Today's topic should be fairly straightforward and not nearly as abstract as the last installment. Inventory planning is simply making an effort to forecast your demand for certain goods and have them available when you need them. By planning ahead, rather than spot-buying day-to-day, corporations save copious amounts of money. It's a principle that carries over to individuals, as well.
Ways to save with forecasting: perhaps you can get an item less expensively by ordering from Amazon, if you know you need it a week ahead, rather than waiting until the day of. Maybe you can have a local store order in for you, rather than taking a trip to the big metropolitan area nearest you (Portland or Anchorage, for example). Each time, these cost savings are going to be small, and may possibly seem insignificant. However, in the long run, you're looking at substantial cost savings and reductions in your home's operating costs.
Trend projection and moving average are two ways of forecasting using historical data. This is a reliable method for items like toilet paper, paper towels, coffee, vitamins, diapers and wipes, toothbrushes, makeup, et cetera. Trend projection might take a year of purchase data, find the monthly average, and then use that average to estimate the next month's demand.
For example: over the last year, we averaged two pounds of coffee per month, so I order two pounds of coffee for the next month.
Or, another option is to just use the previous year's data: Last November, we used one pound of coffee, so I order one pound this November.
Moving average takes a different approach; the planner defines a period of historical data to use for future planning. For example: actual usage in August, September, and October averaged 1.5 pounds of coffee per month, so I order 1.5 pounds for November. Next month, I will use actual usage numbers from September, October, and November to forecast demand for December. The numbers used continue to move with time, hence a moving average.
My preferred method for short-term forecasting is moving average with checks and balances coming from trend projection. Adding in trend projection is helpful because it allows some flexibility for known variants. If, for example, you are hosting Thanksgiving this year, you can account for this variant and order the appropriate amount of coffee for the month.
The other thing to consider is carrying costs. By only purchasing what you need when you need it, you forego the need for extra storage. I watch these shows on "extreme couponing," and I hear people respond as though some magnificent thing has been achieved, but all I see is capital tied up in non-liquid goods and lots of storage costs. Anything saved in the checkout line is lost in opportunity cost and in storing goods that will take years to go through.
Hopefully, as you read, you think of some ways that inventory planning can help you. I've tried to avoid too many specifics so that this is more adaptable to individual situations. Let me know if you have any questions or need some help with application. Have a great week!
Sunday, October 26, 2014
Sunday, October 19, 2014
SLOB
This week, I'm going to talk about that which is, in my professional life, pretty much my favorite thing: SLOB- or slow-moving and obsolete inventory. In a warehouse, when you eliminate SLOB, you free up capital (which makes shareholders happy) and you free up space (which makes you happy). Remember, last installment we talked about carrying costs. Carrying costs are part of what makes the elimination of SLOB "profitable."
You may be wondering how you can have SLOB in your personal life. The reality is that, for most people, SLOB in the home is far more significant (in terms of SLOB on-hand versus overall inventory on-hand) than SLOB in a warehouse. The reason is simple: corporations are well-aware of the cost of SLOB ownership. They literally hire people (like me) to find ways of utilizing SLOB and optimizing on-hand inventory.
As I said at the beginning, I love SLOB elimination, both personally and professionally. My wife and I are planning to build a home next spring, but one contingency I have is that all of our SLOB be eliminated before we move, so that we're not just hauling garbage to the next house to store. Why? Don't these things have value? Yes, they do. But they also have costs. In this case, the cost to move them (logistics) and the costs to store them (carrying). Hopefully you are beginning to see how these principles are relevant to your life.
This is key; if you write stuff down, this is a good note to take: The principles that make corporations successful are the same principles that can make your home successful.
Despite the cries of Occupy Wall Street and the mainstream media, corporations are not evil. To understand that, it's important to understand what makes them tick; corporations have a legal obligation to maximize shareholder wealth, and that is accomplished (in most cases) by maximizing customer value. Therefore, my professional mantra is, "it is my responsibility to maximize customer value in order to maximize shareholder wealth," and I literally make decisions with that in mind.
