The document summarizes best practices for inventory reduction presented by Gary Gossard of IQR International. It outlines top inventory reduction practices like periodic reviews and analyzing usage and lead times. It also introduces the Inventory Quality Ratio method which segments inventory into active, excess, slow-moving, and no-moving categories. Case studies show how companies like IGT and AGCS reduced excess inventory and improved cash flow by applying best practices and the IQR method. The presentation emphasizes focusing on dollar reductions of excess inventory and continuously improving inventory management practices.

1. Best Practices for
Inventory Reduction
Gary Gossard
IQR International

2. Presentation Outline
Best Practices
Top Ten Inventory Reduction Practices
Inventory Quality Ratio
Reduction Strategies and Case Studies
Identify and Reduce the Excess
Revise Material Ordering Guidelines
Use Continuous Improvement
Summary & Conclusions
© 1992-2005 IQR International, Inc.

3. Definition 1
A “Best Practice” is a process or technique …
that has a proven record of success in
providing significant improvement in cost,
schedule, quality, performance, safety,
environment or other measurable factors
which impact the health of an organization.
The Best Manufacturing Practices Center of Excellence
© 1992-2005 IQR International, Inc.

4. Definition 2
A “Best Practice” is a group of tasks that
optimizes the efficiency or effectiveness of the
business discipline or process to which it
contributes. It must be implementable,
replicable, transferable and adaptable across
industries.
The Gartner Group
© 1992-2005 IQR International, Inc.

5. Inventory Reduction
Best Practices Survey
Inventory Management Report
“Improving Logistics & Supply Chain Management”
Survey of inventory managers
Reported top 5 best practices
Tabulated by company size
Under 500 employees
Over 500 employees
Ranked 20 practices by overall utilization
© 1992-2005 IQR International, Inc.

6. Top Ten Reduction Practices
Conduct periodic reviews 65%
Analyze usage and lead times 50%
Reduce safety stocks 42%
Use ABC approach (80/20 rule) 37%
Improve cycle counting 37%
Shift ownership to suppliers 34%
Re-determine order quantities 31%
Improve forecast of A and B items 23%
Give schedules to suppliers 22%
Implement new inventory software 21%
© 1992-2005 IQR International, Inc.

7. Survey Conclusions
“Periodic Review” still most popular
“Order Quantities” biggest gain
Using more analytical approaches
Past usage and safety stocks
Lot sizes and order quantities
ABC classifications
Takes more than one best practice
Inventory reduction a two step process
© 1992-2005 IQR International, Inc.

8. Introducing IQR
A comprehensive approach to reducing
inventory investment.
A more useful method of measuring
inventory performance.
Developed by 35 materials managers.
Combines 7 of top 10 best practices.
© 1992-2005 IQR International, Inc.

9. Inventory Quality Ratio
Inventory management technique
Works with your existing system
Top-down focus on inventory dollars
Measures performance by segment
Gives planners information they need
Enhances any MRP/ERP/SCM system
No additional data entry required.
© 1992-2005 IQR International, Inc.

10. IQR Logic MRP / ERP
Data
NM Extract E3
BOHV
G
12 H 6 R H
K
AWWUV AWWRV
SM
80 - 15 - 5 %
DEF
4 - 12 - 24
ABC
BC
E1 B E2 B
A1 A2
© 1992-2005 IQR International, Inc.

11. Inventory Quality Ratio
Active Inventory Dollars
IQR =
Total Inventory Dollars
A1 + A2
IQR =
A1 + A2 + E1 + E2 + E3 + SM + NM
Perfect IQR = 100%
© 1992-2005 IQR International, Inc.

12. Inventory Quality Ratio
Active Inventory Dollars
IQR =
Total Inventory Dollars
A1 + A2
IQR =
A1 + A2 + E1 + E2 + E3 + SM + NM
30-50% 10%
Average IQR = 30-45%
© 1992-2005 IQR International, Inc.

13. The IQR Logic
Analyzes inventory using:
Balance on hand and unit cost
Past usage and future requirements
ABC techniques and user-defined parameters
Develops inventory quality categories:
Active: reqmt/use, balance within limits
Excess: reqmt/use, balance over user’s limits
Slow Moving: no reqmt, no use in 6 months
No Moving: no reqmt, no use in 12 months
Measures overall inventory performance.
Combines BPs with a dollar focus.
© 1992-2005 IQR International, Inc.

