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Limits of this measure


Inventory Efficiency depends on how you measure your inventory.


In this chapter we are going to focus on Inbound Inventory Efficiency, i.e. the measure of Inventory Efficiency for components or raw material. These remarks can also be used for finished goods: you just have to replace suppliers by customers.


Time of the measure

Given one of your suppliers is delivering every day, if you take the measure of your inventory just after the receipt of the material, the inventory will be higher than if you take your inventory just before its receipt. So it is important to measure the efficiency always at the same time of the day if you want to compare it day after day.


Perimeter of the measure

Example 1
You own material when it is picked-up (contract using Incoterm EXW for example) but you are not able to include this in-transit material in your inventory book due to different reasons:

  • transit time is too short (few hours) and it is difficult or without added value to track this stage of the Supply Chain;
  • no information system is settled-up with the supplier to be aware of this data before the in-house receipt.

In this case the transit-time for the Inventory Efficiency calculation has to be considered at 0.
Example 2
You have a supplier overseas with FOB condition, you own material when it is loaded on the boat. You are aware of this operation only a few days later. In this case, the transit time to be considered is not the real transit-time. It is the time between the date the ownership information is taken into account in your inventory book and the date of the in-house receipt of the material.

The Maximum Inventory Needed is calculated based on the transit-time viewed through your inventory management system. It is called Information Transit Time and generaly is not equal to the Physical Transit-Time.

If you are not able to capture your in-transit inventory, the Information Transit Time has to be at 0.



Input method of the measure

Example 1
The time between the physical receipt and the update of the inventory management system can also impact the Inventory Efficiency. For example, if you update your inventory one day after the physical receipt, your efficiency may seem improved.
Example 2
Supplier consignment is sometimes used . The transfert of ownership in your inventory management system may be done once a day but material could be physicaly picked-up multiple time per day and consumed immediately. Again, this delay between the receipt and the consumption in your system, as well as the choice of grouping the transferts of ownership in one movement can disturb the efficiency calculation.
Example 3
If our consumption is done by backflush of a booking which happens a long time after the real consumption of the material due to the process lead time, it affects the efficiency value.


Conclusions

In general, it is difficult to compare Inventory Efficiency of 2 organizations due to differences on what is considered in the inventory. But for a given organization, if the inventory measure is not changing, it is a very good tool to detect your opportunities of inventory reduction and track your improvements.

What you consider as Transit Time as well as Time Between 2 Deliveries in the Inventory Efficiency calculation have to be carefully validated in order to provide the most accurate results.

People generaly think that they can use the VRO loop to calculate Inventory Efficiency. This is a mistake. VRO loop includes a period between the counting and the pick-up time when material is not owned by the customer. This period cannot be considered in the Inventory Efficiency calculation.

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