern . The solution lies in the use of a suitable tool to undertake this analysis. 1.Computer techniques for Inventory Control: Revised for the twenty-first Century .Bernard T Smith . do not provide sufficient (or any) information as to future usage. Even in the best-organized sites. In the real world.

The IHC% is the return on investment (Hurdle Rate) that the company expects to achieve on any business expenditure plus an allowance for the cost of warehousing. The Annual Purchasing Cost This is simply the number of purchase orders raised per year times the purchase order line cost (POLineCost). Manufacturing and Mining companies such as alumina refineries and steel mills typically choose to have an IHC% of about 30% while statutory authorities may choose a lower value of about 20%.How Much to Order – The Reorder Quantity The Total Annual Cost is made up of two factors. the Annual Holding Cost and the Annual Purchasing Cost The Annual Holding Cost The Annual Holding Cost is calculated by the Average Inventory Value (AIV) times the Inventory Holding Cost % (IHC%) The AIV is. the average value of the stock on hand held in the warehouse. of course. For example consider this situation: Purchase Order Line Cost = $30 Inventory Holding Cost = 15% Annual Usage = 120 Item Price = $20 Looking now at the effect Reorder Quantity has on the Total Annual Cost: The following table shows the outcome from the situation where we order the total Annual Usage (120) all at once ranging down to the situation where we order 10 at a time. Most companies would expect an ROI of at least 20% and the allowance for warehousing is at least 5%. The POLineCost is very basically calculated as the total salary cost of purchasing staff divided by the number of purchase orders raised by them. 2. Thus the IHC% for most sites will be in the order of 25%2. 9 .

00 $150.00 Total Annual Cost $210.73 $186.000 $900 $800 $700 $600 $500 $400 $300 $200 $100 Holding Cost $180 $165 $150 $135 $120 $105 $90 $75 $60 $45 $30 $15 Annual Purchasing Cost $30. It is indeed true that the lowest Total Annual Cost occurs when the Annual Holding Cost = the Annual Purchasing Cost Looking at the calculations in detail.43 $150.Reorder Quantity 120 110 100 90 80 70 60 50 40 30 20 10 Order Price Average Order Price $1.400 $1.800 $1.000 $800 $600 $400 $200 According to the table above it can be seen that the total annual cost reaches a minimum at an order quantity of approx 50.00 $197.43 $60.00 $375.00 $40.00 $45.00 $175. and using the top row as an example.000 $1. In this case 120 * $20 = $2400 /2 = $1200 * .00 $147.00 $165.200 $1.400 $2.200 $1.00 $32.00 $156. in this case 120/120* 30 = 30 The Holding cost is the OrderQty * price divided by 2 to average the quantity held over the year times the IHC%.00 $90.73 $36.00 $360.00 $51.00 $120.00 $210.100 $1.600 $1.200 $2.00 $165.00 $2. we see that the Annual Purchasing Cost is calculated as Annual Usage/OrderQuantity* POLineCost.00 $72.00 $180.15 Put more succinctly one can write the formulas as: AnnPurchCost = AnnualUsage/ OrderQty * POLineCost HoldingCost = OrderQty * price/2*IHC% Since we know that the Total Annual cost is lowest when Holding Cost = AnnPurchCost we can say that the following formula is true when TotalAnnualCost is minimum: AnnualUsage/ OrderQty * POLineCost = OrderQty * price/2*IHC% Solving for OrderQty AnnualUsage/ OrderQty * POLineCost = OrderQty * price/2*IHC% 2 * AnnualUsage/ OrderQty * POLineCost = OrderQty * price * IHC% 2 * AnnualUsage * POLineCost = OrderQty2 OrderQty = 2 x Annual Usage x PO Line Cost Item Price x Inv Holding Cst % 10 .