How do corporations maximize customer value? They reduce the cost of doing business. Oftentimes, people think of reductions in operating costs solely from the perspective of maximizing profits, and while that is true, it also yields the ability to capitalize on a competitive pricing advantage. If Company X can produce their goods at $0.97 per unit, but Company Y can produce like goods for $0.95, they can sell their product for $0.02 less per unit, and still generate the same amount of profit, but at better margins, which makes shareholders happy. Notice how I keep referring to investors as shareholders? I do this to illustrate the fact that they own these companies. We often think of corporations as faceless, inhuman entities, but they are always driven by the people that own them. Why is that significant? Well, it shows us that our homes are just like small-scale corporations.
Most homes have shareholders and stakeholders. My wife and I are shareholders and stakeholders in our home, while our two kids and my brother-in-law (from whom we rent), are stakeholders. Their success is contingent upon our success. With this in mind, we are able to convert my professional mantra into a personal mantra. And though it was a long and winding journey, we have finally arrived at the thesis of this week's topic. We must maximize stakeholder value in order to maximize shareholder wealth. We can now see that optimizing our personal supply chain is even more significant than it is for corporations to optimize theirs.
So that was a lot of back-story, but it was necessary. A great deal of supply chain optimization is found in the lens through which you view your situation. Perhaps you have an old computer that you never use, but you're having trouble getting rid of it because it was $1,000 when you bought it, even though you've bought three more since. When you consider the cost of keeping it, you're only driving that figure up. If the initial cost ten years ago was $1,000, and you've spent $24 per year giving it a warm place to stay, you've now spent $1,240 dollars over the life of the machine. Now maybe you're thinking, "how did I spend $24 per year just holding onto it?" Well, if you've got a 2,000 sf house for which you pay $2,000 per month (and we must factor in utilities, taxes, insurance, and any other costs of ownership, so this is a pretty conservative estimate), the cost to you is $1 per square foot per month. An average PC takes up roughly two square feet, so $2 per month goes toward that PC's storage. Further, that computer probably could have sold for $600 seven years ago (when you bought the first replacement), whereas today, it is completely worthless. Therefore, you've effectively spent $840 to keep this computer.
This is a very petty example, but the cumulative effect of lots of little things can often be greater than the singular effect of one big thing. But speaking of big things, how much does that rusty old truck in the backyard cost to store each month (mom and dad, please don't haul Rusty off; you've got plenty of space!)? Well let's suppose you own one acre of land for $20,000. An average single cab pickup takes up about 200 sf of space (20'x10'), more if you've got it in some sort of shelter. That 200 sf is 0.46% of an acre. $20,000 x 0.46% = $91.83. Therfore, the initial cost of that space was nearly $92, and beyond that, you are paying monthly (in taxes, interest, and insurance on the land) to store it. And because of this example, you can see that storing a PC for the last ten years was likely more costly than storing the old pickup.
Of course, if you already own the land and the house, this isn't as relevant, because idle space costs the same as utilized space. However, in this great land of ours, there is a common theme: as people increase affluence, they acquire more space and then fill it with more stuff. Consequently, they must increase their space to buy more stuff, and then increase their space again. Maybe you've found yourself desiring more space for a hobby studio, to have a BBQ area out back, or just so that you can park your car in the garage. Consider whether increasing your space is maximizing value for your stakeholders. If it isn't, you are likely diminishing wealth for your shareholders (you!). Perhaps the better solution is to eliminate some SLOB.
You may be wondering how you can have SLOB in your personal life. The reality is that, for most people, SLOB in the home is far more significant (in terms of SLOB on-hand versus overall inventory on-hand) than SLOB in a warehouse. The reason is simple: corporations are well-aware of the cost of SLOB ownership. They literally hire people (like me) to find ways of utilizing SLOB and optimizing on-hand inventory.
