It has taken awhile but I have finally gotten to the point of discussing the changes necessary in our inventory control systems and procedures. Time has changed most of what we do with inventory control yet we haven’t kept up with it.

Inventory management deals with two basic questions; how much to order and when to order. It really is quite simple. In the when to order I started in the Industry in 1968 and we used to run batch computer systems, place orders once a week, with some vendors every two weeks, we would put the stock order in the mail and then we would wait. It was not unusual for the lead time to be six to eight weeks for the initial shipment. Can you imagine that? Today we can place stock orders with many vendors on a daily basis, send it via instantaneous electronic means and get the initial shipment from some vendors in three days. Quite a difference don’t you think?

On the how much to order with have a similar dilemma that has crept up on us. The cost to place an order has changed dramatically. With the amazing advances in computer technology and the pricing of the systems the cost to place an order has been reduced dramatically. So much that it really doesn’t cost anything to process a stock order anymore. This means the order cost is approaching zero. That throws the true benefit of the Economic Order Quantity (EOQ) theory on its’ ear.

So what have we got here now? We have order points that are set too high and we also have order quantities coming in with quantities higher than we need.

In other words we are over stocked on our parts. This is reflected in the turnover numbers for the Industry, whether it is the True Turnover (excluding backorders) or the Gross Turnover (including backorders). The high performance dealers today run at a Gross Turnover of 6 or higher. From an extremely conservative position we should be operating at a Turnover rate of 12 or more. In other words we have twice as much inventory as we should have.

Yet many of you continue to do what you have always done and that will continue to deliver the same results you have always received. So who is in charge here? The computer system is set up with rules in it established by people. Who is setting the rules in your company?

Which ever system is being used; from Poisson to Order Formula Codes to Minimum/Maximum to fancy statistical forecasting they are all set up by people. So the question is have you changed your rules to reflect the new reality? Most of you have not. Why is it we settle for substandard results?

Let me present this to you in a different way. If you are achieving a Gross Turnover of 6.0 and have a Stock Order ratio of 60% (60% of the orders you place with a vendor are on stock orders) then your True Turnover is 3.6 (60% times 6.0). With a turnover of 3.6 you have in inventory 101 days of sales (365 divided by 3.6). No if your vendor provides stock orders within ten days (many are less than this) why would you need to carry 101 days of sales on the shelf? You don’t

So who is in charge here? Let’s change the rules for order points and set them such that we have perhaps 30 days on hand when we place an order. Isn’t this the right thing to do? Then if that is true why not do it? Remember ignorance does “not know what to do.” Well now you know what to do. Stupidity is to know what to do and not doing it.

Okay then that is the “When to Order.” Now the “How Much” to order is the second step. The EOQ as outlined above does not work! It hasn’t worked for several years, maybe ten. Yet we continue to use it. Why? What I want you to consider is to order the amount that was sold in the previous period, the period since the last stock order. I understand your systems have a hard time with this but you can set up rules so that this is exactly what happens. If you can’t contact your systems supplier and explain to them that their system is creating and over stock situation and you need them to fix it. Most software suppliers suggest that you use $0.50 as an order cost per part number and a carrying charge of 25%. Neither number is valid. This needs to be fixed as well.

I understand that the world is changing very quickly and that everyone is working very hard. I don’t understand spending two times the money, on an asset as I need to spend. Do you understand why anyone would want to do this? Time we took charge again isn’t it? If not now...when?