The Internal (or Administrative) Lead Time – This refers to the time taken to raise a purchase order on a supplier after the ROP has been broken and the time taken for an item to be replenished in “the bin” after delivery has been made to the warehouse. Supplier Lead Time – Should either be the Average Lead Time calculated over previous replenishment cycles or the Stated Lead Time committed to by the supplier.4 (30. Refer AIPMM Glossary of supply terms and many other Logistics analysis textbooks 11 . Inserting the actual numbers used above into the formula works out as follows: 2 x 120 x 30 20 x . this value would be rounded to 49. This is calculated as the Forecast Monthly Usage (see Crystal Balls are Hard to Source) and this is then divided by 30. Total Lead Time – Supplier Lead Time + Internal Lead Time 3.4 days in an average month) to give a daily usage rate.4 There are two factors making up the Total Lead Time.15 = 48. The daily usage rate is the multiplied by the Total Lead Time (in days) to derive the Lead Time Usage. Lead Time Usage Forecast Monthly Usage = Total Lead Time x 30. When to order – the Reorder Point or Min The Reorder Point (ROP) is made up of aggregate of 3 components: Lead Time Usage (LTU) + Safety Stock + Overshoot Allowance (OS). Lead Time Usage This refers to the stock quantity issued during the lead-time. Lead Time Usage + Safety Stock + Overshoot Allowance ROP = Each of these factors requires analysis in its own right and will be separately considered.9 Of course.This is a best practice forumula3 that can be used to calculate the reorder quantity in a less cumbersome and more accurate way than building a spreadsheet.

The K table (which is a statistical tool for this purpose) is used to determine the area under the curve. This is because the Forecast Monthly Usage is an average figure. As we increase the Safety Stock. Thus. Initial safety stock units result in a profound reduction of stockout risk. if Lead Time Usage is above average the result would be a stockout. but as one moves to the edge of the curve the benefits of additional safety stock reduce at an exponential rate.Safety Stock If all that were held as ROP (disregarding Overshoot) was the Lead Time Usage. (refer to How to Determine the Stockout Cost) Eventually a balance is reached: 12 . The Total Stockout Cost is a function of the criticality of an item and the options available to circumvent the impact of a stockout. Conversely. Mean Lead Time Usage Ok Stockout By adding units of safety stock to our ROP it can be seen that the stockout risk progressively diminishes. then the service level would be 50%. if Lead Time Usage is below average then some stock would still be available when replenishment took place. Mean LTU Safety Stock One is faced with a situation of diminishing returns. the safe area increases.

low risk items have very little safety stock while. 13 . conversely.# of Safety Stock items x Item Price x Inventory Holding Cost Total Stockout Cost X Stockout Risk Factor Thus the Safety Stock that is carried reflects the Stockout Cost and the cost of an item. low priced but high risk items have high levels of Safety Stock. Overshoot Allowance Allowance must be made for the fact that the issue which broke the ROP will actually deplete the Stock On Hand to less than the ROP. depending on how the issue history unfolds: Eg: Overshoot Allowance is estimated as follows4: Overshoot Allowance = Average Issue Size/2 4. This may happen to a greater or lesser degree randomly. There are other methods of calculating Overshoot Allowance such as by skewing the allowance towards the larger Average Issue Sizes where the Average Issue Size standard deviation is high. High priced. this complication has negligible effect on the stock levels while making it very difficult for the user to work out what value has been assigned as overshoot. In practise.

The Bill of Materials (BOMs) in which an item is listed identifies the equipment and/or sub assemblies in which the item is used. too. For example: Show Stopper being a complete stoppage of revenue generating activity. Some will be used in multiple pieces of equipment. postpone an overhaul. for a rusty tank.How to Determine the Stockout Cost Assessing the Criticality of Materials in the Warehouse The criticality of an item will be determined by its role in the production process. Assigning Criticality Codes The criticality code should reflect the daily cost incurred to the site in the event of a stockout of that material.g.g. 14 . for electric motors. There will be some items that fall into non-production categories such as personal protection equipment.g. Reschedule activities e. but loss of resources or asset(s) costing more than (nominally) $5000. and each is suitable for certain types of items. will need to be assessed. Avoiding Stockout Situations There are many options that can be pursued to circumvent the effect of a stockout. There will be a few items for which circumvention strategies are not possible – the item simply must be available “on the shelf” when required. It is important to identify the role that the parent equipment plays in the production process. Actual loss of at least one employee’s daily work. These. Items are held for convenience only. Substitute another part e.g. A partial loss of revenue generating activity or a greatly increased risk of a complete stoppage. No lost production. Monitor the poor component until replacement available e. for V belts or rawl plugs. batteries. and cleaning materials. Repair the failed part e. For example: Expedite delivery of item before it causes a problem.