14. Inventory Reduction Strategies
with Case Studies of IQR Results
1. Identify and Reduce the Excess
Rapid Inventory Reduction at IGT
2. Revise Material Ordering Guidelines
Working Smarter, Not Harder at AGCS
3. Use Continuous Improvement
World Class Performance at Steelcase
© 1992-2005 IQR International, Inc.

15. 1. Identify & Reduce the Excess
Quick Look
Good and Bad
Focus on Dollars
Action Items
Open Orders
Action Codes
© 1992-2005 IQR International, Inc.

16. Case 1 - Rapid Reduction
♠ International Game Technology (♠IGT)
♠ Gaming equipment manufacturer
♠ Markets and products evolving
♠ Shortages increasing
♠ Inventories growing & turns falling
♠ Tired of “Program of the Month”
♠ Management’s demands of consultant
Long-term solution
Short-term benefits
Reduce inventory $10 million by FY end.
© 1992-2005 IQR International, Inc.

17. Inventory Dollars by Category
Purchased and Manufactured at ♠IGT
Quick Look Dollars ($1000) by Purch/Manuf and Quality Category
Purch Active Active Excess Excess Excess Slow No Total IQR
Manuf 1 2 1 2 3 Moving Moving Value Ratio
P 351 16,994 4,097 26,879 0 1,738 3,400 53,458 32.4%
M 21 695 121 385 0 18 267 1,507 47.5%
Total 372 17,689 4,218 27,264 0 1,756 3,667 54,965 32.9%
Excess 2: The biggest and best reduction opportunities.
© 1992-2005 IQR International, Inc.

18. Rapid Reduction Phase
♠ By fiscal year end - 3 months
Over $10 million reduction (20%)
27% reduction in Excess 2 inventories
Management very happy.
♠ By calendar year end - 5 months
$16.4 million reduction (31.5%)
53% reduction in Excess 2 inventories
$14 million increase in cash flow.
♠ Increased turns, cash flow and ROA.
© 1992-2005 IQR International, Inc.

19. Rapid Inventory Reduction ♠IGT
Inventory Dollars and IQR Performance
60,000 45
40
50,000
Inventory Quality Ratio (%)
Inventory Dollars ($000)
35
Added
40,000 30
25
30,000
20
20,000 15
Added 10,000 more
inventory items 10
10,000
5
0 0
6/98 8/98 10/98 12/98 2/99 4/99
Rapid Reduction Phase Continuing Improvement Phase
© 1992-2005 IQR International, Inc.

20. Continuing Improvement Phase
♠ Deployed IQR to all planners
♠ Doubled the parts managed with IQR
Added 10,000 items and $14 million
New items lowered overall IQR
Total inventory base $69 million
♠ $30 million reduction (43% in 14 months)
♠ Purchased parts reductions
Excess 2: $20.3 million (61%)
SM + NM: $3.8 million (52%)
© 1992-2005 IQR International, Inc.

21. 2. Revise Ordering Guidelines
Inventory Profile
Target Setting
What Ifs
Custom Analyses
Safety Stocks
Ordering Rules
© 1992-2005 IQR International, Inc.

22. Case 2 - Working Smarter
AG Communication Systems (AGCS)
Lucent Technologies and GTE
$350 million total sales
Central office switching networks
Genoa, IL: 800 employees, 300K s.f.
Inventories
20,000 active part numbers
$16 million purchased parts
$9 million WIP and finished goods
© 1992-2005 IQR International, Inc.

23. Inventory Performance
Pressures Mounting
Aggressive growth plan
Shorter product life cycles
Inventory investment increasing
Inventory turns deteriorating
Obsolescence exposure growing
20% of inventory balance
Reserve funded from net income
© 1992-2005 IQR International, Inc.

24. New Approach Needed
Had been using
State-of-the-art systems
Event-driven replenishment
Make-to-order assembly
Experienced planners
“The results just weren’t there!”
Spending too much time on C items
Need to focus on $$$, not quantities
Saw IQR as a more effective method
© 1992-2005 IQR International, Inc.

