Sorry, I have been so bad at blogging. I started my master’s program and my little one is enrolled in my activities running me around like a mad man. I ran across this article which reiterates some of the madening assumption I constantly had to fight against.

Inventory Management – Knowing the Formulae is the Easy Part!

Does it really matter if you do or do not understand all the formulae that are used in inventory management? Does it matter if you know or don’t know how to calculate the Reorder Point or the Reorder Quantity for individual SKUs? How many people do you know that don’t bother to learn these formulae when they use software to manage inventory? Or they don’t even seek to understand what algorithm the software applies for the calculations? Surely knowing these things is the starting point for anyone charged with inventory management.

What if you do know the formulae, is that enough to make you an expert manager? Many people seem to think so but is it really enough to enable you to improve your materials and inventory management results? In my opinion it is not.

Certainly, it is worthwhile understanding the basic formulae and elements of materials and inventory management but, as in many situations, the real value comes from looking beyond the basics and understanding the implications of the choices that are made regarding the variables used in any formula.

Anyone can look up a formulae on the Internet or read them in any number of books on the subject (and I encourage those that don’t know the basics to do so) but it is an understanding of the nuances in the variables that provides the real value. Too often people take the basic concepts and formula and do not think through the complicating factors when implementing the concept or formula. This does not mean that we need to make things overly complex; it just means that we need to understand the implications of our choices.

My criticism of people in industry is that they can somewhat blindly apply formulae without thinking about the implications of their choices in the variables that are used. They tend to think that knowing a formula is the smart bit but, in my view, that is the easy part. The smart part is to understand and manage the implications of the choices that are made.

For example, in the ROQ calculation, I think that one of the most contentious values is the cost of placing/processing the order and this needs to be better understood as the calculation is quite sensitive to variations in this number. Here is an example.

The classic formula for calculating the ‘economic’ ROQ is as follows:

ROQ = SQRT((2 x Order Cost x Demand Rate)/(Item Cost x Holding Cost p.a.))

SQRT = Square Root
Order Cost = the company internal cost for processing requisitions, issuing purchase orders and receiving deliveries.
Demand Rate = the expected demand over a year.
Item Cost = the purchase cost of the item, including delivery costs.
Holding Cost p.a.= the financial charge for holding inventory

Now, let’s assume that:
Order Cost = $50 per order
Demand = 1,000 per year
Item Cost = $10 each
Holding Cost = 25% per year

ROQ = SQRT((2 x 50 x 1,000)/(10 x 0.25))
= 200

Therefore, the ‘economic’ ROQ is 200 items.

Now, let’s look at the impact of changing the Order Cost. Assume that we change the Order Cost to $100 and all other variables remain the same, then

ROQ = 283

So, if an order cost of $100 per order is used the ‘economic’ ROQ will be calculated to be 283 items – approximately 41% higher than if an order cost of $50 is used. This simple change in a variable has increased the reorder value of this item by 41%!

Image the effect on your total inventory value if you do not understand the impact of the choices you make with these and other variables. Just knowing the formulae is the easy part!


