Profitability, Longevity and Growth

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Grant HowardGrant W. Howard Company

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Grant Howard:• Expert on Inventory Management, System

Utilization and “Getting Results”• Works with Multiple Distributors,

Associations and Software Houses• Conceptual Designer Behind Sx.e’s AIM• Sits on Multiple Board of Directors• Founder of Grant W. Howard Company

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Our Discussion Today

• The Big Picture • The Replenishment Process • Better Results:

– Customer Service– Profitability

• Final Thoughts

To Final Thoughts Today?

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Profitability

Longevity

Growth

Warehouse

Sell

Procure

Customer ServiceVendor

PerformanceEmployee Happiness

Education and Understanding

Communication, Structure, and

Team

Systems and ToolsProcesses and Procedures

Owner’s Returns and Happiness

The Fundamental Tree Service, GM Improvement,

Asset Management,

Efficiency, Accuracy

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Profitability ($&%):• GM Improvement ($&%):

– Sales Increase– COGS Reduction

• Expense Reduction:– Asset Management– Efficiency– Accuracy

• 1, 2, 5 Points Better?

Longevity:• Customer Loyalty:

– Customer Service– Ability to Solve

Customer Issues• Being Dynamic:

– Adaptability to Market Changes

– Adaptability to Technology Changes and Utilization ofGrowth:

• Existing Customers• New Customers

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GM Improvement ($&%):– Sales Increase - Loyalty:

• Sell Price x 2• Velocity Pricing• Lost Business and Backorders• More of Customer’s Business• New Business• Increase Sales and Sell Price

with ...– COGS Reduction:

• Supplier Performance and Negotiations

• Decrease COGS with ...

Expense Reduction:– Asset Management:

• Freight Reduction• Cost to Carry Reduction

– Rifle Approach– Surplus, Safety Stock,

RC/OC/OQ• Replace Freight & Costs with ...

– Efficiency and Accuracy:• Cost to Replenish Reduction• Cost for Correction Reduction• Replace Costs with ...

Profitability - Dollars and Percentage

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Longevity:• Customer Loyalty:

– Customer Service:• Fill Rates• Backorder Handling• On-Time Delivery• Accuracy - Product, Price, Quantity,

Terms– Ability to Solve Customer Issues– Adaptability to Technology Changes

and Utilization of– Use Technology to ...

• Being Dynamic - its Critical:– Adaptability to Market Changes– Use Technology to ...

Growth:• Existing Customers:

– Lost Sales and Backorders– Depth of Customer’s Business

• New Customers:– Get them with Price– Keep them with Service

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Procure:• IM and Control• Operations• Sales• Marketing• Systems and Tech

Sell:• Sales• Marketing• IM and Control• Operations• Systems and Tech

Seems to be a Pattern?

Where does Management fit into all of this?


Warehouse:• Operations• IM and Control• Systems and Tech• Sales• Marketing

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Customers:• Availability• Backorder Handling• On-Time Delivery• Accuracy

– Product– Quantity– Price– Terms

• Win-Win• MEASURE

Employees:• Want to do a Good Job• Balanced Objectives/Team• Tools, Processes, EDUCATE!• Remove Stress, Give Method• Win-Win• MEASURE

Vendors:• Not Just Price• Win-Win• MEASURE


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• Communication, Structure and Team: Does your company have a team concept, KNOWN balanced objectives, with a way to get there - Management?

• Systems and Tools: Does your company understand and use more than 20, 30, 50% of your systems and technology?

• Processes and Procedures: Does your company have closed-loop, actual working processes and procedures?

• Education and Understanding: Does your company educate your people and help them become part of the solution?


THE FOUNDATION

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Inventory ManagementGetting Results

When, What, How Much, Too Much

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The Replenishment Model

A Good Replenishment Model addresses the two objectives of

Customer Service and Profitability

WhenWhen to Replenish? to Replenish?What What to Replenish and to Replenish and How muchHow much??What is incoming and will be late?What is incoming and will be late?

