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Archive for September, 2010


We all wonder from time to time about some intriguing words used in Inventory/Materials Management function.  I picked-up some unique, some common, some uncommon words from the glossary published by The Institute of Logistics and Transport, UK and furnished the same hereunder.

ABC Classification The classification of inventory, after ABC analysis, into three basic groups for the purpose of stock control and planning. Although further divisions may be established, the 3 basic categories are designated A, B and C as follows:
A Items – An item that, according to an ABC classification, belongs to a small group of products that represents around 75-80% of the annual demand, usage or production volume, in monetary terms, but only some 15-20% of the inventory items. For the purpose of stock control and planning, the greatest attention is paid to this category of A-products. A items may also be of strategic importance to the business concerned.
B Items – An intermediate group, representing around 5-10% of the annual demand, usage or production value but some 20-25% of the total that is paid less management attention.
C Items – A product which according to an ABC classification belongs to the 60-65% of inventory that represents only around 10-15% the annual demand, usage or production value. Least attention is paid to this category for the purpose of stock control and planning and procurement decisions for such items may be automated.
Bill of Material A listing of components, parts, and other items needed to manufacture a product, showing the quantity of each required to produce each end item. A bill of material is similar to a parts list except that it usually shows how the product is fabricated and assembled. Also called a product structure record, formula, recipe, or ingredients list.
“Control Group” Cycle Counting The repeated physical inventory taking of a small “control group” of parts, in the same locations, within a very short time frame to verify the design of a new inventory process. It is the only form of cycle counting not truly used to measure inventory record accuracy.
De-Coupling Stock Inventory accumulated between dependent activities in the goods flow to reduce the need for completely synchronised operations
Economic Order Interval (EOI) In fixed order interval systems, the interval between orders that will minimise the total inventory cost, under a given set of circumstances, obtained by trade off analysis between the cost of placing an order and the cost of holding stock
First-in, First-out (FIFO) 1. Stock Valuation – The method of valuing stocks which assumes that the oldest stock is consumed first and thus issues are valued at the oldest price.
2. Stock Rotation – The method whereby the goods which have been longest in stock are delivered (sold) and/or consumed first.
GUS Classification A classification of products into three categories for the benefit of goods flow control and stock control, based on a products area of application within a product division.
G = General products that may be required in several main article groups or operations centres and are administered centrally in the division
U = Unique products that are used uniquely in one main article group or operations centre but in several of its products, and administered locally in the division
S = Specific products that are used exclusively in one higher level product, and whose procurement is effected per individual order
Holding Cost The cost associated with holding one unit of an item in stock for one period of time incorporating elements to cover: Capital costs for stock; Taxes; Insurance; Storage; Handling; Administration; Shrinkage; Obsolescence; Deterioration.
Independent Demand A classification used in inventory control systems where the demand for any one item has no relationship with the demand for any other item and variations in demand occur because of random influences from the market place
Just-in-Time JIT A dependent demand inventory control philosophy which views production as a system in which all operations, including the delivery of materials needed for production, occur just at the time they are needed. Thus, stocks of material are virtually eliminated.
Kanban A simple control system for coordinating the movement of material to feed the production line. The method uses standard containers or lot sizes with a single card attached to each. It is a pull system in which work centres signal with a card that they wish to withdraw parts from feeding operations or vendors. Loosely translated from Japanese, the word “Kanban’ means literally means “billboard’ or “sign”. The term is often used synonymously for the specific scheduling system developed and used by Toyota Corporation in Japan.
Last-in, First Out (LIFO) 1. Stock Valuation. The method of valuing stocks which assumes that all issues or sales are charged at the most current cost but stocks are valued at the oldest cost available. 2. Stock Rotation. The method whereby the goods which the newest goods in stock are delivered (sold) and/or consumed first.
Materials Management The planning, organisation and control of all aspects of inventory embracing procurement, warehousing, work-in-progress, shipping, and distribution of finished goods.
NDC National Distribution Centre. Centralized distribution warehouse depot serving the whole country
Obsolescent Stock Parts which have been replaced by an alternative but which may still be used until stock is exhausted.
Perpetual Inventory System An inventory control system where a running record is kept of the amount of stock held for each item. Whenever an issue is made, the withdrawal is logged and the result compared with the re-order point for any necessary re-order action.
Quarantine Stock On-hand stock which has been segregated and is not available to meet customer requirements.
Rotable An repairable inventory item that can be repeatedly restored to a fully serviceable condition and re-used over the normal life cycle of the parent equipment to which it is related. Such items have a repair lead time as well as a procurement lead time and normally have a serial number that is retained throughout the rotable life regardless of the extent of replacement of its component parts.
Service Level The desired probability that a demand can be met from stock (for an individual item, group of items or a system) which can be expressed in a number of ways:
Percentage of orders completely satisfied from stock.
Percentage of units demanded which are met from stock.
Percentage of units demanded which are delivered on time.
Percentage of time there is stock available.
Percentage of stock cycles without shortages.
Percentage of item-months there is stock available.
Total Acquisition Cost (TAQ) The sum of all the costs to an organisation of carrying an item in stock including reorder, carrying and shortage costs.
Unit Cost The cost to an organisation of acquiring one unit, including any freight costs, if obtained from an external source or the total unit production cost, including direct labour, direct material and factory overheads, if manufactured in-house.
Vendor Hub Third party operation of a warehouse, funded by suppliers, containing Vendor-Owned stock for delivery to a customer.
Working Stock The stock of materials, components and sub-assemblies (excluding safety stock) held in advance of demand so that ordering can done on a lot size rather than on an as needed basis. In other words, the normal stocks formed by products arriving in large regular orders to meet smaller, more frequent customer demand. Also known as cycle stock or lot size stock.
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York antwerp Rules A set of rules in marine insurance relating to the adjust of general average
Zero Inventories Part of the principles of just-in-time which relates the elimination of waste by having only required materials when needed.
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on behalf of a third party