000 20 20 80 100 300 500 10 10 50 50 50 100 0 0 0 0 0 0 Note: In certain cases the stockout cost will be known for some specific items of equipment.000 500. The difficulty is that the application of these concepts to each inventory stock item is very labor-intensive. In such cases those actual costs will be recorded. In any given year.000 3.000 1. significant savings to inventory costs can be made.000. However.4005 minutes available to carry out inventory management. Opportunities These inventory optimization theories and algorithms are widely known and any qualified inventory manager will be very familiar with the concepts.000 50. even by using such a conservative first cut model.000 100. Knowing that the time taken to optimize the stock levels of a single stock item takes at least 5 minutes. it has been estimated that an inventory manager has only 50. tedious and a poor use of skilled personnel. one can see that if the inventory manager 15 . Then the daily stockout cost is calculated from a chart where the estimated costs have been recorded.Effective Management of Daily Stockout Costs For each material there will be a criticality code and a circumvention option. A supply team can progressively expand and refine the model as more and more experience is gained. This model has been designed to estimate costs for the great majority of items that have no recorded stockout cost. Criticality Expedite Daily resource cost expended in following up expedited item 20 20 Monitor Daily resource cost expended in checking item Reschedule Repair Cost of Amount rescheduling prepared to spend repairing the item Substitute Cost of substituting an item Nothing No options available – daily cost of stockout A Show Stopper B Partial Production Loss C More than 5 Staff disrupted D More than 1 person disrupted E Item held for convenience only 50 50 500 500 5.

500. Minutes Available per year: 8 hours/day x 5 days/week x 52 weeks/year 124.400 Minutes o Training @ 5 days per year 2. enabling valuable human resources to be used on higher value tasks.tedium. A sophisticated and comprehensive inventory optimization system provides the following opportunities to any organization with a large inventory: Virtually eliminate plant unavailability due to inventory stockouts. National Rail system 16 .800 Minutes o Non Inventory work @ 3 hours per day 41. tried and proven forecasting algorithms are constantly and automatically looking for trends.400 Minutes Time Available for Inventory Work 50. within 12 months of the review. with stock levels readjusted in accordance with these trends. This is because maintenance staff can be assured that items that they have identified as being critical are being held with sufficiently high stock levels to ensure the very high service levels appropriate to such items Substantially reduce inventory levels overall as a result of item usage being constantly monitored and appropriate quantities held for the current usage profile. Fifteen to thirty percent reductions in inventory value are not unusual.600 Minutes o Lunch. the stock levels would need to be reassessed.had nothing else to do.0007 items. Large Steel Mill 7. These tools and techniques are most applicable for organizations with inventory valued in excess of $30M.800 Minutes Time Not available for Inventory Management: o Public Holidays @ 10 days per year 4. Enables the supply group to add value to site operations in an unprecedented manner and helps make the jobs of supply professionals more challenging and satisfying.0006 to 3. highly mathematical and repetitive . The very attributes of this work . inventory managers and purchasing staff that enables them to work collaboratively and co-operatively in setting stock levels to maximize business outcomes. It can be expected that the number of inventory items under the control of a typical inventory manager varies between 30.400 Minutes o Sick Leave @ 5 days per year 2. 5. Free staff from performing repetitive tasks through automation of complex calculations. Even if one were to condemn a staff member to this boring task. breaks & toilet @ 1 hour per day 13. Moreover. the organization would only obtain limited benefit from his/her efforts as the usage and pricing of inventory items changes with time and.400 Minutes 6. Develop a common language between maintenance.that make it so unsuited to manual work make it ideal for computer automation. he would manage to review only 10.800 Minutes o Annual Leave @ 20 Days per Year 9.400 Minutes Total 74.080 line items annually – and take all year to do only that. The answer lies in automation.