What is incoming and will be early or is not needed?What is incoming and will be early or is not needed?Too Much?Too Much?

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“When, What and How Much”

• “When” to Replenish– Fixed Interval - Timeframe or Target - Profits only (Not

watching BOP)– Flexible Interval - Trigger Point (Order Point) - Service

and Profits• “What” to Replenish

– Replenishment Cycle (Line Point)– Controls the frequency of P/O’s and Transfers– This is the speed control (Frequency)– Target/Freight and/or C to P driven

• “How Much” to Replenish– Order Quantity– Controls the quantity of items on P/O’s and Transfers– This is the workload/spread (Amplitude)– C to C, C to P and Target/Freight driven

PNA/Level

Surplus Point

Line Point or Max/EOQ

Order Point or Min

EOQ

Order Cycle

Lead Time

Safety

What’s the DifferenceRC = 0; RC = 1 weekOQ = 1 week; OQ=4 weeksRC = 1 week & OQ=1 week; RC = 1 week & OQ = 4 weeks

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DataUsage - OE/WTLead Time - PO/WTLevel/PNA Info - OH & PaperfloatPurch Hist

Set-up“Smart” Set-upCo. and Whse.Product PlineProduct MasterProduct Whse.

The NumbersHits/RankingOrder CycleAve Usage, Safety, OP, LP, Order Quantity

ReplenishmentBuyer’s Ctrl CenterItems BOP/Priority

Timeline AnalysisToo LateToo Early

Surplus InventoryExternal/Lng. TermInternal/St. Term

MeasurementFill Rate, BO’sTurns, Excess, MixT&E, GMROI

MaintenanceOne Stop Inq/MaintProofs/Mass UpdateExc Control Center

The ToolsData to Info

The Process

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Usage LT Saf RCCtoP

EOQCtoP

EOQCtoC

On-hand

Paper-float

SurpPrev/Disp

BOHand-ling

OTD Acc-uracy

IM X X X X X X X X XSales X X X X X X XOpers/Ware X X X X X X X X X X XOffice X X X XIS/IT X X X X X X X X X X X XMgt X X X X X X X X X X X X

Who’s Involved?

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Know the Right Things to DoDo these Things Right

Inventory Management is at the Time of Replenishment, the “When, What, and

How Much”, Everything Else is Inventory Correction.

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Getting Results

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The Path to Success Service and Profits

Keep it Working - Maintenance:– Get out of the “Yellow Sticky World”– The Importance of Proactive Maintenance– Watch for Suppressed with Activity– Watch for Slow/Inactive Stock Items

Measure and Monitor:– Use Measurement and Monitoring to Confirm

Results and to Drill Down and Find Areas of Improvement.

– Drill in, Rifle Approach - Don’t Shotgun Approach it, Just $$$ and Disappointing Results.

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If there is no measurement, then it is all hearsay. Data-free conversations and decisions will cause lots of frustrations, cost lots of money and result in lots of disappointments...

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Service - Fill Rates

• How well a business meets its customer’s needs - pulse of customer’s happiness/loyalty.• What to Measure:

Fill Rates = Shipped/OrderedQuantity: 9 out of 10 = 90%Line Item SC: 9 out of 10 = 0%Order Ship Complete?

• What Should Fill Rates Be?• The Report is Broken - Look at “First Pass” Orders - EDI, Fax, Internet, etc for true fill rates

and backorder retention• Only one way to better Fill Rates - The Right Inventory. Two ways to the Right Inventory...

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Profits - Turns? ROI?

Cost to Carry, Cost to Purchase and FreightC to P Turns

80’s $10.00 2-390’s $5.00 3-600’s $2-3.00 6-10EDI/VMI $0.13?Many companies are increasing the turns, but the infrastructure does not

support it; bottom line, longevity and growth are all suffering! Customer Service, GM Improvement, Efficiency, Accuracy, Asset Management

Pro

fitab

ility

Turns

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TurnsWhat is it Measuring - Profits?

