Over the last several months, we have been discussing barriers to achieving lean inventory management. That is, having inventory arriving “just in time” when it is needed by a customer or for use in an assembly or repair. Successful lean distribution is dependent on two factors:
• Known future demand of products
• Consistent lead times for the delivery of replenishment shipments
Last month we discussed problems involving inconsistent lead times. This month we will discuss what happens when customers’ exact needs are not known in advance; that is, when we cannot accurately forecast future demand of products. Inaccurate forecasts are usually the result of:
Sporadic Usage – These are products that are not sold or used on a regular basis. It is very difficult to predict when this item will be needed. Often, more than half of a distributor’s stocked products experience sporadic usage
Erratic Usage – The quantities sold or used of these products significantly vary from month to month.
The average monthly usage of an item with sporadic usage is often less than the normal quantity sold or used in one transaction. Here is an example of the usage of an item with sporadic sales:
Jan Feb Mar Apr May Jun Jul Aug Sep
12 10 14
The average monthly usage is four pieces (36 pieces ÷ 8 months = 4.5 pieces per month). However it appears that customers buy 12 pieces at a time. Doesn’t it make sense that sporadic usage items should be maintained in inventory based on a multiple of the normal quantity sold or used in one transaction?
We have found that the normal quantity sold or used in one transaction can be determined by using the largest of four averages:
• Mean Hit Average = Total Usage over the Past 12 Months ÷ Number of Orders Recorded Over 12 Months
• Adjusted Mean Average = Total Usage over the Past 12 Months ÷ Number of Months with Usage during the Past 12 Months
• Median Average = The “middle value” after non-zero usage quantities are sorted in ascending order
• Mode Average = The most common non-zero value
More than one multiple of this normal order quantity may be maintained in inventory because of:
• An extended lead time for replenishment
• Frequency of sale (e.g., the item sells four or six times annually rather than once or twice a year)
• The cost of the item (i.e., you may decide to keep more of a less expensive item in inventory)
• The item is critical to operations (i.e., lack of the product might shut down a critical process or operation)
Again, more than half of a distributor’s stocked products experience sporadic usage. Stocking them based on a multiple of the normal quantity sold or used in one transaction will ensure that you maintain your reputation as a reliable supplier.