Inventory Performance, Cost and Value Measures

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RightChain™ Metrics for Inventory Inventory Performance, Cost, and Value Measures

RightChain™ School of Inventory Planning and Management RightChain™ Institute

RightChain™ Inventory Performance Measures Outline

Financial Performance Measures Efficiency Performance Measures Quality Performance Measures Cycle Time Performance Measures

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RightChain™ Inventory Scoreboard

FINANCIALS I

FINANCIALS II

EFFICIENCY

SERVICE & QUALITY

PRODUCTIVITY & CYCLES

INVENTORY INVESTMENT • Average (AIV) • Snapshot (OHIV) • Cube on Hand (COH)

INVENTORY CARRYING RATE Warehousing, Storage, …

INVENTORY TURN RATE Turns at Retail, Turns at Cost, Unit Turns

FILL RATE Unit Fill Rate, Line Fill Rate Order Fill Rate

PLANNER PRODUCTIVITY SKUs per FTE $s per FTE Sources per FTE POs per FTE

INVENTORY CARRYING COST ICC = AIV x ICR

. GROSS MARGIN (GM) Revenue (REV) less Cost of Goods Sold (COGS)

FORECAST BIAS & ACCURACY

ON HAND INVENTORY Days, Leadtimes Cube

CYCLE TIMES Planning Cycle Time PO Cycle Time

INVENTORY VALUE ADDED IVA = GM less ICC

INVENTORY ACCURACIES Fiscal Accuracy, Physical Accuracy

GROSS MARGIN PERCENT GM/Revenue

DC OCCUPANCY Locations Cube

LOST SALES COST LSC = (1 – Fill Rate) x GM

INVENTORY QUALITY RATIO

GROSS MARGIN RETURN ON INVENTORY (GMROI) GM/AIV

ACTIVE SKU RATIO

INVENTORY POLICY COST IPC = ICC + LSC

GROSS MARGIN RETURN ON CUBE

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Inventory Investment • Average Inventory Investment • Snapshot Inventory Investment • Inventory as a Percent of Sales Margin Based Metrics • Gross Margin • Gross Margin Percent • Gross Margin Return on Inventory • Gross Margin Return on Cube Cost Based Metrics

Financial Performance of Inventory

• Inventory Carrying Rate • Inventory Carrying Cost • Lost Sales Cost • Inventory Policy Cost Value Based Metrics • Inventory Value Added™

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Supply Chain Financial Statement

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Supply Chain Financial Statement

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Inventory as a Percent of Sales

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Gross Margin Return on Inventory (GMROI)

If you were a bank, which company would you invest in?

Company A

Company B

Sales$ 1,000,000.00 $

1,000,000.00 200,000.00 800,000.00

Profit $

200,000.00 $ 400,000.00 $

Average Inventory Value $

Return on Inventory

50%

25%

GMROI(i) = [{USP(i) – UIV(i)} x AD(i)] / AIV(i) USP(i) = Unit Selling Price of Item i UIV(i) = Unit Inventory Value of Item i AD(i) = Annual Demand of Item i AIV(i) = Average Inventory Value of Item i

Return on Inventory = Margin / Average Inventory Value

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• Inventory Value Added™ is one of RightChain’s proprietary inventory performance measures. Like GMROI, it takes into account revenue, expense and capital charges. • Inventory Value Added™ = Revenue – Expense – Inventory Carrying Cost = Margin – Inventory Carrying Cost = [ AD x (USP – UIV)] – (AIV x ICR)

Inventory Value Added

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RightChain™ Inventory Financials

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RightChain ™ Inventory Optimization Model

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RightChain™ Inventory Optimization Model

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Inventory Turn Rates • Turns at Cost • Turns at Retail • Turns at Throughput Inventory On Hands • Dollars on Hand • Days on Hand • Leadtimes on Hand • Cube on Hand

Inventory Efficiency Measures

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Inventory Turn Rate Computations

Turns at Retail = (Annual Sales at Retail)/(Average Inventory Value) If the annual sales for a corporation is $200,000,000 per year and the average inventory value is $50,000,000 then the turn ratio at retail is $200,000,000/$50,000,000 = 4.0. Turns at Cost = (Annual Sales at Cost)/(Average Inventory Value) If the annual sales at cost (cost of goods sold) for a corporation is $100,000,000 per year and the average inventory value is $50,000,000 then the turn ratio at cost is $100,000,000/$50,000,000 = 2.0. Unit Inventory Turns = (Annual Units Shipped)/(Average Units in Inventory) If the annual number of units shipped from a warehouse is 2,000,000 and the average number of units in inventory is 400,000 then the unit inventory turn ratio is 2,000,000/400,000 = 5.0.