J M/A J/J S/O D C/I Turns1.00 s1.25 1/1 1

c1.00

1.00 s1.25 s1.25 2/1 2c1.00 c1.00

1.00 s1.25 s1.25 s1.25 s1.25 4/1 4c1.00 c1.00 c1.00 c1.00

CGM T&EGM%

GMROI.25 .25

20%20

.25 .5020%

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.25 1.0020%

80Turns looks at C to C - Don’t Forget Margin,

Freight, C to P and SERVICETurns DOES NOT measure Profits, Turns is

an Indicator of Profits

R O I

Inventory = Dollars! How many Times the Dollars are used to do Something

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Return

140

150

150

140

Turns

4

5

6

7

Margin

35

30

25

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The “Whole” Picture

Inventory Management is not only TurnsCustomer Service Improvement - Availability, OTD, BO Handling

Gross Margin Improvement - Sell Service (Price) and COGS

Expense Reduction - Freight, Cost to Carry, Cost to ReplenishInventory Management is Bottom Line, Longevity and Growth

7 Turns & 4% Bottom Line or 5 Turns & 7% Bottom Line

Velocity P

ricing?

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Return on Investment

GMROI:= Turns CGM%

= COGSGMAve Inv COGS

= Sls Turns GM%

= Sales GMAve Inv Sales

= GMAve Inv

x

x

x

xx

x

Turns:= COGS + $TransferredAve Inv

T&E:= Turns GM%

= COGSGMAve Inv Sales

No Directs, Non-Stocks or Pass-Throughs

How to Use T&E/GMROI

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Inventory Management Objectives

Customer Service Availability (Fill Rates)

Proper Backorder Handling On Time DeliveryAccuracy: Item, Quantity, Price

Profitability (ROI)GM Improvement (Sales and Cost)

Freight Considerations - OC AnalysisEfficiency & Asset Mgt: CtoC and CtoPSurplus Inventory & Safety InventoryTurns/Days supply, ROI/T&E/GMROI

Watch the C to P

(Purchasing/Replenishment, Receiving & Put-away, A/P)

Watch the C to C(Warehousing, Handling, Obsol. & Shrink,

Taxes, Ins, Interest)

Service Profits

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1. Right Inventory/Service not Suffering because of Wrong

2. Controlled Replenishment3. Stocking Policy4. Good Numbers and Proper Use

of Them (OP, Level, LP, and OQ) - Path to Service:– Replenish at Order Point - Prio– Freight, RC, CtoC vs Service– Line Buy vs Emergency Buy– Understand LP and OQ Effect

Customer Service

5. Operations:– Backorder Policy and Handling– On-Time Delivery– Accuracy of Shipments and Billing

6. Fill Rates, BO’s, OTD, Accuracy - Monitor, Drill Down, Find Areas of Improvement

Back to Basics - JDI

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7. Understand and Use:– Usage: Lost Sales, DP– Customer Buying Habits– Timeline Analysis– NOOS Policy and Procedure– Smart Selling/Transferring

8. Follow LP and EOQ Suggestions:– Too many Fires– BOP but not at Target Problems

9. “Never-Arrive” Incoming10. Safety Stock Increase:

– Safety Analysis– Use a Rifle Approach– Small Steps, Results, ...– Watch the Profits

Stellar Customer Service does not have to drive your inventory through the roof, it just has to be done smart.

