"Most ailing organizations have developed a functional blindness to their own defects. They are not suffering because they cannot resolve their problems, but because they cannot see their problems." John Gardner
Inventory Snapshot Overview
Inventory snapshots combine analytical and graphic techniques to improve the understanding of an organization's current inventory position.
The intent of the snapshots is to give a mid-level view of the inventory: the snapshots are between the top level view (total inventory) and the ground level (individual items) view. As a result, they allow the inventory to be "sliced and diced" into meaningful segments for review and analysis.
In the example above, the top bar for all locations shows that the existing, on hand inventory as of right now will fill about 38% ( Left side FILL %) of the loaded demand over the next month and the loaded demand will consume about 56% (Right side - UTIL %) of the inventory that is currently on hand.
Once a user understands how to "read" the snapshots, quick assessments can be made to understand where work and improvement opportunities exist. If the snapshot for a specific dimension is "good" and is the picture expected, move on. For those inventory areas that don't meet the expectation, more work is required to identify what is causing the gap and more importantly, what can be do to improve the inventory position.
Most importantly, to be of value, the critical factor is that the snapshots are used as a tool to identify improvement opportunities and not just for reporting.
Interpreting the Inventory Snapshot
When I identified that being "inside the curve" represented an inventory out of balance condition and I could not find any existing metric to represent this condition; I invented two new metrics designed to be used together to reflect inventory balance and to be specifically represented in a graphic format: the inventory snapshot. The metrics are Inventory Fill % and Inventory Utilization %.
Before Inventory Fill % and Utilization % can be calculated, a new quantity called FFI (Filled from Inventory) must be calculated. It answers the question, "How much of the projected current demand can be satisfied with the on-hand inventory at the item or SKU level?"
FFI (Filled From Inventory) equals the lesser of on-hand inventory or current demand. This calculation is done at the item or SKU level. This prevents an excess inventory for one item (against its demand) from being applied as an off-set to a shortage for another item.
Once you have FFI for each item, the totals for On-hand inventory, current demand and FFI are aggregated for each group that you wish to use for reporting.
Inventory Fill % (Fill %) - Left side of graphInventory Fill % measures the ability of the existing on-hand inventory to satisfy the current demand.
Fill % = FFI / Current Demand. This is done at the aggregated or group level. Example: In the table at the bottom of this page, the values for Group A are:
The Fill % for Group A = 4,575 / 5,825 = 78.5% (Note: I always multiply this value by -1 to facilitate graphing.)
Inventory Utilization % (Util %) - Right side of graph
Inventory Utilization % measures the amount of the existing on-hand inventory expected to be consumed by the current demand (FFI) against the on-hand inventory.
UTIL % = FFI / On-hand Inventory. Again, this is done at the aggregate level.
Using the example from Group A:
The Util % = 4,575 / 7,269 = 62.9%
For the 6 items in Group A, the total on-hand inventory exceeds the current demand, but due to balance issues between the 6 items only 79% of the projected demand can be satisfied with the existing on-hand inventory. And only 63% of the existing inventory will be consumed.
Slicing and Dicing
Snapshots can be used to look at inventory by almost any dimension that is linked to the items in the system data base.
Inventory snapshot by commodity graph
Dimensions I have used to look at snapshots, both at the enterprise and location level, include:
I have seen the technique used for non-manufacturing/distribution resource areas such as capacity by different types of resource groups and time share unit Fill and Utilization for resort locations.
Examples of Types of Pictures
Safe and Soft: Inventory in this category is well balanced. The on-hand inventory will meet the current demand and will be consumed during the period. However, too much inventory may be carried since most of the inventory needed over the next month is already on hand. Consider approaches to carry less inventory and move to a more just in time strategy.
Fat: This picture indicates excess inventory with low turn over.
Short: This inventory is seriously short. The inventory will fill a fraction of the demand and the inventory that is on-hand is completely consumed.
Disaster: This inventory is seriously out of balance for both Fill % and Util %. This indicates the items that have demand are short and the items that are on hand are excess.
About Right: In a lean or JIT environment, it is expected that the inventory will arrive or be produced shortly before it is needed and then be consumed. It is assumed that multiple, relatively frequent receipts will be made and as a result, it is acceptable to have only a portion of the inventory necessary to meet the demand on hand at any point in time. Also, the recommendation is that a target range be used, so for the "about right" picture, the Fill % would be in the range of 25 - 40% and the Util % at 80% or greater.
What's a good number?
The short answer is "that depends". I always recommend that the targets be a range and not a single number and that the range depends on the organization's inventory strategy for the various segments
.Why use a month or four weeks for the demand?
I chose the month demand because if gave a reasonable target for demand. Longer periods were too far out and inventory management activities in shorter periods tended to be expediting and intervention types of activities. I wanted to be able to "see" what the "normal" inventory balance was based on the more stable inputs. (Keep in mind that when the concept was developed, the concepts of JIT and Lean did not exist - at least not in the U.S.)
What are recommended target ranges?
When I first developed the technique in a consumer products company, we felt that reasonable targets were Fill % of 60 - 80% and Util % in the 40 - 60% range. In those days, JIT and Lean were unknown and systems did not have the capabilities they have now. Now in a lean type type environment, I'm comfortable with having the bars shift to the right, with the Fill % target in the 25 - 40% range and Util % above 80%.
However, there is nothing sacred about those target ranges and ultimately, YOU have to decide what makes sense for YOUR operation and inventory strategy.
For example, in one consumer product company, there were a limited number of raw material items that were key components in a product line with dozens of end items. The specific items were sole sourced with a long and fragile supply chain. Significant, unsuccessful effort had been expended to developing back-up and alternative sources without success. So for these items, the very specific inventory strategy was to keep large quantities on-hand. The FILL % was always 100% and if the UTIL % rose above 25%, reviews and corrective action were implemented.
How are the Fill % and UTIL % Calculated?
Use system reporting tools to capture the on-hand inventory and demand for the next month for each item.
Calculate FFI, Filled from Inventory, and Production/Purchase Requirement for each item.
Create sub-totals for whatever dimensions or reporting groups being analyzed.At the sub-total and total levels, calculate Fill % and Util %. Note: multiply the Fill % by -1 to facilitate graphing.
Only the sub-totals and total lines are used in graphing.
Inventory Curve logo with Service Mark.
Assumptions and Limitations
It is assumed that the one month demand is relatively accurate and generally level loaded. It is assumed that the inventory will be consumed at a relatively level rate throughout the one month period.
The graphs measure only Fill % and Util %. They do not give any indication of the magnitude of each dimension being reported.
If you have questions or would like to discuss how snapshots can be used within your organization, please feel free to contact me at David.Armstrong@inventorycurve.com.
Looking at inventory performance improvement through a different lens.