As I said at the beginning, I love SLOB elimination, both personally and professionally. My wife and I are planning to build a home next spring, but one contingency I have is that all of our SLOB be eliminated before we move, so that we're not just hauling garbage to the next house to store. Why? Don't these things have value? Yes, they do. But they also have costs. In this case, the cost to move them (logistics) and the costs to store them (carrying). Hopefully you are beginning to see how these principles are relevant to your life.
This is key; if you write stuff down, this is a good note to take: The principles that make corporations successful are the same principles that can make your home successful.
Despite the cries of Occupy Wall Street and the mainstream media, corporations are not evil. To understand that, it's important to understand what makes them tick; corporations have a legal obligation to maximize shareholder wealth, and that is accomplished (in most cases) by maximizing customer value. Therefore, my professional mantra is, "it is my responsibility to maximize customer value in order to maximize shareholder wealth," and I literally make decisions with that in mind.
How do corporations maximize customer value? They reduce the cost of doing business. Oftentimes, people think of reductions in operating costs solely from the perspective of maximizing profits, and while that is true, it also yields the ability to capitalize on a competitive pricing advantage. If Company X can produce their goods at $0.97 per unit, but Company Y can produce like goods for $0.95, they can sell their product for $0.02 less per unit, and still generate the same amount of profit, but at better margins, which makes shareholders happy. Notice how I keep referring to investors as shareholders? I do this to illustrate the fact that they own these companies. We often think of corporations as faceless, inhuman entities, but they are always driven by the people that own them. Why is that significant? Well, it shows us that our homes are just like small-scale corporations.
Most homes have shareholders and stakeholders. My wife and I are shareholders and stakeholders in our home, while our two kids and my brother-in-law (from whom we rent), are stakeholders. Their success is contingent upon our success. With this in mind, we are able to convert my professional mantra into a personal mantra. And though it was a long and winding journey, we have finally arrived at the thesis of this week's topic. We must maximize stakeholder value in order to maximize shareholder wealth. We can now see that optimizing our personal supply chain is even more significant than it is for corporations to optimize theirs.
So that was a lot of back-story, but it was necessary. A great deal of supply chain optimization is found in the lens through which you view your situation. Perhaps you have an old computer that you never use, but you're having trouble getting rid of it because it was $1,000 when you bought it, even though you've bought three more since. When you consider the cost of keeping it, you're only driving that figure up. If the initial cost ten years ago was $1,000, and you've spent $24 per year giving it a warm place to stay, you've now spent $1,240 dollars over the life of the machine. Now maybe you're thinking, "how did I spend $24 per year just holding onto it?" Well, if you've got a 2,000 sf house for which you pay $2,000 per month (and we must factor in utilities, taxes, insurance, and any other costs of ownership, so this is a pretty conservative estimate), the cost to you is $1 per square foot per month. An average PC takes up roughly two square feet, so $2 per month goes toward that PC's storage. Further, that computer probably could have sold for $600 seven years ago (when you bought the first replacement), whereas today, it is completely worthless. Therefore, you've effectively spent $840 to keep this computer.
This is a very petty example, but the cumulative effect of lots of little things can often be greater than the singular effect of one big thing. But speaking of big things, how much does that rusty old truck in the backyard cost to store each month (mom and dad, please don't haul Rusty off; you've got plenty of space!)? Well let's suppose you own one acre of land for $20,000. An average single cab pickup takes up about 200 sf of space (20'x10'), more if you've got it in some sort of shelter. That 200 sf is 0.46% of an acre. $20,000 x 0.46% = $91.83. Therfore, the initial cost of that space was nearly $92, and beyond that, you are paying monthly (in taxes, interest, and insurance on the land) to store it. And because of this example, you can see that storing a PC for the last ten years was likely more costly than storing the old pickup.