June 11, 2009 Aggressive Supply Chain Transformation at Home Depot How do you rapidly transform a supply chain culture and pack 10 years worth of system, network and process changes into just three? That’s exactly what Home Depot is in the process of doing, and so far the effort is working just fine. In April, Home Depot’s public relations group reached out to SCDigest to see if we were interested in better understanding the massive transformation the company was making in its supply chain. The general story is pretty well known, and we have reported on it ourselves several times, from when Mark Holifield, Sr. Vice President of Supply Chain for the retail giant, made a presentation unveiling the strategy in Q1 2007 as part of the company’s quarterly earnings report. Gilmore Says: If Home Depot can get that inventory turn number up by just 1, from 4 to 5, it means $1 billion in annual cash flow improvement. What Do You Say? Click Here to Send Us Your Comments Click Here to See Reader Feedback I subsequently sat down with Mark once in Atlanta and, then again, by phone a couple of weeks ago to dig into the details. Interesting and related side note: I was first introduced to Mark when he had a similar role at Office Depot. He wrote a feedback letter on my column on “The 50% problem,” which, in quick summary, argues that most companies believe their performance is better than it is. Holifield agreed, and sent a link to a magazine article supporting the same principle. I intersected with him a few times after that at the Georgia Tech Supply Chain Executive Forum. That feedback letter is related, because Holifield was very frank about Home Depot’s supply chain position in 2007. “We knew we were behind, and the supply chain was a competitive disadvantage for Home Depot,” Holifield told me. “We looked at how quickly we could eliminate that gap and ultimately make the supply chain a true competitive advantage for us.” Home Depot’s challenges, as is often the case, in general resulted from a supply chain that was built to fit one mission and set of realities, but which hadn’t evolved as Home Depot’s world had changed. At the beginning and middle of Home Depot’s massive growth, stores often did as much as $80 million in sales per location. Now, as a result of store expansion and competition, stores may do $40 million in sales. That’s still a giant number, but one that changes the inventory dynamics substantially. The other factor was that the focus on rapid growth in the store network ultimately slowed, as it inevitably must for all retailers. That means the focus has to evolve, at least in part, from expansion to execution – and that meant the supply chain model had to change. “About 75 percent of our inventory two years ago was delivered direct to store from suppliers,” Holifield says. That included about 60 percent truly direct to store, and then another 15-20% through LTL-type pool points that operated much like direct store delivery. Only 20% or so went through Home Depot DCs. Combine that with a very store-centric ordering and replenishment process, and the results were high transportation and inventory costs, and some issues with out-of-stocks. “The rumor when I got here was that 37,000 people at Home Depot could place orders to send inventory to the stores, and I think that was about right,” Holifield says. So, plans for a massive transformation. First, a network optimization study, performed in just a few months using a commercial tool but with just in-house talent. That study clearly showed the opportunity to rethink Home Depot’s massive network, which even with all the direct store delivery included dozens of facilities for the LTL pooling mentioned above, lumber DCs, import warehouses, and more. “For a company with 75 percent direct store delivery, we sure had a big logistics infrastructure,” Holifield says. The analysis showed the opportunity to “flip the ratio totally on its head” – move to a DC-centric model in which some 75 percent of goods would be shipped to stores through a new generation of flow-through DCs, or what Home Depot calls “Rapid Deployment Centers” (RDCs). Of course, there is nothing new about flow-through in retail distribution, although unlike most, these RDCs do nothing but flow-through. A relatively small amount of non-flow through replenishment will be performed at some of the existing “carton DCs” that had been in place for some time. “We were late, but I think we have some last mover advantage, leveraging today’s technology, to actually do some leap-frogging,” Holifield told me. In parallel, the company is moving to a much more centralized inventory management and replenishment model, with some 70% of inventory being handled that way, versus the de-centralized model of the past. The real story, however, is the speed and urgency with which this program has been tackled. “It’s the most aggressive supply chain transformation program I have ever seen,” Holifield says. “Fortunately, we have some tremendous assets here at Home Depot, some very talented people, and we now have the real drive to make this happen.” From one pilot RDC in 2007 to work out the details, the company has now rolled out six in the past 15 months, the latest one just recently in Valdosta, GA. Incredibly, the goal is to commission some 14 more RDCs, or about 20 in total, by the end of 2010, serving 100% of Home Depot’s North American stores. That is quite a pace, facilitated by three full-time teams working on the roll-outs, which are of course all in various stages. “I tell people we are looking to hire that if you are interested in being an RFID leader or use the latest wiz-bang technology, you aren’t going to find it here,” Holifield says. “This is a place you are going to learn about making a radical supply chain transformation in a huge, established company, with a culture very store-centric, in a way that services stores well, and to manage a big time growth spurt in supply chain thinking and execution in very short time. You can apply that to any business.” The payoff will be huge. First, Home Depot’s inventory turns right now are about 4 per year, largely due to the massive inventories each store needs. Some 70% of items average less than one sale per store per week. “You might have some consultant say “Cut those SKUs,” but they don’t understand our mission is to be in stock in every little part you need to complete your project, and if we get to a mass merchant view of inventory, we would have lost that mission.” The challenge is to keep that strategy, but do it much more efficiently. If Home Depot can get that inventory turn number up by just 1, from 4 to 5, it means $1 billion in annual cash flow improvement. That’s a big number even for a company with some $70 billion in annual sales. However, the tough economy, which has been even tougher on home improvement retailers, isn’t helping. “I can tell you we will get there [inventory turn improvement], I just can’t tell you when yet,” Holifield says, because of the uncertainties on the economy. As always, the cultural change is the hardest part of the transformation. Executive management and the board have been exceptionally supportive, Holifield says. “I had a real mandate to make substantial supply chain improvements.” As for the troops, “It was a constant battle early on. You win one heart and one mind at a time,” Holifield added. The key is showing results, especially to the stores. “When you demonstrate you can reduce out-of-stocks while improving inventory turns at the same time, you make believers,” he says. In fact, Holifield believes “Home Depot is really on its way to becoming “a supply chain company,” which is a big shift for us,” he says. “Now, we are reaching parity, but we are confident we can move to being truly advantaged with our supply chain.”