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Inventory Turn Rate Computations

Turn Measure

Ratio

Global Inventory Turnover Regional Inventory Turnover Country Inventory Turnover Local Inventory Turnover Facility Inventory Turnover Category Inventory Turnover Vendor Inventory Turnover Item Inventory Turnover

Global Sales at Cost / Global Average Inventory Value Regional Sales at Cost / Regional Average Inventory Value Country Sales at Cost / Country Average Inventory Value Local Sales at Cost / Local Average Inventory Value Facility Sales at Cost / Facility Average Inventory Value Category Sales at Cost / Category Average Inventory Value Vendor Sales at Cost / Vendor Average Inventory Value Item Sales at Cost / Item Average Inventory Value

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Inventory Turns in Various Industries

Inventory Turn Rate Inventory Days of Supply

140

120

100

Inventory Turn Rate

Inventory Days of Supply

Drug Stores

Liquor Stores Other Retail Stores

Grocery Stores

Hardware Stores

Other Food Stores New & Used Car Dealers

Apparel & Accessories Furniture & home furnishings

Gas stations & mini-marts

Auto parts & Accessories

Lumber & building materials

Wholesale - Furniture & fixtures Wholesale - lumber & construction Wholesale - sporting goods & related Wholesale - electrical goods

General Merchandise Stores

Wholesale - Drug store items

Wholesale - apparel & related

Wholesale - misc non-durable

Wholesale - chemical & related

Wholesale - petroleum & related

Wholesale - Groceries & related Wholesale - Machinery & Equipment

Wholesale - other durable goods Wholesale - paper & related products

Wholesale - alcoholic beverages

Retail Nurseries & Garden Supply

Wholesale - hardware & plumbing

Wholesale - Vehicles & automotive

Source:BizStats.com

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Retail Industry Turns & GMROIs

1 1.5 2 2.5 3 3.5 4 4.5 5

10 12 14 16

4.87

Turn Rate GMROI

13.7 4.12

3.48

9.2 2.9

8.7

2 4 6 8

2.61

2.513571429

GMROI

2.37

2.24

2.22

5.4

1.93

5.1

4.87

1.78 1.68

1.72

1.71

Inventory Turn Rate

1.56

3.8 3.4

2.8 2.9 3

2.8

2.3

AVERAGE

Book Stores

Shoe Stores

Home Centers

Grocery Stores

Hardware Stores

Women's Clothing

Mail Order Houses

Office Supply Stores

Family Clothing Stores

Sporting Goods Stores

Auto Parts & Accessories

Pharmacies & Drug Stores

Hobby, Toy & Game Stores

Gift, Novelty and Souvenir Stores

Source: The Retail Owners Institute

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Inventory Comparables Benchmarks

Premier Parks The GAP IMRA Best Practice The Limited Hardlines Retailer Discount Department Store TJX Mass Merchant J.C. Penney Venator Group Hardlines Retailer Pier 1 Imports Top 20 Retailer Hardlines Retailer ABC Company Specialty Apparel Retailer Toy Retailer Hardlines Retailer Top 50 Specialty Store Sport Shoe Retailer Shoe Retailer

1.54

2.05

2.13

2.4 2.4

Much like a real estate agent looks at comparable homes to determine the appropriate selling price for a home, we use companies with comparable logistics profiles to compute appropriate benchmarks for logistics performance.

2.5

2.4

2.8

3.41

4.24 4.2 4.2

4.31

4.8

5.21

5.87

6.3

6.65

7.35

21.11

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Manufacturing Industry Raw Materials

Source: Manufacturing Pulsemark

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Manufacturing Industry Work in Process

Source: Manufacturing Pulsemark

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Manufacturing Industry Finished Goods

Source: Manufacturing Pulsemark

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Total Inventory Cost Example

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Inventory Management Productivity Measures

• SKUs per FTE • $s per FTE • Suppliers per FTE • Purchase Orders per Man-Hour • Planner Effectiveness

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Purchase Operating Expense as a % of Purchase Dollars

Purchase Spend per Purchasing Employee ($millions)

% of Active Suppliers Representing 80% of Purchase Spend

Industry

Aerospace/Defense

2.69% 0.78% 0.72% 0.76% 0.34% 0.58% 1.71% 0.99% 0.63% 0.69% 0.23% 0.63%

$ $ $ $ $ $ $ $ $ $ $ $

5.29 14.05 24.61 31.20 36.64 20.16 22.15 14.30 24.59 18.05 47.05 21.27

4.67% 5.41% 4.79% 8.98% 9.49% 17.81% 19.94% 4.13% 3.37% 2.09% 3.60% 5.92%

Supply Productivity

Chemical

Computer Hardware Consumer Products Food & Beverage Industrial Manufacturing

Media

Petroleum

Pharmaceuticals Semiconductor Telecommunications

Utilities

Source: Center for Advanced Purchasing

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Purchase Order Processing Costs