Image by Lєaтнєянєaят via Flickr

At the outset I would like to clarify that this article is not going to deal with outsourcing risks.  The focus is on Supply Chain risks in an outsourced environment.  Risk in managing supply chains is high due to several reasons such as Terrorism, Shrinkage, Quality, Natural disasters, IP Thefts, and Vandalism etc.  The risk magnifies if the some or total operations are outsourced. Twenty five percent CAPGEMINI 2010 outsourcing survey participants have indicated that loss of control as one of the reasons for not outsourcing.

In order to outsource and to mitigate the supply chain risks collaboration becomes very critical in an outsourced environment.  According to CAPGEMINI 2007 report practitioners reveal a gap between the desire to work collaboratively with 3PLs and how to go about it. Collaboration means equal participation whereas 35% of the CAPGEMINI 2005 survey participants have indicated that the time and effort spent on managing Logistics functions not reduced.  This could mean practitioners believe that outsourcing means total responsibility transfer to 3PLs and no participation or minimal participation from their side.  Outsourcing means handing over the control over operations to a third party but the ownership rests with the outsourcing companies and they cannot disown the responsibility. One should clearly understand that the outsourcing is confined to activity but not the function.  The functional responsibility rests with the outsourcing company and they may have to execute the activity in collaboration with the service provider.

Time and again shippers (outsourcing companies) repeatedly pointed out that 3PL (third party logistics) companies do not have the project management capabilities and they fail during the transition due to lack of industry specific knowledge and also due to lack of process integration capability across supply chain. These teething issues if not addressed properly could lead to relationship failures.  Hence, the problem is not supply chain risks but the lack of collaboration in tackling the issues.  In order to highlight the seriousness of the issue, I reviewed the last five CAPGEMINI outsourcing surveys and the trend indicates consistency.

In my opinion, top three reasons that could lead to supply chain risks in an outsourced environment would be lack of project management skills, unsatisfactory transition and lack of knowledge based skills.  Surprisingly the feedback over the last five years was consistent and we see 20% improvement in case of knowledge based skills.  This could be due to more skilled force joining 3PL companies and we have seen recently 3PL companies recruiting practitioners as subject matter experts and to manage the projects.  What is disturbing is that on an average 15% survey respondents have indicated that 3PLs are unable to form meaningful and trusting relationships.  In my opinion this is a cause of concern.  The recent survey conducted by CAPGEMINI (2009) indicated that only 25% of the shippers felt that the outsourcing is “extremely successful” and further 64% participants felt that outsourcing is “somewhat successful”.   If the outsourcing community is not totally happy with the outsourcing outcomes or performance, managing risks through collaboration could become a serious issue.

How secure are the shippers about the security provided by 3PL companies?

