Driving turns through Velocity Based Planning

Introduction

 

Inventory management theory teaches that we maximize inventory turns with frequent, smaller purchases.  While this pleases the accountants, it frustrates vendors and warehouse staff who like to think and work in pallet quantities.  In fact, most suppliers impose item and or purchase order minimums that thwart small order sizes.

This article explores the value of planning buys based on item velocities.  We call this approach “Velocity Based Planning”.

As the legend goes, when Jessie James was asked why he robbed banks, he replied, “Because that’s where the money is!”  If we apply this wisdom to inventory management, we can improve turns by buying fast-moving items more frequently and slow-movers less frequently. 

 

Opportunity

 

Let’s consider a simplified example to “size” the value offered by Velocity Based Planning . . .

Current Assumptions:

°      We order once a month from a vendor that has a mix of A, B, C & D items
(where the ABC code ranks the velocity of an item)

°      From the perspective of the warehouse and the vendor, it is not practical to buy every line on each purchase order – so we plan to buy each item on alternating PO’s

°      A simple turns calculation predicts that an 8 week ordering level would produce 12 turns

Velocity Based Planning assumptions:

°      Plan to order A items every month - doubling the frequency changes the turns for A items from 12 to 24

°      Plan to order B on alternating months - no change in order frequency or turns

°      Plan to order C & D items on every third PO – increasing average order sizes and decreasing turns for these items to around 8

°      A items represent 50% of your inventory value, B’s represent 25% and the remaining C & D items represent 25%

°      Since the A items are “where the money is”, Velocity Based Planning produces 17 turns - a 40% improvement!

In addition to driving higher turns, Velocity Based Planning offers an opportunity to manage safety stock investment and improve service levels (aka fill rates).  This topic will be explored in a follow-up article entitled “Improving Service Levels with Velocity Based Planning”.

 

 

Methodology

 

Velocity Based Planning assumes that items are ranked according to their movement (or ‘velocity’).  A variety of methods exist for ranking: sales, margin, quantity, number of orders, etc.  Since item velocity changes over time, items need to be ranked frequently.  You’ll need tools to objectively measure and assign ABC values on a regular basis (typically monthly).

The changes required in your replenishment system will vary according to your current software and processes.  Generally speaking, planned stocking levels need to adjust each month to reflect revised ABC rankings and updated forecasts.  These adjusted ordering levels will help produce ‘smarter’ purchase orders over the coming month.

While adjusting ordering levels, special accommodations need to be made for vendors with extremely high or low ordering frequencies.  ‘Capping’ order frequencies will prevent excessive ordering.

Implementing Velocity Based Planning will likely require changes to your current software and processes.  If your planning software is more than a few years old, be aware planning tools exist that can be added to your current software to bring new functionality into your current system.

 

Conclusion

 

Velocity Based Planning can tangibly increase your bottom line and boost your ability to service your customers.  To learn more about this topic or about tools and processes that enable Velocity Based Planning, feel free to contact the authors at info@overdrivesolutions.com, 1.702.476.0878.