Customer Service

Keys to Good Fill Rates

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Inventory Management Objectives

Customer Service Availability (Fill Rates)

Proper Backorder Handling On Time DeliveryAccuracy: Item, Quantity, Price

Profitability (ROI)GM Improvement (Sales and Cost)

Freight Considerations - OC AnalysisEfficiency & Asset Mgt: CtoC and CtoPSurplus Inventory & Safety InventoryTurns/Days supply, ROI/T&E/GMROI

Watch the C to P

(Purchasing/Replenishment, Receiving & Put-away, A/P)

Watch the C to C(Warehousing, Handling, Obsol. & Shrink,

Taxes, Ins, Interest)

Service Profits

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Profitability

1. Stellar Customer Service2. Controlled Replenishment3. Stocking Policy4. Good Numbers and Proper Use of

Them (OP, LP, OQ, Level) - Path to Profitability:– Up to LP, OQ, Min, Package– Usage: Exceptional, DP– Targets/Incentives Properly– Line Buy vs Emergency Buy– Availability (Sales, GM, Fires)– At Target/Timeframe, no BOP

5. Vendor Performance and Negotiations

6. T&E and/or GMROI - Monitor, Drill Down, Find Areas of Improvement

Back to Basics - JDI

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Vendor Performance and Negotiations - It’s not just Price

• Lower COGS• Lower Freight Minimums• Multiple Drops for Freight• Combined P/O’s for Minimum• Freight Paid Fill-ins

• Fill Rates• Consistent Lead Times and OTD• Accurate Shipping (Blanket

Receiving) - Product, Quantity, Price

• Good Backorder Handling

• EDI/VMI/2-Way Information Flow - B2B

• Automated Product and Pricing Updates

• RGA’s on New Items• Excess Inventory Returns

• Win/Win - Partnership

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Profitability

7. Excess and Defective Inventory:– Prevention– Disposition

8. Order Quantity Reduction:– OC/RC (LP) Reduction:

• OC/RC Analysis/Paths, Watch Freight

• Lower Targets - Negotiate• C to P Departments Tools/

Efficiency– Suggested OQ Reduction (EOQ):

• Watch C to P Departments• Proper C to C

9. Safety Stock Reduction:– Safety Analysis - Use Rifle Approach– Improve the Process - Better Usage,

Lead Time and Level, Replenish at OP, Timeline

– Small Steps, Results, …, ...– Watch the Service

10. Other Reductions:– “Never-Ship” Committed– Duplicate Products and Lines

Turns the Right Way!

Balanced Objectives - Increase turns/decrease inventory but

DON’T EFFECT SERVICE!

Inventory Reduction/Increasing Turns

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PNA/Level

Surplus Point

Line Point or Max/EOQ

Order Point or Min

EOQ

Order Cycle

Lead Time

Safety

Profitability

Understand the Impact Areas:• Excess and Defective:

– No one wants or needs– Control the Feelings– Let it Roll, Let it Go– Be Careful - C to C/Mix– Cost of Disposition

• Line Point and Order Quantity:– “What” and “How Much”– Be Careful - C to P Departments

• Order Point - Safety Stock:– “When”– Be Careful - Customer Service

Low Risk

High Risk

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Excess Inventory Disposition

BOP/GAP - Put of the fire: Short or Long TermBLP/Sugg Xfers - Use it where you can: Long TermTeach branches to use LT first. Don’t borrow stock and put branch in “need”.

1. Stock Balance: (“X” Months Supply) - With “To” branch approval/Before Buy2. Sell Above Cost: Customer, Other Distributor 3. At Cost: Sell at cost, Return at cost with no charges (freight, restock)4. Below Cost: Sell below cost, Return below cost and/or with charges5. Sell Above “Write-off” Cost: Garage/Fire Sale, Flea Market, Auction House,

Liquidation House6. Dump at “Write-off” Cost: Donate, Scrap, Dump

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Cost to Carry, Freight, and Service

Versus

Cost to Replenish

HIRE SOMEONE

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Some Final Thoughts

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Getting Results

1. Order Point

2. Stock Level

3. “When” to Replenish

4. Stock Out/Lost Business Prevention -Timeline Analysis -”Too Late”

5. Closed-loop Backorder Process

1. Line Point and Order Quantity

2. Stock Level

3. “What & How Much” to Replenish

4. Surplus Prevention - Timeline Analysis -”Too Early”

5. Inventory Reduction Program

Service Profits

Most “Talk About” 1 and 2, Many Do Not Understand 3 and Few Do 4 and 5

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12 Months to Better Service and Profits