Guiding Principles Any asset intensive organization looking to take control of their inventory using an automated inventory optimization system needs to look to a solution that provides robust functionality in: Classification of inventory Catalog cleansing Lead time analysis Criticality analysis Usage forecasting Usage profiling Displayed calculations Automation One should identify an inventory segment where the greatest savings are to be made and apply these eight key principles. 17 . analysing and optimizing each classification of items in order of greatest need. The following is a detailed description of the process of applying these guiding principles: Classification of Inventory There are a number of inventory analysis tools and classifications by which an inventory item may be assessed including: Criticality Code (Show stopper through to convenience item) FMS Code (Describes rate of turnover: Fast Moving. Slow Movement. Fast Moving Hi Use Critical Slow Potentially Obsolete – no usage for some years Critical long lead time The user can create as many classifications as desired and then determine a management strategy appropriate to each classification.g. Medium Movement. or Dead = No Turnover) ABCD Usage (“A” = top 10% by usage per year through to “D” dead) Lead time – Items with long lead time compared to those which are readily available Hazardous items These and other such tools can be used individually or in combination e. An iterative process should be employed.

guides less experienced catalogers to the most appropriate descriptions. e. For Critical items it is vital to know at a glance the worst-case delivery time. Sophisticated lead time analysis also provides the standard deviation of lead times over a given number of months. such as “Pliers Slip Joint” when the user wants “multigrips”. “Personal Protective Equipment” or “Motors AC”. The most effective approach is to pick one group of items. as are confirmation orders in which the item was delivered before the order was placed. Having an effective tool that enables new items to be cataloged with the minimum of keystrokes.g. It is not sufficient just to know the delivery time promised by the vendor or even the average lead time over past delivery cycles. By providing a criticality code and circumvention code matrix with an agreed scale of stockout costs. Typical results of poor cataloging are: The same item being held under 2 stock codes such as a “Twist drill HSS” being held as both 6. 18 .Catalog Cleansing The optimization of inventory stock levels is less effective when the cataloging is poor. Lead Time Analysis A key factor in determining the minimum stock level that needs to be held is the supplier lead time (refer to Lead Time Usage).5mm and ¼ inch. A fully comprehensive inventory optimization system enables catalogs to be maintained with a minimum of keystrokes and data entry tedium. and cleanse the catalog for that group alone before moving to the next group. Not only does an accurate knowledge enable the setting of the stock minimum to optimal quantities but also it enables one to plan maintenance schedules more accurately. allowing vendors with highly variable lead times to be identified and the issue addressed. An item being described such that users cannot recognize it and end up purchasing the item on direct purchase. Criticality Analysis One should carry a level of safety stock that reflects the criticality of an item (refer to How to Determine the Stockout Cost). communication between maintenance and supply staff is greatly enhanced. and provides a clearly established workflow ensures that inventories are kept clean and lean right from the start. Maintenance staff can play a very real role in the inventory optimization process and thus overcome the disquiet commonly felt by the maintenance team in relation to stock levels. A good inventory management system will display the clipped lead time in which aberrant long delivery blow outs are excluded.

Usage Forecasting The key to effective inventory optimization lies in accurately forecasting the usage in the forthcoming month (refer to Crystal Balls are Hard to Source). With no usage. Forecasting algorithms are of dubious use with such items and the lead time is generally irrelevant as the interval between uses is generally much longer than the lead time. A sensible approach to the management of these items is to hold multiples of the Average Issue Quantity or the Set Size (the number of items needed to carry out a task). 19 . The criteria for holding these items should be based on the cost of a stockout of the item weighed against the price of the item.issued in at least 3 months in the past 2 years) Such items have a sufficiently robust usage history for forecasting to be made with an acceptable level of confidence. The full range of statistical inventory control functionality can be employed (refer to How Much to Order – The Reorder Quantity and When to order – the ReOrderPoint or Min). these items are held as insurance against a failure or as spares for a maintenance activity with very long scheduling periods. A sophisticated inventory optimization tool will run a series of forecasting algorithms and then choose the one with the best fit between forecast results and past history. A sophisticated inventory optimization tool will select a set of algorithms appropriate to different usage profiles. Slow Moving . Usage Profiling Nothing has as profound an effect on the optimal stock levels as does the usage profile. The number of multiples of the AIQ or SS can be adjusted in accordance with the criticality of the item. Items with Frequent Usage These items are identified as having an FMS Code of “F” (Fast – issued in at least 20 months in the past 2 years) or “M” (Medium . For this reason the user needs the ability to override the monthly forecast. Sometimes the future will be unrelated to the past such as when a new vendor has been engaged or when a change has occurred on site that causes a large change in usage. Non Moving – Dead Items These items are identified as having an FMS Code of “D” (Dead – No issues in the past 2 years).Sporadic Use Items These items are identified as having an FMS Code of “S” (Slow – Some issue in the past 2 years but fewer than 3 usage months). The Bills of Material from the maintenance schedules gives a reliable indication of the set size for each stock code).