Understanding Cross-Docking

June 1, 2009

Understanding Cross-Docking

Click Here To Download:
Article: Understanding Cross-Docking

By Vivek Sehgal, Supply Chain Musings

Supply chain management is all about flows. Material flowing through warehouses is no exception. Conventionally the warehouses were set up as inventory buffer points along the supply paths so that demand fluctuations across the network could be smoothed. That provided stability to the planning and operations of the supply chain.

But, better technology, integrated systems, and near real-time information exchange have all made it possible now to operate the warehouses more efficiently. Where the product and demand attributes allow, it is possible to leverage cross-docking opportunities and reduce the inventory buffers at the warehouses.

Cross-docking basically involves receiving the merchandise at the inbound docks and then shipping it out shortly after without the need to stock it at the warehouse. If planned and executed properly it saves the intermediate disposition, storage and order fulfillment tasks in the warehouse. Well planned cross-docking operations save resources across the board, at the warehouse like labor, space, and equipment; and also technology resources by simplifying the process.

When reviewing a supply chain especially under economic turmoil we can get lost on what to do first. This article articulates a clear strategy to mapping and identifying areas of improvement while determining and developing partnership strategies with upstream suppliers to build and  fully review all areas of improvement.

This article is interesting as it proposes that the integrated supply channels adoption of lean manufacturing systems increases the whip effect through the supply chain taking inventories to low and actually causing sales loss with stock outs.The recessionary pressure by definition creates lack accurate forecasting subsequently causing manufactures to conservative drive inventories down. With less on hand inventories and more flexible manufacturing systems in place today the adjustment has caused a huge drop in available inventories. Best Buy COO reiterates that especially in the electronics industry that proper inventory management and profiling are key in maximizing sales. This becomes even more difficult in the short life cycle of the electronics industry.

great read on supply and inventory strategies on handing the excess of inventory on the PC and handset market. Poor OEM’s have huge inventory in house and at subcontractors really crippling there ability to adjust to future market growth. These subcontractors like solectron and sanmina will pressure OEM’s to return product or allow a write off for credit from them creating further downward pressure on financial performance (called write downs). The article emphasizes how important inventory management and control can really be an advantage if down correctly. So supply managers out there time to shine

People and Talent Supply Chain Management

People are what makes organizations work or in some cases not work. How many times have the actions of one person in an organization either made you loyal to that company or swear to never do business with them again? Just as supply chain is all about getting the right product to the right place at the right time and at the right price, the talent supply chain is all about getting the right people in the right jobs with the right skills at the right time and right price.

Building The SCM Company is all about the application of supply chain management methods to all aspects of a company’s business and the talent supply chain is no exception. Just as in supply chain management you begin with an inventory of your current human resources within the firm and the skills and attributes of those people. It’s then time to do some future planning relative to what your needs will be by location in three to five years. This will become your forecast for the talent supply chain in your firm but only represents the beginning of the full application of supply chain management principles to ensure the future health and stability of your workforce.

Once you know your future requirements and when these new people are required, forecasting, planning and management of your talent supply chain can then begin. Please note that supply chain management is a numbers game and the analysis and management of all the people in the talent supply chain is not meant to in anyway downplay, degrade or dehumanize the people of an organization. The intent is to ensure that The SCM Company always has the right people in the right numbers with the right skills to best match the company’s business strategy now and into the future.

Beyond application of SCM concepts within your own company, as SCM professionals will know, forecasting success, accuracy and supply chain performance increases greatly with aggregation and can be so applied by combining the human resources and development needs of a number of organizations which will not only provide better results for individual company talent supply chain performance but also reduce the cost of maintaining this readiness.

All of the SCM concepts and methods also apply to the successful management of the Talent Supply Chain. Procurement of the right people with the right attributes/skills through hiring at a cost the organization can bear. Lead time application for hiring to ensure that when people leave through retirement, illness or other cause that there is not a shortage or critical human “out of stock” condition in your organization.

It is important that business planners understand these lead times and communicate future potential needs with enough time for the Talent Supply Chain Manager to react and deliver effectively. You can see how especially in this instance, using the Classical Re-Order Point method of replenishing your people could be problematic, whereas implementing a systems driven Distribution Resource Planning methodology incorporating the above nuances, and even more up to and including neural network inputs, can give your SCM Company a competitive advantage and unmatched resilience. In conjunction with applying SCM Company methods and measurement to all facets of the organization our goal is to take another step forward in the evolution of modern organizations providing stability, adaptability and resilience in the face of the accelerating change within our world.

People and the Talent Supply Chain is the first in a series of articles entitled “The SCM Company” and these articles are intended to lay the groundwork for a future book of the same name. If you have input, feedback or wish to perhaps become involved in this project feel free to ASK.


Jeff Ashcroft