The 2008 CAPGEMINI survey did indicate that majority of the respondents are comfortable with the security arrangements.  Around 22% have indicated somewhat secure and 2% indicated that not secure.  Supply Chain security is paramount and even if 2% were unhappy, it needs immediate attention.  These risks could lead to major customer satisfaction issues.  That could be the reason why 25% non-outsourcing respondents (2009 survey) indicated that they do not outsource due to loss of control over operations.  Some of the serious security breaches indicated in the 2008 survey included the following:

  1. In one case, 2GB branded USB sticks were replaced with 1GB but appeared as 2GB to users.
  2. Another case involved falsified Italian airplane parts that were later rumoured to have contributed to accidents.

Supply Chain security is critical to all industries but it is vital for some specific industries where any security breach could be life and death question and the example could be food contamination.  58% Food and beverages industry respondents in 2008 survey indicated that spoilage of food products creating a health risk as the biggest risk. The above mentioned survey did indicate that 3% Food and Beverage industry respondents were not secure about the arrangement, which is really a cause of concern.  Tampering was reported as the second biggest threat (45%) for life sciences and pharmaceutical companies.  This is also a life threatening risk.

Type of Supply Chain Risks:

One can divide the risks into two categories, the first one dealing with 3PL operational efficiency related risks and the second one dealing with generic supply chain risks. The trends reveal some interesting facts.

The top three risks, theft of material, material tampering and theft intellectual capital were predominant in Asia compared to global trends.  The risk of terrorist attacks and the disruptions due to natural disasters are the two top risks in North America.  Whereas Latin America faces serious supply chain risks from, smuggling of other material with the shipments, Vandalism and Spoilage of food products leading to health risks.  Europe is a mixed bag, it also faces all risks but the thefts and thefts of Intellectual capital are over and above the average global percentage.

The first three supply chain risks identified as 3PL operational efficiency related risks are quite common even in insourced operations.  As warehousing and distribution function is a non-core activity for many organizations, organizations should work in collaboration with the service provider to minimize the risks and operational disruptions.

Enhance Supply Chain Security:

Risks are inevitable and outsourcing is unavoidable (encouraged due to various benefits of outsourcing).  Hence, it is necessary to enhance the supply chain security with the help of service providers.  CAPGEMINI 2008 survey identified 12 enhancements and the participants have identified gaps in enhancing the security.  The below given chart is developed based on the data published in the above mentioned survey:

If we review top three gaps, any one would understand that it is not a challenging task to improve security.  What is lacking is proactive approach from both the shipper and the service provider.  Lack of proactive reporting with regard to thefts or any other risks is the biggest complaint by the outsourcing community and this continues to haunt the 3PL industry even today.  In most of the cases, the customer (shipper) gets to know first about the incident.  This is really frustrating for the practitioners.

RFID tags are virtually impossible to copy, making them suitable to security applications. According to “The pros and cons of RFID in supply chain management” article the cost of goods lost within supply chains among the European companies was 50 Million euros a day and the same report indicated that up to US$30 billion worth of goods are being lost each year within supply chain.  However, recent development are encouraging, one of the biggest retailer (Wal-Mart) introduced mandates for RFID adoption.

Providing alternative routing for shipments is a possibility.  However, in the peak seasons such as Christmas and Chinese New Year time it would be next to impossible for rerouting keeping in view of very limited options.

Collaboration:

Collaboration is all about working together.  The CAPGEMINI 2008 survey published how the shipper and service provider are collaborating by industry.  What is heartening to note is that 48% shippers are willing to collaborate with the service provider to enhance the supply chain security to a limited extent.  Retail dominates this segment (57%), followed by Life Science (51%) and Chemical (50%).  Thefts are very high in retail whether the operations are outsourced or insourced and life science and chemical industries face more risks if they fail to collaborate with the service providers to achieve selected security improvements.  The 2008 CAPGEMINI report indicates that the higher the company’s revenue, the more likely they are collaborating beef up security measures.

Supply chain efficiency is the back bone of organizational excellence.  According to one estimate supply chain disruptions could result in 40 percent decline in share price.  Prof. Vinod Singhal of DuPree College of Management, Georgia Institute of Technology indicated that material shortages could contribute 7.5% reduction in share value on a given day.

