INVENTORY MANAGEMENT OPTIMISATION AS A TOOL FOR EFFICIENT

INVENTORY MANAGEMENT OPTIMISATION AS A TOOL FOR EFFICIENT UTILISATION OF RESOURCES (PUBLIC & PRIVATE SECTORS). A PRESENTATION TO THE 5 TH ZIPS NATIONAL CONFERENCE ON: PRESENTER: KIZZY MOONGA (Dip. M, ZIM, MCIM, +FZIPS, FCIPS, BBA, MBA)

PRESENTATION OUTLINE 1) Introduction to Inventory Management Optimisation 2) Strategies for inventory reduction 3) Measuring inventory management performance 4) Inventory Quality Ratio (IQR) 5) The top 25 SC companies in the world(Gartner’s 2016 top 25 SC – The SC Hall of Fame) 6) Amazon’s Distribution Channel Revolution

Inventory Management Optimisation Introduction § Inventory: All the tangible assets of an entity or organisation that are intended for consumption or resale § Inventory management or inventory control is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory. § Optimisation is the action of making the best or most effective use of a situation or resource 3

SOME FACTS ABOUT INVENTORY • It is a major Balance Sheet item (classified as working capital) • It generates cost (A ‘rule of Thumb’ is that inventory carrying costs amount to 25% of the value of stock per annum) • Locks up funds • Locks up resources • Impairs flexibility • Institutionalises risk 4

INVENTORY MANAGEMENT OPTIMISATION INCREASE CASH FLOW DECREASE /ELIMINATE STOCK-OUTS DECREASE COSTS INCREASE STOCK TURNS

THE BIG QUESTION IN INVENTORY MANAGEMENT OPTIMISATION • INVENTORY: • ADDING VALUE or • ADDING COST? HOW EX-ZCCM ADDED COST TO ITS INVENTORY. pptx 6

STRATEGIES FOR INVENTORY REDUCTION & IMPROVING SERVICE LEVEL • • • Good Forecast of Materials Requirements Collaborative/Partnership Sourcing Vendor Held Stock (VHS)/ Vendor Managed Inventory (VMI)/ Customer Held Stock (CHS) JIT (Just In Time) or JIC (Just In Case)? Standardisation and Variety Reduction Stock Cataloguing System – Eliminate Duplicates Dispose of inactive/redundant/obsolete stocks on a continuing basis Determining how much and when to order Reorder Point System Material Requirements Planning (MRPI & MRPII) ABC Classification Technique 7

Measuring Inventory Management Performance q Inventory Turnover – (COGS/Average or Current Period Inventory) Disadvantages: • Backward looking • Based on historical Cost of Goods Sold • Gives a Score After the Game is Over • Lumps Inventory Together q Inventory Quality Ratio (IQR) – Avoids formation of excess and obsolete inventory Each item is categorized as either Active (A 1, A 2 or A 3), Excess (E 1, E 2 or E 3), Slow Moving (SM 1, SM 2 or SM 3) or No Moving (NM 1, NM 2 or NM 3). These are called the Inventory Quality Categories. , i Fr y da , M c ar h 16 1 20 8 K MOONGA 2011 8

Measuring Inventory Management Performance • The Inventory Quality Ratio is the ratio of the active inventory dollars to total inventory dollars and calculated as: A 1 + A 2 IQR = = A 1 + A 2 + E 1 + E 2 + SM + NM Active Inventory $/Zmw Total Inventory Dollars Advantages • • Improves Cash flow Identifies Active, Excess, Slow-Moving and Non-Moving inventory Drills Down to Problem areas and Prioritises Corrective Action Measures Performance by Inventory Segment , i Fr y da , M c ar h 16 1 20 8 K MOONGA 2011 9

Measuring Inventory Management Performance • The Inventory Quality Ratio is the ratio of the active inventory dollars to total inventory dollars and calculated as: E 1 + E 2 IQR = = A 1 + A 2 + E 1 + E 2 + SM + NM Excess Inventory $/ZMW Total Inventory Dollars Advantages • • Improves Cash flow Identifies Active, Excess, Slow-Moving and Non-Moving inventory Drills Down to Problem areas and Prioritises Corrective Action Measures Performance by Inventory Segment , i Fr y da , M c ar h 16 1 20 8 K MOONGA 2011 10

END RESULT OF IQR , i Fr y da , M c ar h 16 1 20 8 K MOONGA 2011 11

Measuring Inventory Management Performance q Findings from 400 Companies Studied in USA § IQR was in the 30 - 45% range § Meaning Approximately 55% US$ tied in Excess, Slow -Moving and Non-Moving items § Slow and Non-Moving items Accounted for 10% of the tied US$ § Excess Inventory Accounted for 30 - 45% of tied US$ , i Fr y da , M c ar h 16 1 20 8 K MOONGA 2011 12

GATRNER’S TOP 25 SUPPLY CHAINS FOR 2016 Gartner's top 25 supply chains. pptx • During the ZIPS reloaded launch, Secretary to the Cabinet Dr Roland Msiska encouraged ZIPS to come up with an award to recognise high performing organisations in the area of SCM q GARTNER SUPPLY CHAINNOVATORS AWARDS • Introduced in 2005 • Gartner appreciates and recognises SC innovation and impact delivered by SC organisations • These must meet the threshold of: 1) Impactful 2) Sustainable 3) Unconventional (very different from the things that are used or acceptable by most people) 4) Collaborative 5) Measurable 6) Must demonstrate operational and innovation excellence 7) Willingness to share lessons learned with the broader SC community 13 Source: gartner. com