Of course, if you already own the land and the house, this isn't as relevant, because idle space costs the same as utilized space. However, in this great land of ours, there is a common theme: as people increase affluence, they acquire more space and then fill it with more stuff. Consequently, they must increase their space to buy more stuff, and then increase their space again. Maybe you've found yourself desiring more space for a hobby studio, to have a BBQ area out back, or just so that you can park your car in the garage. Consider whether increasing your space is maximizing value for your stakeholders. If it isn't, you are likely diminishing wealth for your shareholders (you!). Perhaps the better solution is to eliminate some SLOB.
Friday, September 26, 2014
Carrying Costs
An accurate understanding of carrying costs is paramount to a successful supply chain optimization endeavor. However, in my personal life, I've never heard them come up in conversation. So, what are carrying costs? Carrying cost is the total cost of carrying an item in inventory. Everything you have has a carrying cost. Carrying costs are pretty simple to calculate (equation graphics provided by opsrules.com (Hou, 2013)):
First, calculate the cost of inventory per year:
Then, divide that figure by the inventory value:
This is, in my opinion, easier to calculate for a corporation than it is for an individual. In a corporation, you can look at the cost of your warehouse, tools used in that warehouse, cost of storage solutions, cost of expansion if you run out of space, and so on. Also, you have an accurate tally of inventory book value.
For an individual, your home may be your warehouse and odds are pretty good that you don't use an inventory management program to keep track of your possessions' NBV (net book value). With this in mind, how do you use carrying costs in your personal life?
There are a few items (cars, ATVs, kayaks, RVs, etc) that carry a significant NBV and require significant storage solutions that would benefit from an actual carrying cost analysis, but for most things, you don't need to pin down your exact carrying costs for decision-making. For example, say you are considering a move to a more expensive home. It is important to evaluate the impetus behind that move. Are you moving to a safer neighborhood with better schools for your kids? Carrying costs probably aren't relevant to that decision. On the other hand, are you moving because you've run out of room in your two-car garage and you want to move to a home with a three-car and a shop? This is when carrying costs should be considered.
Here's what it ultimately boils down to: do you add value to your family and/or quality of life by increasing carrying costs? Is the value added by the purchase of a boat overshadowed by the value lost in the need for more extensive storage solutions? As stated earlier, these are easy questions to answer for a corporation, whose legal obligation is to increase wealth for shareholders. For an individual, those decisions impact myriad things. Therefore, I am in no way suggesting that there is a formula for making these decisions, nor am I making recommendations for how you spend your money. I am simply offering some things to think about to help make a more informed decision.
This topic is, in my opinion, the most abstract when applied to individuals. That is one reason why I chose to cover it first. The other is that the next five segments will include more practical solutions, but they all must be framed in the context of carrying costs to achieve the highest efficacy. My aim is to keep these installments succinct, so this post may not seem to address your personal situation. As such, I encourage you to reach out to me if you have any questions or would like a little clarification on anything covered. Thank you for reading; I look forward to seeing you again in two weeks!
References:
Hou, B. (2013, September 10). Do You Know Your Inventory Carrying Costs? Retrieved September 25, 2014, from http://www.opsrules.com/supply-chain-optimization-blog/bid/314279/Do-You-Know-Your-Inventory-Carrying-Costs
First, calculate the cost of inventory per year:
Then, divide that figure by the inventory value:
This is, in my opinion, easier to calculate for a corporation than it is for an individual. In a corporation, you can look at the cost of your warehouse, tools used in that warehouse, cost of storage solutions, cost of expansion if you run out of space, and so on. Also, you have an accurate tally of inventory book value.
For an individual, your home may be your warehouse and odds are pretty good that you don't use an inventory management program to keep track of your possessions' NBV (net book value). With this in mind, how do you use carrying costs in your personal life?
