March 1996 € Volume 6 € No. 3

Dear APICS

ECR, QR and More on Excess Inventory

By George Johnson, CFPIM



Dear APICS: What is the difference between ECR and Quick Response?

Reply: ECR (efficient consumer response) and quick response (QR) both are rapid response order/replenishment systems. Both are founded in the spirit of Just-in-Time and provide competitive advantage via speed. Both use bar coding, network communications and, very important, common communication standards.

Universal product codes (UPCs) were developed and implemented by the food industry in the early 1970s. Initially, this bar coding system and related technology were used primarily to improve grocery store inventory control. However, it was the textile and apparel industries that first experienced the competitive necessity and had the foresight to expand the technology into its retail channels and supply chains to compete on the basis of speed (quick response).

About the mid-1980s, the textile and apparel industries were in serious competitive difficulty, especially against low-cost imports. Under the leadership of Roger Milliken, the foundation of an industrywide QR strategy was developed, including technology (e.g., bar coding, EDI) to enable rapid, predictable flow of information and merchandise among "trading partners," and standards for industrywide communication. The standards concerned both label formats and message transaction sets. Today, QR programs are very successfully utilized in several retail industry channels/supply chains.

The grocery industry "hit the wall" about 1990 and realized it needed to reengineer its overall operations in the direction of quick response, too. ECR is the quick response program of this industry, connected to its suppliers and carriers throughout the food industry. The analysis leading up to ECR revealed a $30 billion potential by improving four particular areas: efficient assortment; efficient new product introduction; efficient promotion; and efficient replenishment.

A good source of information about these programs is the annual QuickResponse conference and its published proceedings. Contact: AIM USA, 634 Alpha Drive, Pittsburgh, PA 15238, (412) 963-8588.

References
1. Bravman, Richard, "Quick Response-An Introduction," Conference Proceedings: QuickResponse 93, AIM USA, Pittsburgh, Pa., 1993, pp. 1-8.

2. Jenkins, David B., "ECR: QR Strategy in the Grocery Industry," Conference Proceedings: QuickResponse 95, AIM USA, Pittsburgh, Pa., 1995, pp. 257-265.

Dear APICS: I have too much inventory because of lifetime buy situations. What do I do with it and are there better solutions?

Reply: Let's look at this question in two parts: what to do with excess inventory, and how can excess inventory be prevented.

First, it might be useful to indicate what is meant by "lifetime buy." Lifetime buy generally refers to a situation where there is only a single opportunity to purchase product or parts and the purchased supply is projected to last until the product or part no longer is needed/demanded. The necessity to engage in such one-time buys may be triggered by a sole supplier going out of business, by the planned elimination of a product line or part, by regulations or trade practices affecting service part availability, or by company policy, for example. How to estimate the size of such a buy is explained in Brown (1977, pp. 259-61), "Terminal Service."

Now, what to do with excess inventory? Excess inventory is that portion of the on-hand and on-order supply that exceeds probable demand over some specified planning horizon, often expressed as a time-supply (e.g., more than 18 months supply). Sometimes, however, the limits that mark the beginning of excess are based on other factors such as limited storage space, limited total investment for inventory or limited total weight allowance.

There are several options for elimination of excess inventory. One is to return it to the supplier for credit. In a true last-buy situation, this may not be feasible. Another option may be to ship it to another location where it is needed-in your own company or another. Still another option is to mark down the excess to increase its attractiveness in the marketplace, influencing demand (everyone loves a bargain).

Another possibility is to consult your design engineers about finding another use for the excess. Could it be designed into another product or be inexpensively modified for other use? Promotional use might provide another outlet: give it as free samples to induce or reward purchase of other things you market. Auction may be a way of recovering at least part of the investment in the inventory, as might be donation to charitable causes. In the final analysis it may be necessary to scrap the excess when the accountants say it would be OK. (Silver & Peterson, 1985, pg.383, "Options for Disposing of Excess Stock.")

To prevent excess inventory, the prescription is simple, but hard to implement consistently: "Don't buy more than is needed." Why is it so hard? 1.) Forecasts of demand tend to be less accurate the farther they are projected into the future. Lifetime can be a long time.

2.) Buyers can be unintentionally incented to make larger rather than smaller quantity purchases, depending on how their performance is measured.

3.) Sometimes material planning, facility design and operating policies are misguided. For example, if safety stocks are all based on a rule of thumb of x weeks supply, they are set on an inappropriate basis (i.e., based on the average rate of demand rather than on the variability of demand), which could mean that safety stocks are the real culprit.

Maybe lot size inventory is too large because costs of reorder or setup are too great, encouraging larger lots. If so, work toward smaller lots. Maybe process layouts involve unnecessarily long, convoluted travel paths. These "long pipes" contain the time supply of inventory appropriate to their length and flow rates. Shorten the pipes and the WIP will come down.

Even though the lifetime buys appear to be the culprit in excess inventory, they may not be. A look at the total inventory picture and activities that affect it may reveal that lifetime buys are done correctly and other procedures are inserting more into the system than they should.

4.) It was mentioned earlier that a lifetime buy might be forced by the planned phase-out of a product that needs continuing service part support. Perhaps it would be economically prudent to buy the equipment that produces the service parts and occasionally hire a retired machinist to produce small lots of the parts as needed.

5.) For the longer run, it could prove useful to engage in design for maintainability, where components likely to need service replacement can be common to many models of product.
 The guidelines for preventing excess inventory boil down to doing smart things to avoid creating demand in the first place for unique products/parts; finding economically justifiable ways to buy/produce in small lots in short pipeline systems at the "market rate of use"; employing appropriate models, rules and policies to influence/make decisions that increase inventory; and making forecasts as realistic as possible, if they can't be eliminated by short lead times.


References
1. Brown, Robert, Materials Management Systems, Wiley-Interscience, 1977.

2. Silver, E.; Peterson, R., Decision Systems for Inventory Management and Production Planning, Second Edition, Wiley, 1985.
This department is provided to answer technical questions regarding problems in production and inventory control. Readers are invited to contact George Johnson, APICS National Research Committee, Rochester Institute of
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