September 09, 2006

That's a lot of SKUs!

Not so recently - sorry for the delay! - I received the following question in response to one of my articles:

We have over 2000 parts in inventory. Rather than calculcating the EOQ with the formula, which I do not have time to do, I want to use the "rough estimate." What are the factors that go into the material's "actual value per year?

Dave brings up an interesting point - What to do when there are so many SKUs?

So many parts, so little time, eh Dave?  EOQ 2000 times in a row...blah!  I mean seriously, is it even worth the effort?

Is it worth the effort?
This is the question you need to ask yourself. Unfortunately, finding the answer to this question may be harder than just doing the damn work, so now what are you supposed to do?

To answer this, I have 3 suggested solutions:

1.  Maybe it is worth it.

Possibly, there are enough savings that can be found in reducing holding costs for each individual part that performing EOQ calculations for each part is actually worth the trouble.  I mean, on a case by case basis, you'll probably become quite good at evaluating the holding costs and from there, it's a simple matter of plugging the variables into the equation.  The result could be cost savings of 10% per year.  Maybe it is worth it to repeat 1999 times.

Maybe not.  Also, if it worth those savings, maybe buying a software package or hiring a consultant is a better option.

2.  Rough estimate may be more your style.

Chances are, holding costs are similar for certain types of products.  My suggestion (if you really want to cut corners) is to group products that your gut feeling tells you have similar holding costs properties and similar ordering costs.  Hopefully, they even have similar in demand.  Build an Excel spreadsheet and make the program do most of the work for you.

But...rough estimates are a waste of time if you ask me.  Either it's worth it to get a decent idea of what EOQ should be or it's not worth it.  Currently I'm in a situation where it's not worth it...lucky me.

As for what factors go into a material's actual value per year, it varies.  Luckily I wrote a whole article on what goes into holding costs.

3.  Pay someone to do it.

Like I said earlier, get a software suite and a consultant to implement it.  If you have 2000 products, you're probably big enough to warrant the help.

Similar to what you're doing now (although reading this is a much smaller scale compared to what's out there for purchase), stand on the shoulders of giants and buy your way into the vast quantities of inventory management resources and gurus.

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WHy not start with 20-80 classification? to start with the most valuable items, which is enough to make a decision

Posted by: zongyou73 | Sep 18, 2007 2:50:03 AM

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