Source: ApparelSearch

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Inventory Service and Quality Measures

• Fill Rate • Forecast Accuracy • Inventory Accuracy • Warehouse Occupancy % • Active SKU % • Inventory Quality Ratio

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Fill Rate Measures

Measure

Definition

Conversion

Unit Fill Rate (UFR) Line Fill Rate (LFR) Order Fill Rate (OFR)

units shipped units requested

Facing vs Global Fill

lines shipped complete lines requested orders shipped complete orders requested

LFR = UFR upl

Initial vs Final Fill

OFR = LFR lpo

Quantity Requested

Quantity Shipped 50 units 20 units 10 units 80 units

Quantity Requested

Quantity Shipped 70 units 20 units

ORDER 1 3 lines requested, 2 lines filled complete 100 units requested, 80 units filled

ORDER 2 3 lines requested, 2 lines filled complete 100 units requested, 90 units filled

Item

Shampoo 50 units Conditioner 40 units Hair Spray 10 units

Comb

70 units 20 units

Brushes

Hair Spray 10 units

0 units

TOTALS

100 units

TOTALS

100 units 90 units

Unit Fill Rate = 170/200 = 85%, Line Fill Rate = 4/6 = 67%, Order Fill Rate = 0/2 = 0% UFR > LFR > OFR

OOS Probability

Out of Stock Probability vs Number of SKUs

Fill Rate

Number of SKUs

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Fill Rate Benchmarks Retail Shelf Outages

Source: Prism Partners

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Fill Rate Benchmarks Retail Shelf Outages

Source: Prism Partners

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Fill Rate Performance in Various Industries

Source: Herb Davis Associates

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Honda Parts DCs Turn and Fill Rate Internal Benchmarking

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Turn & Fill Rate Benchmarks

80 82 84 86 88 90 92 94 96 98 100

Lanier

Fill Rate

Turns

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Forecast Accuracy Metrics

• Algebraic Deviation • Absolute Deviation • Mean Absolute Deviation (MAD) • Mean Absolute Percent Error (MAPE) • Forecast Bias

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• Location Inventory Accuracy (LIA) = % of Locations without Discrepancies • Item Inventory Accuracy (IIA) = % of Items without Discrepancies • Net Value Discrepancy (NVD)

Inventory Accuracy Metrics

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Warehouse Inventory Accuracy Benchmarks

Client = 99.2%

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Example Inventory Accuracy Report

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Inventory Counting Methods

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Part Number Co-Location

Occupancy Levels at Normal and Peak Inventory

2.9%

99%+

33.5%

7.6%

95% to 99%

25.3%

11.0%

90% to 95%

16.5%

23.3%

85% to 90%

11.8%

Normal Peak

The “average” warehouse in the survey is 82% full at “normal” inventory levels and 96% full at “peak” inventory levels.

15.7%

80% to 85%

7.1%

% Occupancy

16.9%

75% to 80%

4.1%

10.5%

70% to 75%

1.8%

12.2%

Less than 70%

0.0%

0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0%

% of Warehouses in Range

Productivity Loss Due to Excessive Occupancy

The average expected productivity loss due to excessive occupancy is 9%.

Source: Edward H. Frazelle, Ph.D., The Logistics Institute at Georgia Tech, WERC

Active SKU Percentage

Median: 83.1% Average: 73.4%

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Inventory Quality Ratio

Inventory Quality Ratio (IQR) = Inventory Investment in Active SKUs Total Inventory Investment

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Example Inventory Scoreboard

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Exercises • Choose an organization in your group. Develop a mission statement for the inventory management activity, an optimization statement for the activity, and seven key performance metrics for inventory management. There should be at least one metric in each of the following categories – finance, productivity, quality, and cycle time. Assign weights to each metric such that the weights add to 100. • What inventory performance measures are currently not being measured that should be? • Develop seven key inventory performance indicators that meet the criteria for effective performance measurement systems established earlier. Present them in dashboard format. • Develop an inventory performance measurement dashboard.

Financial Metrics Calculations • The annual retail sales for an item is $3,200,000, the COGS is $1,200,000, the UIV is $5.00, and the AIL is 500,000.

• What is the retail turn rate? • What is the turn rate at cost? • What is the GMROI? • If the ICR is 30% per year, what is the IVA™?

• If the unit fill rate for the all the items in a warehouse is 97%, the average units per line is 3, and the average lines per order is 2; what is the expected line fill rate and order fill rate out of that warehouse?

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