METHODOLOGYglobal-2000. jpg Fortune 500 2, 500? ? ? Revenue Threshold US$12 m Forbes 2, 000 14

METHODOLOGY (Cont’d) • Selection cover manufacturing, retail and distributors • Financial services and insurance are eliminated • After the above steps, a list of 300 entities go to the final stage • Weighting: 50% Business Performance, 50% opinion component 15

Three Financial Metrics used + CSR • ROA – Net Income/Total Assets, measures overall performance • Inventory Turns – COGS/Inventory, indication of cost • Revenue Growth – Change of revenue from previous year, innovation? • Index of third-party – CSR measure 16

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q Amazon is an American e-commerce and cloud computing company q Founded by Jeff Bezos in 1994 in Seattle, Washington q It is the largest internet retailer in the World by total sales and market capitalisation with a labour force of 341, 000. q Services: Online shipping, Cloud computing, Digital Distribution q Game of Drones (Amazon Prime Air) § Orders < 5 Pounds delivered within 30 minutes § Amazon Prime Air or Unmanned Aerial Vehicles (UAVs) still under development and scheduled to be launched in 2017 § Amazon has got the weight and political influence 17

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q Disadvantages of Drones (UAVs) § The real problems with drone deliveries are practical, not regulatory. § 1. It's not clear that drone deliveries will be any cheaper than existing methods. § 2. It might not work for heavy items. § 3. Drones can't go everywhere. Amazon delivers goes to the easy-to-reach front porches of suburban homes. § 4. May be theft-prone 18

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q Disadvantages of Drones (UAVs) § 5. Property rights advocates trying to maintain control over their airspace. § § § 6. Hacking. If the Iranians can hack U. S. military drones armed with deadly missiles, smart suburban teens can certainly wreak havoc on commercial drones fetching burritos. 7. Crowding. Drones are small and can't carry that much. To deliver everything Amazon needs to move every day and would require squadron after squadron of drones, increasing the inevitability they would bump into each other. 8. What happens when all those drones bumping into each other get involved in accidents? Who pays for the damaged goods, and whatever else gets damaged in the process? 9. Weather. 10. If drones aren't able to deliver all ordered items to all locations at all times— and that seems inarguable—Amazon would have to maintain multiple delivery logistics. The costs of that alone would likely be enough to negate any benefits of drone delivery 19 Source: Nuff

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q Two-Day Delivery is so 2005 § Amazon Prime membership offered free 2 -day shipping § Quickly copied by other on-line retailers § Amazon began offering one (1) –hour deliveries § Deliveries during specific hours of the day q Need More Detergents? It Will Be There in a Dash § 2016 – Amazon unveiled Dush-Buttons with little internet of things (lo. T) § Similar to click and collect solution, Amazon clients simply press a button to order a household staple such as Detergent or Coffee 20

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q 3 PL? More Like 3 PLoser § Traditional 3 PL providers such as DHL, Fed. Ex, UPS, USPS, etc. cannot match Amazon’s same day and one hour shipping § Amazon heavily relies on its own fleet of delivery vehicles to sustain the same day and one-hour shipping § Amazon claims a piece of the cake owned by Fed. Ex, UPS, USPS § Deliveries during specific hours of the day q Anything You can Make, Amazon can Make Cheaper § Amazon no longer just a retailer but also a manufacturing giant § Amazon’s basic line include a wide variety of household items, including dog poop bags (yes, dog poop bags), a very popular line 21

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q I, For one, Welcome our Automated Warehouse § 2012 -Amazon acquired KIVA Systems, a provider of robots and automated warehouse solutions § 2015 -Kiva System re-branded as Amazon Robotics § Automated robots picks, packs and sorts shipments § Plans underway to eventually remove the human element from Amazon’s fulfilment centres altogether (consider the financial resources savings) q Amazon caught in some serious flak several years ago § Brutal conditions in Amazon’s warehouses threaten to ruin the company’s image (Jim Edwards, 2013) § Temp employees toil in freezing conditions § Lunch and rest breaks disappear § Pennsylvania – reported hot warehouses, workers fainted on the job and stretchers by paramedics (Amazon has since installed aircons) 22

FORWARD-THINKING TRENDS IN AMAZON’S SUPPLY CHAIN STRATEGY q Amazon’s initial and current SC for books AUTHOR PUBLISHER PRINTER AMAZON CONSUMER RETAILER WHOLESALER 23

KEY TAKE-AWAYS FROM AMAZON. COM § Amazon is making significant strides in the improvement of short time delivery by subverting traditional 3 PL models and investing in new technology like drones (UAVs) and warehouse automation. § For SMBs that compete with amazon in the e-commerce , they have a tall order § Better for SMBs to invest where they have a competitive edge § Must make appropriate investment in SCM technology § Regardless of the size of SMBs , SMBs should look at amazons example of what the future of SCM could look like 24

Bibliography /references 1. Akindipe S. Olusakin (2014) Inventory Management for optimal use of resources and overall efficiency in manufacturing SMES, Journal of entrepreneurship , management and innovation, vol. 10. issue 4, 2014 2. Beta. fortune. com 3. Buinson Forrest (2016): 6 ways Amazon is changing supply chain management in 2016. 4. www. amazon. com/prime air 5. www. forbes. com 6. www. network. com 7. www. scdigest. com