By classifying such items as “cataloged but not stocked”. a log of all calculations carried out in achieving the recommended settings. and print. Should an item be required to be on hand for an emergency or breakdown situation then the criticality assigned to the item will be higher and the appropriate approach would be to stock the item. Accountability The optimization tool must allow the user to view and print the full set of calculations on which stock levels recommendations were made. The system should also include the facility to note items to be flagged to the user if the calculated changes exceed user defined guidelines. all procedures that manage the data manipulation should be available for the user to view and edit. The KPI’s for inventory performance improvement need to be agreed upon. An inbuilt suite of reports must be readily available that provide users and management clear visibility of inventory status. One will find that users will make considerable use of this feature in the early life of the product on site until they develop confidence that all recommended settings are soundly based. leading to unnecessary inventory holdings. For example. This automation is essential to ensure the benefits gained through the initial optimization do not dissipate over time. One cannot expect supply and maintenance staff to put their careers on the line supporting recommendations that cannot be verified. A viable inventory optimization solution will enable the user to display. the calculation engine should automatically apply the algorithms appropriate for the new situation. with each stakeholder able to select the suite of KPIs to be reviewed. Moreover. It is unacceptable for a provider of this type of software to claim that the algorithms used are their intellectual property and therefore confidential. Generally. Automation A sophisticated inventory optimization tool will enable any item to be flagged to be automatically monitored. including the results of every forecasting algorithm (refer to Displayed Calculations page 20). Displayed Calculations It is virtually useless for a system to generate recommended stock level settings if it does not provide evidence of how those levels were calculated. 20 . It should be noted that the algorithms run on an item should be determined automatically. if an item had an FMS Code of “S” (Slow) but usage increased over time to now have an FMS Code of “M” (Medium). with new Min/Max or ROP/ROQ settings being recalculated as changes occur over time. This frees supply staff from the need for day-to-day control in the management of stock levels. changes in both usage and price will cause a recalculation to occur. a reservation for an item can be raised and the item bought in for a scheduled activity.

This moves the organization beyond the traditionally adversarial relationship between the two functions that arises from a fundamental difference of focus when considering the level of inventory held on each item. It is critical the solution go further and automatically analyse usage and adjust stock holdings and reordering points on an ongoing basis. 21 . maintenance teams and the CFO – minimizing inventory holdings and value. A focused and effective approach to inventory optimization enables these organizations to improve the performance of both the supply and maintenance functions. freeing working capital. A sophisticated and intelligent inventory optimization software tool will not only identify optimal holdings of each item. especially critical items. The outcome of this achieves the aims of the supply area. based on usage patterns and criticality.Conclusion Asset intensive organizations with large inventories can achieve millions of dollars in savings through an effective approach to inventory optimization. but do so automatically. while also maximising availability of critical items to reduce downtime and increase productivity of the maintenance function and the assets themselves.

Mincom’s proven supply chain solutions and demonstrated expertise have delivered dramatic process improvement and reduced costs for a global customer base. of service levels.About Mincom Mincom is the leading global technology partner for asset-intensive industries. Established in 1979. The solution enables organizations to maintain high plant availability by ensuring that appropriate stocks of critical items are maintained. transportation. defence and government across more than 40 countries. Mincom serves customers in mining. Mincom’s people have successfully linked organizations with their mission-critical assets for nearly 30 years. The Mincom inventory optimization solution can operate and integrate with any ERP/EAM system. Mincom’s inventory optimization solution is unique in achieving an inventory optimization outcome that is shared by both Maintenance and Supply. assets and people. The company delivers innovative answers that maximize customers’ business. utilities. 22 . the solution optimizes inventory holdings while ensuring understanding. while freeing up capital by adjusting inventory holdings of all stocked items to the optimal levels needed for day-to-day operation. and achievement. Built to meet the specific needs of organizations in which maintenance and supply play a critical role in maintaining an efficient and productive asset base.