25. Improvement Strategy
A Three Step Approach
1. Stop the Bleeding
Cancel or defer excess open orders
2. Clean House
Identify slow and obsolete inventories
Assess potential for reducing write-offs
3. Take Away the Knife
Apply ABC classifications
Re-evaluate ordering guidelines
Synchronize IQR and MRP
© 1992-2005 IQR International, Inc.

26. Inventory Dollars and IQR AGCS
Purchased Parts by Category and IQR Performance
12,000 50
45
10,000
Active 40
Inventory Quality Ratio (%)
Excess
Inventory Dollars ($1000)
SM+NM
35
IQR %
8,000
30
6,000 25
20
4,000
15
10
2,000
5
0 0
0 1 2 3 4 5 6 7 8 9
Months After Implementation
© 1992-2005 IQR International, Inc.

27. The Results and Benefits
IQR doubled in nine months
35% reduction in excess inventory
$3.8 million inventory savings
Doubled active inventory available
Fine tuned their MRP system
Orders now consistent with targets
Everyone working smarter, not harder
Quicker response to product changes
© 1992-2005 IQR International, Inc.

28. 3. Use Continuous Improvement
The Second Step
Movement Matrix
Flag Changes
Financial Impact
Track Results
Root Causes
© 1992-2005 IQR International, Inc.

29. Three Causes of Bad Inventory
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Materials Sales Engineering
© 1992-2005 IQR International, Inc.

30. Case 3 - Steelcase (four plants)
World Class Performance
4 - 12 - 24 IQR= 80-90% 30 turns
1 - 2 - 6 IQR= 40-50%
6 months IQR= 55-70% 40 turns
Over 42 turns
Make to order
Benchmark
Revise rules
Don’t outgrow
The best get better.
© 1992-2005 IQR International, Inc.

31. Best Practices and IQR
Conduct periodic reviews
Analyze usage and lead times
Reduce safety stock levels
Use ABC approach (80/20 rule)
Shift ownership to suppliers
Re-determine order quantities
Update inventory systems
IQR adds the dollar focus
© 1992-2005 IQR International, Inc.

32. IQR Environments
Manufacturing companies
material planners
buyers
production schedulers
operations management
financial management
Distribution and logistics
Utilities and MRO stores
Management consultants
© 1992-2005 IQR International, Inc.

33. Best Practice Criteria
A “Best Practice” is a process or technique
that has a proven record of success in
providing significant improvement.
It must be implementable, replicable,
transferable, and adaptable across
industries.
© 1992-2005 IQR International, Inc.

34. IQR Use is Spreading
Airtechnics Dialogic - Intel Corp. Nilfisk-Advance
Alcatel Dow Chemical Oakley
Allergan Medical Eastman Chemical Ocean Cuisine
Amtrol Incorporated Engenio IT - LSI Logic O’Sullivan Industries
Andrew Corporation Erico Incorporated Pharmacia Italia
Arvin Meritor GKN Automotive Rheem Manufacturing
Avery Dennison Honeywell Ricon Corporation
Banner Pharmacaps Hyundai Schering-Plough
Beckman Coulter Johnson & Johnson Schlumberger
BiltBest Products Katy Industries Stanley - MAC Tools
Binney & Smith Korry Electronics Telex Communications
Black & Decker Kohler Companies Tyco Electronics
Bosch Corporation Krebs Engineers Unilever Bestfoods
Bunn-O-Matic Corp LuK Automotive Wellman Products
Carrier Corporation Motorola Wenger Corporation
Chamberlain Group National Oilwell Woodward Governor
Dana Corporation National RV Valmont Industries
© 1992-2005 IQR International, Inc.
Newell-Rubbermaid Vita-Tech International

35. Conclusions
MRP/ERP good for planning
Best practices needed to manage
IQR combines best practices with $ focus
Keys to reducing inventories:
Focus on the dollars – prioritize opportunities
Identify the excess – stop the bleeding
Apply dynamic ABC analysis – work smarter
Re-evaluate ordering rules – fine tune MRP
Monitor movement – address root causes
Make the planners’ job easier.
Improve turns, cash flow and profits.
© 1992-2005 IQR International, Inc.

36. Thanks for attending.
Questions?
Gary.Gossard@IQR.com (949) 487-5400
© 1992-2005 IQR International, Inc.