Today’s business success to great extent depends on logistics and supply chain performance and the role of Supply chain has never been as critical as it is today. Supply Chain speed and flexibility have become two key levers for competitive differentiation and increased profitability. In order to compete effectively in the market place Supply Chain managers drive cost improvements and that could lead to some supply chain risks.

“Many of the key risk factors have developed from a pressure to enhance productivity, eliminate waste, remove supply chain duplication, and drive for cost improvement,” says William L. Michels, CEO of consulting firm ADR North America, Ann Arbor, Mich.

Today’s supply chain professionals recognize the risk as part and parcel of supply chain management and at the same time outsourcing is also inevitable.  Hence, the trick lies in identifying the risk and mitigating the same with the help of supply chain partner.  Proactive approach and collaboration minimizes the risk element in Supply Chain.

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Some time ago, we have reviewed the Warehouse KPIs and it time now to review the best-of-breed performance in order to bench mark the warehouse performance.  The data source is from DC Measure 2010, by Karl B. Manrodt, PhD and Kate L. Vitasek, published by WERC 2010.

The respondents were drawn from large corporations, medium size organizations and small industries.  The classification was based on company’s turnover.  The first group (31.9%) turnover is over 1 Billion US $, the second group (30%) consists of companies with turnover between 100 Million and 1 Billion US $ and the third group (38.15%) consists of companies below 100 Million US $.  In my opinion the grouping is balanced.

Some of the vital Key Measures:

If we review the top 10 metrics used by the companies (listed below) one can clearly understand how the focus has shifted to warehouse activities in order to improve overall supply chain efficiency.  All the below mentioned top 10 supply chain measures used by the survey participants are pointing towards operational efficiency.  It is a foregone conclusion that if we improve the efficiency/ productivity / cycle time, the overall operations cost would become efficient.

I have been monitoring the key measures for the last five years and I will highlight the improvement or decline in the performance level.  For the purpose of this article, I would be focussing on best-in-class performance, median performance, and the worst performance.  The logic is to understand the best performance and facilitate benchmarking.  The median performance will act as guidance for companies who cannot perform at the best-in-class rate and would continue to focus on improvement using median performance as a guide.  The worst performance is again used as an indicator for recognizing unacceptable performance.

I have divided the measures into five categories based on the nature and characteristics of the activity, the first one focuses on operations management, the second one deals with Inventory Management, the third one concentrates on Order Management, the forth one aims at Cost Management efficiencies, and the fifth one highlights Resources Management efficiency.

Operations Management:

I have included receiving, put-away, pick-n-pack and shipping activities.  In my opinion, Damage free receipts, Order pick accuracy, Cases and Pallets picking rate, complete order shipment and Damage free shipments indicate the operations management efficiency.

Please click the above graphic to magnify the image.

When we compare with 2009 best-in-class performance; dock-to-stock cycle time (23.33%) and cases picked and shipped per hour (12.11%) registered improvement in performance.  We have seen negligible efficiency improvement in handling material without damages.  We have seen decreased productivity levels in orders and pallets picked in an hour.

Inventory Management:

Inventory efficiency is the key indicator for Supply Chain efficiency, Inventory Shrinkage, Inventory in days of supply and Raw material and finished goods inventory on hand in days are considered as critical measures.  It is necessary to understand the difference between Inventory in days of supply and raw material and finished goods inventory on hand in days. Inventory in days of supply is calculated as shown below:

= Current (at the end of year/period) inventory value/ Total value of cost of goods sold.

Inventory in days of supply (13.64%) and Raw material in days (12.5%) shown improvement in 2010 compared 2009 results and this could be considered as tight inventory management as focus is to reduce inventory in the supply pipe.  We have seen 12.86% additional finished a goods carrying which is not in line with above two inventory performance indicators, this could also indicate lacklustre demand patterns noticed in the retail industry which could have caused additional inventory carrying.  Considerable (60%) improvement was noticed in case of product damages in the median group.

Order and Cost Management:

Order fill rate, Lost Sales, Distribution cost to sales are the key performance indicators in this segment.

Lost sales % and back order % has shown tremendous improvement in the best-in-class group.  This is an indication of supply efficiency.  As we all know both these performance indicators are interlinked.  The distribution cost has gone up by 20%, which could be due to low sales volume in $ and fixed warehouse costs.  Whereas the distribution cost per unit shipped has improved by up 94%, this is an indication of increase in number of units shipped but the sales value decreased; this could mean increased product discounts.  There was no increase in distribution cost in median group.  However, in-line with best-in-class results, we could notice improvement in cost of units shipped indicating increase in volume of units shipped.