Execution Is the Key - One Action Each Month1. Good Usage: Lost/Exceptional Sales, Usage Roll-up, Seasonal Trending, DP2. Implement Customer Buying Habits/Average Ship Quantities3. Stock Level Accuracy: On Hand Integrity and Paperfloat Control4. Buyer’s Control Center: Replenish at OP Priority, Targets, EB vs LB, One-stop5. Order Cycle Analysis and Proper use of EOQ - Understand and Use Properly6. Timeline Analysis: “Too Late” and “Too Early”7. “Smart” Inventory Reduction Program, including Excess Prevention and Disposition8. Inventory Stocking Policy and “Product Add” Procedure9. Controlled Replenishment: Centralized Replenishment and Maintenance10. Backorder Policy and Flawless Backorder Handling System11. Data and Parameters: Smart Parameters (Depth, Cost and Hits/Rank Balance),

Smart Exception Reports and Proactive Maintenance12. Measure and Improve and Don’t Measure Just to Measure

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J D I

It’s too hard to log lost and exceptional salesIt’s too hard to keep the paper work cleanIt’s too hard to keep the on-hand correct

It’s too hard to work excess inventoryIt’s too hard ...

It’s too hard..., The system is broken or doesn’t have it…, We will never get them to do that…,

We don’t know how to do that… J D I !

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Spend $ to Make/Save $$

Execution Is the Key - How to Get it Done

• Get an IM, Operations and Education Person!• Understand the IM models, How the “Dials” Work and How to Meet the

Objectives (Service and Profits; OP, LP, OQ)• Understand and Utilize the System and People Better - Better Tools,

Better Processes, Better Education, Better Objectives - All Departments, Entire Company - SAME OBJECTIVES, SAME TEAM

• You Don’t Have to do the Extraordinary, Just do the Basics Extraordinary • No Magic, Common Sense, Back to Basics• Maximize Profits and Service, Asset Management, Cost Reduction and

Increase Turns the Right Way!

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It’s not just good Software and SystemsIt’s not just good Processes and Procedures

It’s not just good People and EducationIt’s not just good Management

IT’S ALL OF THEM!It’s not just good Usage

It’s not just good Order PointsIt’s not just replenishing at Order Point

It’s not just the TimelineIt’s not just working the Surplus

IT’S THE ENTIRE PROCESS

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Back to Basics

Many distributors DON’T:• Set the system up properly• Feed the system good data• Understand or Use the system properly• Clean up bad processes and procedures• Educate their people on the system or processes• Help departments work together• Help work towards common goalsYet they think it will all just magically work

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Spend your days reacting to the fires... you may be efficient, but will

you be effective?

Fire Prevention ...

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The World is Changing!

Yesterday Today TomorrowBuyers/Inv. ControlInventory/Asset Managers ???Turns Dominated Customer Service Oriented If you can’tInaccurate Data Data/Information Managers handle today,Four Glass Walls Communications & Team how will youLearned from “Bill” Education & Understanding handlePencil and Paper Technology and Efficiency tomorrow?

If your company is stuck in Yesterday or having troubles with Today, how will it survive Tomorrow?

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Replace Inventory and Costs and Improve Service with Technology

Improve Profits, Longevity and Growth with Technology

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GWHCO

www.gwhco.org

Grant Howard:[email protected] Phone734-428-0593 Fax

John Cason:[email protected] Phone256-830-0481 Fax

Our approach involves tailoring the best practices in distribution to the specific needs of our clients. Our working philosophy revolves around building a strong and self-maintaining infrastructure by developing a working plan based on processes and procedures, education and understanding, implementation of tools and technology; and through communication, organizational structure and team environments.

Thank You!

Profitability, Longevity and Growth

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