Forecasting Inventory

with CoVM
Tom Rafferty, Director, Supply
Chain STO
Copywrite Supply Chain STO, 2002

The CoVM Approach

Step 1 Pareto Analysis
Step 2 - CoVM
CoVM
CoVM
CoVM
CoVM
CoVM

Analyses
Ranking
Matrix
Ratios
Management
Copywrite Supply Chain STO, 2002

CoVM Analyses
Its a ratio
Find the mean
Find the standard deviation
Divide the Standard Deviation by
the Mean

Copywrite Supply Chain STO, 2002

CoVM Ranking
CoV a

<= 25%

CoV b

> 25% <= 50%

CoV c

> 50% <= 75%

CoV d

>75% <= 100%

CoV e

>100%

Copywrite Supply Chain STO, 2002

CoVM Matrix
Aa

Ab

Ac

Ad

Ae

Ba

Bb

Bc

Bd

Be

Ca

Cb

Cc

Cd

Ce

Da

Db

Dc

Dd

De

E
Copywrite Supply Chain STO, 2002

CoVM Demand Profile

Erratic
Variable
Steady

Irregular
Lumpy
DEAD
Copywrite Supply Chain STO, 2002

CoVM Unit Sales:SKUs

65% Sales
5%
Sales
1%
SKU's

15% Sales
5% SKU's

5% SKU's
5% Sales
10% SKU's
10% Sales
72% SKU's
0% Sales

3% SKU's

Copywrite Supply Chain STO, 2002

CoVM Management
Manage
Vigorously

Urgent
Attention

Track
Vendor Managed
Inventory
Consignment Stock
Housekeeping
Copywrite Supply Chain STO, 2002

Case 1
Some Details

Copywrite Supply Chain STO, 2002

Case 1 Pareto Analysis

100%

90%

80%

Rank
A
B
C
D
E

70%

60%

50%

40%

% Sales
80%
10%
5%
5%
0%

% SKU's
14%
25%
37%
97%
100%

30%

20%

10%

0%
A

Copywrite Supply Chain STO, 2002

Sales of five A products

One forecasting methodology used
for all A products
Annual Unit Sales ranges from
7,100 to 7,800
Average Monthly Unit Sales ranges
from 595 to 650

Copywrite Supply Chain STO, 2002

Sales of five A products

How do you do
anything useful or
meaningful with
all A SKUs?

Copywrite Supply Chain STO, 2002

Aa, Ba, Ca Actual Units

Sold

Copywrite Supply Chain STO, 2002

Aa, Ba, Ca, on a Log Scale

Copywrite Supply Chain STO, 2002

The Log Scale

Like CoVM , we are looking at
relative values rather than actuals
Relative values allow meaningful
comparison of data sets that have
different means and standard
deviations
CoVM and the Log Scale reveal
these relationships
Copywrite Supply Chain STO, 2002

Back at the oasis

Aa
Ba
Ca

Demand will not

fluctuate wildly
Forecast
Maybe a Moving
Average

Watch
Probably the
Tracking Signal

Da
Copywrite Supply Chain STO, 2002

Manage Vigorously

Ab

Ac

Bb

Bc

Demand is variable
Need to
understand the
drivers of
variability at an
item level
Represent up to
65% sales from 5%
SKUs

Copywrite Supply Chain STO, 2002

Fix Urgently

Ad

Ae

Sales are very erratic

In some cases 50%
of sales are made in
one month and it is
not due to
seasonality
Makes forecasting
difficult
Only 5% SKUs but
15% of sales

Copywrite Supply Chain STO, 2002

Vendor Managed/Held
Stock
Bd
Cb

Cc

Cd

Irregular demand,
seasonality and
random shocks
10% SKUs at 5%
Sales
Could the suppliers
do a better job
managing the
inventory?

Copywrite Supply Chain STO, 2002

Lumpies
Be
Ce
Db

Dc

Dd

De

The rats and mice

Demand either too
irregular or too small
to pick!
70%+ of SKUs, 10%
sales.
Consignment Stock?
Direct Delivery?

Copywrite Supply Chain STO, 2002

Remove/Review
E
Approx 3% of SKUs that have not moved in 12
months.
These look remarkably dead
Write them off, get rid of them and get them
off the catalogue!
Copywrite Supply Chain STO, 2002

Results
Case 1
Family business Annual revenue $40m
Reduction of capital tied up in inventory by $1.4m
Reduction in annual carrying costs of $650k

Case 2
Average Inventory $4m
Reduction of capital tied up in inventory by $2m or 50%
Reduction in annual carrying costs of $900k per annum

Case 3
Government Dept - $40m revenue
Potential to reduce capital invested by $3m
Reduction in carrying costs of $1m per annum

Copywrite Supply Chain STO, 2002