Does it really matter if you do or do not understand all the formulae that are used in inventory management? Does it matter if you know or don’t know how to calculate the Reorder Point or the Reorder Quantity for individual SKUs? How many people do you know that don’t bother to learn these formulae when they use software to manage inventory? Or they don’t even seek to understand what algorithm the software applies for the calculations? Surely knowing these things is the starting point for anyone charged with inventory management.
What if you do know the formulae, is that enough to make you an expert manager? Many people seem to think so but is it really enough to enable you to improve your materials and inventory management results? In my opinion it is not.
Certainly, it is worthwhile understanding the basic formulae and elements of materials and inventory management but, as in many situations, the real value comes from looking beyond the basics and understanding the implications of the choices that are made regarding the variables used in any formula.
Anyone can look up a formulae on the Internet or read them in any number of books on the subject (and I encourage those that don’t know the basics to do so) but it is an understanding of the nuances in the variables that provides the real value. Too often people take the basic concepts and formula and do not think through the complicating factors when implementing the concept or formula. This does not mean that we need to make things overly complex; it just means that we need to understand the implications of our choices.
My criticism of people in industry is that they can somewhat blindly apply formulae without thinking about the implications of their choices in the variables that are used. They tend to think that knowing a formula is the smart bit but, in my view, that is the easy part. The smart part is to understand and manage the implications of the choices that are made.
For example, in the ROQ calculation, I think that one of the most contentious values is the cost of placing/processing the order and this needs to be better understood as the calculation is quite sensitive to variations in this number. Here is an example.
The classic formula for calculating the ‘economic’ ROQ is as follows:
ROQ = SQRT((2 x Order Cost x Demand Rate)/(Item Cost x Holding Cost p.a.))
Where:
SQRT = Square Root
Order Cost = the company internal cost for processing requisitions, issuing purchase orders and receiving deliveries.
Demand Rate = the expected demand over a year.
Item Cost = the purchase cost of the item, including delivery costs.
Holding Cost p.a.= the financial charge for holding inventory
Now, let’s assume that:
Order Cost = $50 per order
Demand = 1,000 per year
Item Cost = $10 each
Holding Cost = 25% per year
Then
ROQ = SQRT((2 x 50 x 1,000)/(10 x 0.25))
= 200
Therefore, the ‘economic’ ROQ is 200 items.
Now, let’s look at the impact of changing the Order Cost. Assume that we change the Order Cost to $100 and all other variables remain the same, then
ROQ = 283
So, if an order cost of $100 per order is used the ‘economic’ ROQ will be calculated to be 283 items – approximately 41% higher than if an order cost of $50 is used. This simple change in a variable has increased the reorder value of this item by 41%!
Image the effect on your total inventory value if you do not understand the impact of the choices you make with these and other variables. Just knowing the formulae is the easy part!
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Business as Usual – Do You Really Want It?
There is no doubt that the current economic times are not ‘business as usual’ but is that what we really want? Is ‘business as usual’ a good thing?
In the past month or so I have been running workshops, based on my book Smart Inventory Solutions, for the Production and Inventory Control Society in Australia (apics). The workshop attendees have been from many different industries and it is always good to hear firsthand the issues they face and the perspectives they bring. One issue, though, was raised consistently throughout and usually came up when we were discussing policies and procedures for controlling materials and inventory. One attendee, let’s call him John, said it best when he said:
‘Over the years our company has paid many different consultants to come in and develop various policies and procedures in this area, however, when the consultant leaves, the document usually gets put into the bottom drawer and we just get on with business as usual.’
On the day that John said this I let those last three words hang in the air – ‘business as usual’. Is that what you really want? Is ‘business as usual’ really a good thing?
What John was saying was that nothing had changed. Someone (no doubt a manager of some variety) felt like they had done something positive in getting the policy or procedure developed. Plenty of people may have been involved in developing the documents – just like everyone says that they should. But in the end no one acted differently, that is, their actions and behaviors had not changed, they just got on with doing what they knew, not what might now be required – they got on with ‘business as usual’.
The discipline of execution is a widespread issue that, in my opinion, can only be addressed by people taking individual responsibility and being held accountable for their role in executing new policies and procedures. This means doing what’s required to implement company policies and procedures in our area of responsibility, not saying things like, ‘if they don’t do it, I won’t do it’. That attitude is unprofessional.
Execution requires you to get others involved and actually start doing something different—preferably applying the new actions and behaviors. Once you take action, you must then reinforce the desired behavior. Positive reinforcement is clearly preferred, but behavior correction and follow up also have a place, not in a berating sense, but in a ‘that’s not the way we do things anymore’ sense. This is not ‘business as usual’.
Furthermore, do not underestimate the power of regular review meetings with those assigned responsibility. These provide a forum to air issues that arise, can be the catalyst for problem solving, are an opportunity for positive reinforcement, and a chance for behavior correction. The implementation of new policies and procedures must be seen as important and this can be achieved by demonstrating the willingness of senior personnel to dedicate time to these meetings.
‘Business as usual’ means not taking this responsibility and perhaps even actively working against change. That’s why ‘business as usual’ is not a good thing!
In the past month or so I have been running workshops, based on my book Smart Inventory Solutions, for the Production and Inventory Control Society in Australia (apics). The workshop attendees have been from many different industries and it is always good to hear firsthand the issues they face and the perspectives they bring. One issue, though, was raised consistently throughout and usually came up when we were discussing policies and procedures for controlling materials and inventory. One attendee, let’s call him John, said it best when he said:
‘Over the years our company has paid many different consultants to come in and develop various policies and procedures in this area, however, when the consultant leaves, the document usually gets put into the bottom drawer and we just get on with business as usual.’
On the day that John said this I let those last three words hang in the air – ‘business as usual’. Is that what you really want? Is ‘business as usual’ really a good thing?
What John was saying was that nothing had changed. Someone (no doubt a manager of some variety) felt like they had done something positive in getting the policy or procedure developed. Plenty of people may have been involved in developing the documents – just like everyone says that they should. But in the end no one acted differently, that is, their actions and behaviors had not changed, they just got on with doing what they knew, not what might now be required – they got on with ‘business as usual’.
The discipline of execution is a widespread issue that, in my opinion, can only be addressed by people taking individual responsibility and being held accountable for their role in executing new policies and procedures. This means doing what’s required to implement company policies and procedures in our area of responsibility, not saying things like, ‘if they don’t do it, I won’t do it’. That attitude is unprofessional.
Execution requires you to get others involved and actually start doing something different—preferably applying the new actions and behaviors. Once you take action, you must then reinforce the desired behavior. Positive reinforcement is clearly preferred, but behavior correction and follow up also have a place, not in a berating sense, but in a ‘that’s not the way we do things anymore’ sense. This is not ‘business as usual’.
Furthermore, do not underestimate the power of regular review meetings with those assigned responsibility. These provide a forum to air issues that arise, can be the catalyst for problem solving, are an opportunity for positive reinforcement, and a chance for behavior correction. The implementation of new policies and procedures must be seen as important and this can be achieved by demonstrating the willingness of senior personnel to dedicate time to these meetings.
‘Business as usual’ means not taking this responsibility and perhaps even actively working against change. That’s why ‘business as usual’ is not a good thing!
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