The Logistics Institute at GA Tech Explores Decision-Making Impact With Inventory Management Focus Group

Survey with 14 Industry-Leading Companies Facilitated by The Logistics Institute at GA Tech

- Factors that influence inventory turns and fill rate in warehousing, transportation and procurement.
- Why demand data is less valuable as time goes by.

Dr. Ed Frazelle, director of The Logistics Institute's (TLI) Logistics Management Series and president of Logistics Resources International (www.LRILogistics.com) facilitated the inventory management focus group. The focus group included representatives from American Italian Pasta Company, BP Fabrics and Fibers, Bush Brothers and Company, Defense National Stockpile Center, Department of Defense, Expotran, FedEx Supply Chain Services, Groenewout Consultants & Engineers, Milliken & Company, NCR Corporation, Office Depot, PPL Services, The GAP, Inc., and Vistakon/Johnson & Johnson Vision Care, Inc. The focus group concluded with the following findings:

Factors that influence inventory turns and fill rate in warehousing, transportation and procurement.

According to Dr. Ed Frazelle, "Increasing inventory turns and fill rate all at the same time is a process not unlike using a divining rod to find underground deposits of gold. The barriers to increased turns and fill rate are often "underground" in decisions made in warehousing, transportation, and procurement by individuals not accountable for turn/fill rate performance and not necessarily trained in the tradeoffs in logistics. When we work with our clients to assist them in increasing turns/fill rate, we look in every area of the supply chain for the locations and excuses that lead to the thousands of little piles of inventory that add up to slow turn rates and low fill rates for key items. We asked our Logistics Focus Groups to rank the factors in warehousing, transportation, and procurement that influence inventory turns and fill rate."

Warehouse Factors:
1. Inventory accuracy. Lack of trust breeds just-in-case inventory.
2. Number of SKUs. More SKUS means more safety stock and less attention to problem SKUs.
3. Number of Warehouse Locations. The amount of inventory in a logistics network is proportional to the square root of the number of stocking locations (i.e. warehouses). Fewer warehouse locations translates to less inventory, primarily safety stock.

Transportation Factors:
1. Mode Choice. Slower modes yield excess in-transit inventory. Less reliable modes yield higher safety stocks.
2. Delivery/pick-up frequency. More frequent shipments reduces cycle stock inventory.
3. Routing. Favorable routes and schedules reduce in-transit stocks.
4. Tracking. Inventory visibility breeds trust which reduces just-in-case inventory.
5. Carrier choice. Reliable carriers show up on time and reduce the need for safety stock.

Procurement Factors:
1. Leadtime. Longer lead times mean lower forecast accuracy and excess in-transit inventory.
2. Quantity/order amount. Half the purchase order quantity stays in the system. The lower the purchase order quantity, the less inventory in the system.
3. Purchase price. Quantity discounts are special opportunities to procure but yield higher inventory levels.
4. Cost of ordering. Some suppliers are more costly to do business with than others. The higher the cost of ordering, the less often we should order. The less often we order, the more we have to order each time. The more we order per order, the higher the inventory level.

Why demand data is less valuable as time goes by.

According to Dr. Frazelle… "Demand data is not like fine wine. Its value does not appreciate over time. In fact, the value of the demand data declines exponentially over time. Many people do not realize that the best predictor of tomorrow's stock price is today's stock price. Similarly, the most valuable information for forecasting future product demand is the demand data closest to the forecasting period. As time goes by changes in market conditions, competitive circumstances, macroeconomics, consumer tastes, etc. erode the value of historical demand data. There are two more analogies I like to use to explain the phenomenon. The first is from chemistry and physics. Some reactive elements have daily half-lives. The principle is that the reactive capability of the element is cut in half as each day goes by. The second analogy is from electrical signal processing. There, the strength of the signal degrades exponentially as the distance from the source and time removed from initial signal production increases. Similarly, the value of demand data declines exponentially as time goes by and as the data is removed from its original source and amalgamated/corrupted with other demand data. In studying this phenomenon in our Logistics Focus Groups we asked the groups to rank the reasons for degradation of demand data over time."

1. Declining Product Life Cycles
2. Rapidly Changing Consumer Preferences
3. New Global and E-Competitors
4. Data Accuracy Degradation
5. Employee Turnover
6. Customer Base Turnover
7. Mergers and Acquisitions
8. Product Obsolescence Rates
9. History/Influence of Promotions
10. Changing Demographics
11. Government Regulations
12. Economic Environment
13. Product Diversification
14. Changes in Management Perspective and Priorities

TLI's focus groups are conducted as a part of its professional education programs, each addressing key issues in supply chain strategy, inventory management, transportation management, world-class warehousing, and third-party logistics.

About The Logistics Institute
The Logistics Institute (TLI) was established in 1992 to coordinate all logistics-related activities on Georgia Tech's campus. TLI's Leaders in Logistics is comprised of more than 20 corporations and government agencies that partner with the Institute to fund research and educational programs. Through this partnership TLI focuses on logistics research, education, and practice, with an emphasis on supply chain design, transportation planning, and e-commerce logistics.

MEDIA CONTACTS

Tammy Artosky
LMS Program Director
The Logistics Institute at Georgia Tech
tammy.artosky@isye.gatech.edu
404-894-1713

Yolanda Wilson
PR Specialist
Georgia Tech Continuing Education
yolanda.wilson@conted.gatech.edu
404-385-3547