The 2009 APICS International Conference and Expo is starting next week in Toronto (Canada). One of the educational tracks is focusing on how to manage inventory in a changing economy. As inventory is a challenging issue for all types of manufacturing organizations, regardless of industry. If an organization can manage its inventory without losing focus on demand and where its dollars are being spent, it may achieve its inventory objectives. Gary Gossard (president of IQR International) gave a preview presentation in a webinar in which he pointed out a technique that can be used by organizations to manage inventory and reduce waste during changing economic times.
Gossard presented a simple methodology that uses data from existing systems (enterprise resource planning [ERP], supply chain management [SCM], or manufacturing requirements planning [MRP] applications) and finds which inventory rules are obsolete or not working in the organization’s favor. This methodology is the inventory quality ratio (IQR), a logic that has been around for quite some time, but that has not been used much or has not been understood by many material managers.
In IQR logic, inventory is divided into three parts:
In the presentation, Gossard explained in detail the different classifications of inventory. The classifications can range from active to excess, and everything in between. He also explained that IQR is a ratio of inventory based on active inventory dollars to total inventory dollars. In my opinion, if the inventory is managed according to IQR—meaning, materials without excess, not moving too slowly, or not moving at all—an organization may have an IQR of 100 percent. (That would be wishful thinking on my part.) As reality demonstrates, organizations have materials in every category imaginable: active materials, excess materials, slow-moving materials, not-moving materials, etc.
With the help of the IQR technique, organizations can get a “dollar focus” on their inventories. The IQR logic looks at both future and past usage of materials, as well as at the ABC classifications associated with them. This way, material managers/planners and buyers can effectively identify to what category the inventory belongs.
Gossard shared an example of an electronics manufacturing organization that is using IQR methodology to achieve its inventory objectives. The inventory numbers he presented were an 18 percent reduction in 5 months and a 32 percent reduction in 12 months. Overall, organizations using IQR can improve cash flow and working capital, and have better inventory turns without having customer delivery shortages. This method will definitely make the jobs of material managers, planners, and buyers much easier, as they won’t need to constantly keep track of excess inventory. The use of the IQR ratio will continuously improve overall inventory performance.
At the end of webinar, Mr. Gossard asked organizations to reevaluate their inventory positions. To change the way they manage inventory going forward, organizations need to become more demand-driven and dollar-focused, and also measure inventory performance by segments, helping identify and prioritize inventory. He mentioned that there are three strategies for reducing excess inventories and improving inventory performance, which will be presented in detail at the APICS Conference.
As TEC analysts will be attending the APICS conference, we will report back our insight on these details. Stay tuned—we will be back with some other great finds from our APICS journey.