Resources Management:

This is my favorite segment.  I strongly believe that time related positioning of resources is logistics management and logistics is part of supply chain.  Any improvement in this segment, I believe will have a direct impact on supply chain efficiency.  Warehouse Capacity utilization is an indication of business efficiency.  Equipment utilization and Human Resources turnover indicates how well warehouse operations are managed.  Last but not least workforce productivity is the proof of happy workforce.  In my opinion, happy workforce will contribute high productivity.  In order to achieve this both workers and management are equally responsible.  I am sure by this time you would have understood why this segment is my favourite.

Honey Comb %: Actual cube utilization/Total warehouse cube positions available.

All in all we have seen improvement in all performance measures.  There is a slight (3.16%) dip in the workforce productivity.  However, HR turnover has shown some great improvement. These two measures analysed together reflect the impact of financial recession.  We have seen salary cuts and uncertain job market.  I believe these two factors could have influenced these performance indicators.  However, we could see improvement in case of productivity levels in median group to an extent of 2.35%.  Any improvement in productivity irrespective of the quantum is always welcome and it is a good sign.

I would like to emphasize once again that warehouse operation is the key to the success of any supply chain.  Unless product moves seamlessly within supply chain, no supply chain would be successful.  This is a great job by the authors; I look forward to reviewing 2011 performance.

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gold-bars-stock-pile_MkA2QFrO

In my opinion, optimization means maximising the return at a given risk level or risk is minimised for a given expected return.  The two key elements that dominate the meaning of optimisation are the risk and ROI.  Now Inventory Optimisation means maintaining a certain level of inventory that would eliminate the out-of-stock situation and at the same time the cost of carrying inventory is not detrimental to the bottom line (ROI).  In simple inventory optimisation means balancing demand and supply.

Inventory is the largest single asset that most companies have. Unfortunately, it consumes space, gets damaged, and sometimes becomes obsolete and carrying surplus inventory costs the organisation.  Despite well-documented studies that have proven a 77% correlation between overall manufacturing profitability and inventory turns, manufacturers and traders by and large have acted with ignorance and carried excess inventory to please customers.  Today’s customer thinking is totally different and they suffer from the problem of plenty and the gratification is instant.  They do not have the patience to wait for the product, they don’t mind considering other brands with the same product features and most of the time they may buy the product if they are convinced that the product would meet their expectations.

What level of additional inventory is optimal?

How do you know if you have too much, too little, or just the right amount of merchandise inventory? One way is to compare the value of your current inventory to an “ideal inventory investment.”  The optimal safety and cycle inventory is determined by two factors, supply lead time and predictable demand for a specific time period. In fact, the third factor that could play a critical role is the demand deviation percentage.  Whereas the cycle inventory is expected to cover the demand during supply lead time, the safety stock is expected to cover the deviation in predictable demand and uncertainties in supply lead time.  If we are able to understand and master the technique of identifying these three factors, the inventory balancing is a piece of cake.  But unfortunately, no one is able to crack the code so far.

Safety stock is basically carried to protect against the out-of-stock situation.  Out-of-stock level measurement is industry and segment specific according to Bruce Tompkins.  In the case of manufacturers, the out-of-stock level is assessed at the distribution centre or product level whereas in the case of retailers at the store level or individual buyer level as shown in the below given graphic.

Source: “The Supply Chain Consortium’s report Supply Chain Planning, a True Balancing Act.”

According to Bruce Tompkins, average safety stock varies between 10% and 30% of monthly sales by industry and segment. Cycle stock ranges from 85% to more than 190%. This is based on the report, “The Supply Chain Consortium’s report Supply Chain Planning, a True Balancing Act.”  Industry wise the cycle inventory and safety stock levels are shown in the below given graphic:

How Top 25 Supply Chains behave?

When we compare the basic activities of the supply chain (plan, source and supply) of 2009 top 25 supply chains and others we may not notice any significant difference in efficiency levels as shown in the below-given chart.

Source: Kevin O’Marah (APICS) 2009

The critical difference between the top 25 supply chains and the rest of the pack is the leadership traits. As you can see from the above chart, only sourcing efficiencies are better compared to others.  This factor negates inefficiency caused due to deviation in predictable demand to some extent.

