11/04/2020

Managing By Exception – Part IV, Focusing on The Most Important Situations

Presented by: Jon Schreibfeder, President, Effective Inventory Management, Inc.

A few months back we discussed the importance of reviewing unusual usage at the end of each month or week. That is examining situations where your forecast of future demand was substantially different from the quantity actually sold or used. Many of you contacted us and asked about making the best use of the time you have available to work on this important task. This month we will discuss how to focus on the situations that most need your attention:

• Sort items to be reviewed by product rank (based on “hits”). A “hit” is a customer request for a product, regardless of the quantity ordered. Whether someone asks for one piece, 10 pieces or 100 pieces of a product it is still one hit.  You want to focus first on products that are requested most often.  Though “A” ranked products are normally responsible for 80% of hits, they typically represent no more than 10% - 13% of your normal stocked items.
• Define the characteristics of items you want to review. How much greater (or less) than the forecast does usage have to be in order to be listed on the report or inquiry.  While a high percentage of 100% and a low percentage of 50% work well for products frequently requested, they probably don’t accurately reflect possible unusual activity for low usage items.  Consider a product whose forecast for the inventory period was one piece.  If we applied the high percentage of 100% and the low percentage of 50%, this item would appear on the unusual report or inquiry if actual usage was greater than two pieces, or less than one piece.  The result would be a cluttered report listing far too many products than a buyer could review in a reasonable length of time.

Here are some typical parameters for defining high and low activity:

• Within each rank, products whose usage is greater than the high percentage limit are listed in descending order based on the percentage difference between the forecast demand and usage. The product whose usage exceeded demand by the highest percentage will be listed first. Then, within each rank, products whose usage is less than the low percentage limit are listed in ascending order based on the percentage difference between the forecast demand and usage. The product whose usage fell short of anticipated demand by the largest percentage will be listed first.

Organizing your unusual usage review in this way will assure that you review the most important situations first. And if you don’t have time to look at every single instance of unusual usage, at least you’ve addressed those situations that will have the greatest effect on customer service.