Inventory Management Review

Notes From an Inventory Management Consulting Job: Part II of IV

2 of 4: Collecting the remaining data needed to determine Reorder Points 

To recap, at the end of the first day of consulting I had found out what went into the kits and the lead times for the materials. On day two it was my job to determine what the demand was and how much standard deviation was in that demand. Lucky for me the mail room manager keeps excellent records of this data. Not so lucky for me was that their demand recently increased by quite a sizeable amount due to a permanent increase in advertisement and that this demand was projected to remain high. This cut my useable demand data drastically.

Fortunately the manager was still able to supply me with 19 pieces of demand data. This data was enough for me to determine the average demand the mail room faces as well as the standard deviation in that demand. I then took that data and turned it into weekly figures and determined the average weekly demand and average weekly standard deviation. Although this weekly demand data is only based on 3 complete weeks worth of data, the data will be better in the future, as I’ll explain later.

As I mentioned earlier however, there are certain types of kits that require an additional booklet as well as an additional 30 pieces of paper. In order to determine the approximate demand for these materials, I determined the approximate percentage of kits that require these extra pieces and then I counted those pieces into the use of raw materials only as often as I projected they would be used. 

Now I had the information I needed to determine the Reorder Point. I had the average lead time, the average demand, and the standard deviation of the demand. The missing piece of this formula is the z value which comes from the service level. Service level and z values are explained in greater detail in a previous post which can still be found on this blog.

I multiplied the average lead time by the average demand together in order to get the point at which they should reorder assuming there is no deviation in demand. However, since there is always deviation from the average demand I also determined the safety stock.

To get the safety stock, I used the following formula:
 

z*Square Root of (Average Demand^2*Standard Deviation of Lead Time^2 + Average Lead Time*Standard Deviation of Demand^2)

I Then added the safety stock to the result  determined from multpiplying demand with average lead time and together they make the reorder point.  When current inventories reach this level, the managers need to reorder.

Notes From an Inventory Management Consulting Job: Part I of IV

This post is the 1st of 4 posts that provide detailed notes of an inventory management system design job and the building of a decision support system that helps managers determine when to reorder materials. 

I was recently hired to setup an entirely new inventory management system at a small mailing room in Los Angeles. Rather than keep what I learned to myself, I thought I’d share it with all of you. First I’ll give you some background information on the mailing room. 

The mailing room processes leads from a variety of different sources and sends each lead a mailing kit that has a few pieces of paper, a business reply envelope and a couple of booklets in it. This fairly small operation handles approximately 1500 leads a month and is run out of a vacant room in the office. The booklets, the business reply envelopes, and the large envelopes are all printed by another firm. The loose sheets of paper are printed in house and are printed on blank paper shipped from Staples. 

When I arrived at the mailing room I talked to the man in charge. While he had set up a very good system for keeping track of leads, when and where they came from, whether or not they were delivered successfully, and while he had setup a fairly automated mailing kit production process, his inventory tracking system was as archaic as his lead tracking was detailed. The ordering of his supplies was very simple. He would order as much as he had room for because the quantity discounts at the printing house were so great that ordering small amounts was not even an option. 

For him, the real question was when to order. Previously his policy regarding when to reorder was, “I dunno I reorder, when it looks like I’m running out.” As funny as this may seem, it is not the only company I have encountered that has this policy, and I can assure you, that is not a good thing. In this case, when I say it is not a good thing, I mean that in the sense that they ran out of supplies and now are facing two weeks of production with a missing part of their kit. I guess it looked like they had more inventory than they really did. 

Now I’ll discuss step by step exactly how I set up their system. 

The first step I took was to determine all of the individual components that are associated with the final product. It is a little bit more complex than what I mentioned earlier, so I’ll break it down in more detail. Each mailing kit involves the following raw materials: 

1 letterhead

Black Toner

2 blank pieces of paper

Color Toner

1 Booklet A

1 Booklet B

1 Booklet C

And sometimes the kits require an additional 30 pieces of blank paper AND

1 Booklet D 

The second step I took was to determine the lead times of each of these raw materials. Right now these are estimates. The manager in charge of ordering the materials has informed me that he does not know how long it takes for him to order and receive shipments on any of his supplies except paper and toner. His best estimate for the other supplies was that the lead time was approximately a week and a half.

That's about all the information they were able to give to me on the first day, so I think that's all I give you.  Part II, which will be published on July 28th will discuss the collection and analysis of the demand data.