There are a few items (cars, ATVs, kayaks, RVs, etc) that carry a significant NBV and require significant storage solutions that would benefit from an actual carrying cost analysis, but for most things, you don't need to pin down your exact carrying costs for decision-making. For example, say you are considering a move to a more expensive home. It is important to evaluate the impetus behind that move. Are you moving to a safer neighborhood with better schools for your kids? Carrying costs probably aren't relevant to that decision. On the other hand, are you moving because you've run out of room in your two-car garage and you want to move to a home with a three-car and a shop? This is when carrying costs should be considered.
Here's what it ultimately boils down to: do you add value to your family and/or quality of life by increasing carrying costs? Is the value added by the purchase of a boat overshadowed by the value lost in the need for more extensive storage solutions? As stated earlier, these are easy questions to answer for a corporation, whose legal obligation is to increase wealth for shareholders. For an individual, those decisions impact myriad things. Therefore, I am in no way suggesting that there is a formula for making these decisions, nor am I making recommendations for how you spend your money. I am simply offering some things to think about to help make a more informed decision.
This topic is, in my opinion, the most abstract when applied to individuals. That is one reason why I chose to cover it first. The other is that the next five segments will include more practical solutions, but they all must be framed in the context of carrying costs to achieve the highest efficacy. My aim is to keep these installments succinct, so this post may not seem to address your personal situation. As such, I encourage you to reach out to me if you have any questions or would like a little clarification on anything covered. Thank you for reading; I look forward to seeing you again in two weeks!
References:
Hou, B. (2013, September 10). Do You Know Your Inventory Carrying Costs? Retrieved September 25, 2014, from http://www.opsrules.com/supply-chain-optimization-blog/bid/314279/Do-You-Know-Your-Inventory-Carrying-Costs
Wednesday, September 24, 2014
Introduction to Personal Supply Chain Management
Supply chain management is not a
topic at the forefront of too many minds right now. It’s a prominent topic in
major corporations, but on the local, and especially individual levels, it
doesn’t quickly come up in conversation. I’m hoping to change that. Regardless of
who you are or where you are (both geographically and chronologically), you
have a supply chain that is used to operate your life on a daily basis. Don’t believe me?
Do you have a home? What do you use
that home for? Do you have a car, a bike, or shoes? What do you use them for?
Do you consume anything? What do you consume and why do you consume these
things?
For some of us, we have a home to
satisfy basic shelter needs. Others may have homes that are used to entertain
guests or help others that are down on their luck. Some of us eat alone; others
may have large parties to engage socially and fellowship. Some of us use cars
to commute to work; others may use them to travel all over the place. Most of
us consume television, food, fuel, cellular service, and stuff for our hobbies.
Some consume materials while making arts, crafts, or even major construction
projects.
These are all great things, and I
want you to continue to enjoy what you do in life and also free up some
resources for your goals; be they a new house or sending money to help orphans
in Uganda. With a stagnant economy, however, it may be tough to find the
resources to accommodate these goals. The days of anticipating sizable raises
and lofty promotions are, for most of us, just not here anymore. And why is
that? Well, it’s because this same economy is just as stagnant for your
employer. In the corporate world, companies are learning to shift their focus
from revenue growth to diminishing operating costs through supply chain
optimization.
My assertion is that you can do the
same. How liberating would it be if you could allocate more of your resources
to your goals (capital projects) without having to wait for a raise (revenue
growth)? The same principles that apply to the corporate world can be applied
to your personal life. Over the next few weeks, I’d like to help you optimize
your personal supply chain. I will submit a new post every other week, starting this Saturday. Please share with your
friends and subscribe to get updates. Here is a rough outline to what I’ll be
covering (please email me with requests for other topics or if you’d like to
ask a question):
-
Carrying costs- the costs of ownership
-
SLOB- slow moving and obsolete inventory and
what to do with it
-
Inventory planning- how to forecast future
demand and use that knowledge to reduce costs
-
Logistics optimization- how to reduce the cost
of doing life
-
Vendor selection- considerations for choosing
when and where to buy
-
Procurement- how to buy the things you need (or-
let’s be honest- want)
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