Parts Sources and BSL

[stevef]

I am interested in getting some input concerning sourcing parts by BSL in
an
attempt to
-have an inventory that is more responsive to demand.
-more efficiently use inventory dollars.
-reduce inventory investment.
This subject was briefly mentioned in Chuck Hartles article, Numbers
dont
Lie in the March 1999 Parts Manager .

Ive set up sources, with increasing days supply criteria to sort parts
with
BSLs of 1, 2-5, 6-12, and greater than 12. Ive even come up with some
easy and quick English statements (ADP) to make daily adjustments of parts
with BSLs that have changed.
One problem I havent figured out is this, although you want to quickly
ramp
up supply of parts that had a low BSL by moving them to a source with a
higher Days supply, you have the opposite problem at the other end of the
BSL spectrum. Those high BSL parts often seem to be stocked in excess of
what is really needed on hand. I guess I feel like Im working both ends
toward the middle.

Anybody know what I mean? How are you doing it?

Thanks, Steve Ferris, Parts Coordinator MB of Portland, MB of Wilsonville

[David S]

Steve:

The goals you stated are:

-have an inventory that is more responsive to demand.
-more efficiently use inventory dollars.
-reduce inventory investment.

My experience has shown that you can accomplish all of these goals with tools already available from your dealer management system.

First, to address your concern with responsiveness; the best thing you can do for yourself to make your system more responsive to your customers current needs is to insure that your system is not calculating its orders based on straight line averaging. Determine your system parameters using MNT selection 1. This will print out the current specifications of your sources. The straight line averaging setting can be adjusted in MNT selection 4. Why not use straight line averaging? Lets use a simplified example. Using a calendar year, Days supply set at 30 and the part in this example is stocked and has not met Phase out Criteria. Using straight line averaging, its not going to matter if you sell 12 in one month or 1 each month of the year. The system is going to total all sales (12) and divide by 12 months. The system is then going to suggest you stock only one piece. This is definitely not responsive if the demand has only happened in recent months or conversely happened 5 months ago without any recent sales. On the other hand if you do not use straight line averaging the system takes in to account recent sales history and weights the most current demand (or lack thereof) and makes a more reasonable calculation. If you sold 6 pieces this month, 4 pieces last month and 2 pieces the month before, by not using straight line averaging the system would weight the current sales heavier and recommend that you stock 2 or 3 pieces. And if the sales were opposite, selling 2 pieces this month, 4 last and 6 the month before the system would recognize a diminishing sales trend, weight the current sales heavier and reduce your BSL from 2 or 3 to one piece, thereby reducing your potential exposure to obsolescence. By not using straight line averaging this is how you make your system responsive to demand.

Now to reduce inventory investment and use inventory dollars efficiently. With ADP there are two choices. If you are on the old 8800 box, you can twist a few arms at ADP and purchase an additional program called Calculate Sources YRSL or if you are on the newer systems go to program SCS from the Function prompt.

In almost the exact same way as sourcing by BSL you divide your inventory based on sales. Think about this. If you sell 100 pieces of a particular part each month you are going to want a higher BSL than if you sell 1 piece a month. On the other hand if you sell 100, you dont want to end up with an excessive amount of stock on the shelf. As and example: Initially, I typically will set up a dealer that has daily stock orders and a one day lead time as follows: Source 1 with 0 2 sales per year has 35 days supply, Source 2 with 3 12 sales per year has 28 days supply, Source 3 with 13 35 sales per year has 21 days supply, Source 4 with 36 199 sales per year has 14 days supply and Source 5 with 200 99999 sales per year has 10 days supply. This is not a one size fits all setting. A dealer that has large wholesale orders of common fast moving parts like large case orders of oil filters will be different then the dealer that primarily supplied their own shop. But using this method, the faster a part moves the fewer days supply it has. This is important, I have often seen dealers get this backwards and have a higher days supply on the faster moving parts which goes against what you are trying to do. By using this technique I have seen inventory reductions of as much as 35% while still retaining the ability to provide a high Repair Order fill rate.

To illustrate this technique I use another example. If you have a daily stock order and you sell one particular part number once a day, day in and day out, how many pieces do you need on the shelf? In a perfect world you would only need one. You sell that part today and another comes in for replenishment tomorrow. This would be a fast moving part and again in a perfect world you would only need 1 days supply. In reality we know that demand of parts is erratic. So, one days supply is probably not enough. But how many days supply do you really need? 35? I dont think so. 10 to 14 days supply will provide you more than enough safety stock for most situations. And last but not least, the best part of sourcing by movement is that your system makes all the changes from source to source for you. No english statements and no time wasted manually moving parts.

Like I said, this is not one size fits all and it doesn't end with this inital setting. By measuring your performance of each source and your ability to fulfill the customers demands these setting are further adjusted to reduce the overall inventory value while maintaining the fill rate.

David S.

[Chuck Hartle]

Hi Steve,

Ditto to what David Summers has said. In short, what he is suggesting is that you "reduce" your days supply and the demand as sales increase. This certainly has worked for us.

I believe that David is right on with his approach. There are some who actually preach that you should increase your days supply as the parts turn quicker. What is the right answer? It all boils down to what effect you want from your inventory and how much depth and room you have.

Everyone wants to chase "Fill Rate" and "Level of Service" right now. The problem is you will be chasing a ghost that you can't put your arms around and you will end up working twice as hard as you should. Let's face it, if you need 10 parts for a job and you have only 1 or you have 9, the RO fill rate is really zero, because you didn't have all the parts to fulfill the job.

When you look at both ends of the spectrum, you should have 100% fill rate on your promotional (fast moving) parts and somewhere around 20-30% on your warranty repairs. The newer the model, the lower this will be.

If you don't mind doing some extra work (as you state you already are) what you might want to create are some "spike" insurance sources.

These would be sources where your sales look like this:
0 0 1 0 3

All of the sudden a part takes off in sales. If you are running daily english statements to look at BSL (remember that your BSL will change only when you run your stock order) then you could source out these parts based on a low year's sale and a sudden surge in sales or demand. Pump up the days supply to 50-60 days to make sure that these parts show up on your order. These are the ones that you need to review the demand to see why the spike happened. It they are legitimate, then order accordingly, if not move it to a source with a high years sale and next to no days supply.

Here is something we have been toying with and it seems to work well with larger dealers. No one says that you can't start with a high days supply for low BSL's and a low day's supply with medium moving BSL's and a higher days supply on the real fast moving items, thus creating a "V" effect for your days supply. You might check it out if you have some room for a little depth.

It's all about trends, and David's explanation about Straight Line Averaging couldn't be put better. By the way, if you want to 'shut down' straight line averaging in MNT 4 you would enter 0 (zero) in the months on prompt number 3.

Anyone else have some tested thoughts about this?

Chuck Hartle'