How they are different from the rest of the pack?

The leaders in 2009 top 25 supply chains clearly proved to the world how they are different from the rest by demonstrating leadership in the following areas:

  1. Strategy and Change Management;
  2. Customer Management;
  3. New Product design and launch;
  4. Post-Sales Support.

Top Five Techniques to achieve inventory optimisation:

Let us identify top 5 inventory management techniques and compare how the top 25 supply chains have embraced it.

  1. Reduce replenishment cycle time:  This is one of the critical factors in deciding the safety stock.   Shorter lead time for inventory replenishment would lessen the complexity of supply chain.  However, due to global sourcing, this is becoming a great challenge.  Lead time consists of three factors, time taken to place the order, manufacturing time (includes sourcing time) and transit time.  What is critical in establishing the efficient cycle time is the accuracy or certainty?  There is no point having a shorter lead time with huge uncertainty.  It would be easier to plan for longer lead time with minimal uncertainty.
  2. Rank the Inventory: It is necessary to know which part or SKU hurts more if you carry excess inventory.  The best way to rank the inventory is ABC classification. High dollar volume (A), moderate dollar volume (B) and low dollar volume (C). “A” Parts should comprise the top 80% of dollar volume, “B” Parts about 15%, and C Parts about 5%.  The ranking should be based on dollar volume.  The ABC classification system is a tool that will help you employ your inventory control efforts efficiently.
  3. Eliminate Obsolete Stock: Ideal way to identify the obsolete stock is to run FSN analysis periodically.  FSN stands for fast, slow and non-moving items.  The criteria to decide fast, slow and non-moving is specific to industry and product.  In an IT industry if we have a finished product has not shown movement from 21 to 30 days, it is considered as a dead inventory.  Explore the possibility to liquidate non-moving items, review the slow moving items and identify the reasons for sluggish movement and take necessary action.  The red dot/tag sale organised by many organisations is the result of identifying dead inventory.
  4. Understand your customer: Carrying surplus safety inventory is mainly due to lack of understanding about the customer buying patterns.  It is very important to understand the customer and their needs to adjust your supply accordingly and it is fundamental to the inventory management success.
  5. Optimise your SKUs: Product proliferation is one of the reasons for dismal forecasting performance.  The proliferation of SKU numbers is the unfortunate consequence.  One more factor that is contributing to inefficiency is the inefficient management of product lifecycle.  The launch of the new product should be the end of the old product in most cases.  However, customers would prefer to order old products in spite new product with additional features.  This would lead to confusion and inefficiency in planning.

Now compare the five suggestions with the findings of AMR 2009 research and it is a close match.  Strategy and change management is critical to managing your supply chain efficiently.  Supply chain efficiency to a large extent depends upon inventory efficiency.  Understanding the customer and their needs is very critical in positioning your product in the market.  There is no point trying to sell a product that is not an immediate need of the customer.  It is like trying to sell laptops in an economically back word country where customer priorities are different.  Timing is very critical for new product design and launch and at the same time, product life cycle management is also equally important to improve forecasting efficiencies.

I asked myself whether Inventory Management is the key to the business success. I strongly believe that it is certainly a bigger factor in influencing the business success.  However, the results of 2010 AMR Research 2010 findings were not aligned to my thought process. The biggest average revenue growth registered company did not fare well with regard to their inventory management. However, the most comforting factor is that the leader, Apple Computers showed all-around success. Using the data provided by the AMR Research, I have sorted the data based on inventory turns which are the point of discussion for now and the results are quite interesting:

While analysing and understanding the above table one should consider the industry-specific characteristics.  Inventory carrying patterns differ from industry to industry.  Further, one should not draw conclusions based on the above table because two of the factors in the above-given table are based on 3-year average and whereas inventory turns shown in the table is for the period of assessment.  However, if we go by the average revenue growth factor all growing companies managed reasonable inventory turns specific to their industry.  I have again sorted the data based on 5% and above average growth registered companies and the efficient inventory management is a contributor to the success as shown below:

Let us not forget that the purpose of carrying safety stock is to protect customer service from volatile demand variation during the lead time or delays in receiving a replenishment shipment. Hence, it would be ideal to maintain safety stock considering the variation in demand and lead time.  The greater the variation in demand and/or lead time, the more safety stock will be maintained for the item. This method is known as the “average deviation method.”

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