Differentiated Inventory Management
Tomas Wennerstein – MD, Syncron Inc.
Stockholm, 8 January, 2013

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Main Themes of the Presentation
•A segmented approach is default within price and campaign management etc., but why not when it comes to Inventory Management?
•What dimensions are relevant to segment the inventory management approach on and what are the benefits?
•Repairable parts requires a different inventory management process vs. non- repairable

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Differentiation is Applied in Many Areas
• Everybody understands the value of
Differentiation
• Differentiation is embedded in business practice
when it comes to:
– Marketing
– Pricing
– Sourcing

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Different Levels of Inventory Differentiation
•Basic differentiation CostDemand (Sales lines, VAU, Cost)
•Basic Purpose differentiation and Manual overrides.
•Advanced differentiation CostDemand
•Strategy based differentiation
Scope: Inventory Management for After Market parts. Many SKUs in many stocking locations requires dynamic rules that are automatically applied.
DO
Quality

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Today - What Do Most Companies Do?
•Basic “CostDemand” differentiation:
–Demand, ABC (VAU), Picks/Calls/Sales, Cost
A
B
C
$ 0-100
$ 101-1000
$ 1000-
1
Rule X
Rule Y
Rule Z
1
Rule V
Rule W
Rule U
2
Rule XX
…
…
OR
2
Rule VV
…
…
3
…
…
…
3
…
…
…
4 or more
…
…
…
4 or more
…
…
…
PICKS
VAU
PICKS
COST

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COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Today - What Do Most Companies Do?
•Basic “CostDemand” differentiation:
–Demand, ABC (VAU), Picks/Calls/Sales, Cost
•Basic Purpose differentiation and Manual overrides
Rule YY
Part A
Non Critical Items
Critical Items
A
B
C
A
B
C
1
Rule X
Rule Y
Rule Z
1
Rule X
Rule Y
Rule Z
2
Rule XX
…
…
2
Rule XX
…
…
3
…
…
…
3
…
…
…
4 or more
…
…
…
4 or more
…
…
…
PICKS
VAU
PICKS
VAU
Non Critical Items
Critical Items
A
B
C
A
B
C
1
Rule X
Rule Y
Rule Z
1
Rule X
Rule Y
Rule Z
2
Rule XX
…
…
2
Rule XX
…
…
3
…
…
…
3
…
…
…
4 or more
…
…
…
4 or more
…
…
…
PICKS
VAU
PICKS
VAU

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COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
•Get better at managing the ”CostDemand” differentiation
–What is the cost for maintaining the same agreed service level for a part that has few sales and high VAU compared to LOW VAU and high sales?
Inventory cost / Sales order line
A1
A2
B1
B2
C1
C2
1
2
3
4
?
5-6
7-9
10-19
20 or more
?
PICKS
VAU

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COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
•Get better at managing the ”CostDemand” differentiation
–What is the cost for maintaining the same agreed service level for a part that has few sales and high VAU compared to LOW VAU and high sales?
Inventory cost / Sales order line
A1
A2
B1
B2
C1
C2
1
2
3
4
500-5000
5-6
7-9
10-19
20 or more
1
PICKS
VAU

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COPYRIGHT © SYNCRON INTERNATIONAL AB 2013
Advanced CostDemand Differentiation
•Get better at managing the ”CostDemand” differentiation
–What is the cost for maintaining the same agreed service level for a part that has few sales and high VAU compared to LOW VAU and high sales?
•By targeting different Service Level on a more granular level, you will be able to maintain a Total Higher Service Level at a lower cost
Inventory cost / Sales order line
A1
A2
B1
B2
C1
C2
1
2
3
4
500-5000
5-6
7-9
10-19
20 or more
1
PICKS
VAU
Target Service per DEMAND/VAU class
A1
A2
B1
B2
C1
C2
1
0%
0%
0%
0%
0%
0%
2
0%
0%
0%
0%
0%
0%
3
0%
0%
0%
0%
0%
0%
4
50%
5-6
7-9
10-19
99.7%
20 or more
99.7%
99.7%
PICKS
VAU

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Advanced CostDemand Differentiation
•Challenge the 12 month horizon as a stocking criteria
–What says that 12 months is optimal?
–In Fast moving Retail no one would use 12 months
–Aerospace and similar industries sometimes use 3-4 years

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Advanced CostDemand Differentiation
•Challenge the 12 month horizon as a stocking criteria
–What says that 12 months is optimal?
–In Fast moving Retail no one would use 12 months
–Aerospace and similar industries sometimes use 3-4 years
Successful results from going from 12 months to 12 and/or 18 months
Target Service per DEMAND/VAU class
A1
A2
B1
B2
C1
C2
1
0%
0%
0%
0%
0%
0%
2
0%
0%
0%
0%
0%
0%
3
0%
0%
0%
0%
0%
0%
4
5-6
7-9
10-19
99.7%
20 or more
99.7%
99.7%
PICKS
VAU
Target Service per DEMAND/VAU class
A1
A2
B1
B2
C1
C2
1
0%
0%
0%
0%
0%
0%
2
0%
0%
0%
0%
0%
0%
3
0%
0%
0%
0%
0%
0%
4
5-6
7-9
10-19
99.7%
20 or more
99.7%
99.7%
PICKS
VAU
Target Service per DEMAND/VAU class
A1
A2
B1
B2
C1
C2
1
0%
0%
0%
0%
0%
0%
2
0%
0%
0%
0%
0%
0%
3
0%
0%
0%
0%
0%
0%
4
5-6
7-9
10-19
99.7%
20 or more
99.7%
99.7%
PICKS
VAU

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Strategic Differentiation
•Understand the ROI on different parts as they are stocked in Inventory and adjust your inventory strategy and consequently your Inventory Parameters
•Example of groups that could be valid when segmenting you inventory management techniques
–Criticality
–Captive vs Commercial
–Margin contribution
–Weather and Climate related
–Part Life cycle phase
–Unreliable suppliers
–Machine Life cycle phase
–Machine belonging
–Non historical demand driven items vs. demand driven
–Planned vs. unplanned
–Rotables vs. normal
–Short vs. long lead-time

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Strategic Differentiation
•Dimensions to consider for the different strategies
–Stocked or not stocked
–Criteria for stocked or non stocked
–Target Service Level
–Alert level for manual review
–How much should historical demand influence the inventory management (new parts)
–New methods

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Common Questions Related to Inventory Differentiation
• Is there a business case for me?
• What differentiation is applicable?
• What is the effort?

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Business Case and Relevant Differentiation
•Smarter basic differentiation normally yield 10-25% inventory savings at a maintained overall service level.
•Adding other values such as differentiated service and techniques for different segments will add value as well as facilitate less administration.
•A more exact value can only be found by:
–Analyzing the data, you will be able to draw relevant conclusion as long as the business has not changed substantially.
–Understanding the value contribution of Inventory Management and discuss with Sales and Marketing as well as Product Development.

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What is the Effort to Become Better at Differentiating?
Two aspects to consider are:
•Finding the relevant segments for the operation
–Understand the value that availability adds for customers and profit for the different segments
–Understand the data and how you can make your segments
•Incorporate the differentiation in daily inventory management
–System support
–Skills and “know how”

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Questions
How many would say that they that are doing differentiation to its full potential?
1

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Questions
What segments do you differentiate on today and what has prompted that?
2

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Questions
Where do you see the biggest challenge in incorporating more Differentiation in your inventory management?
3