May 4, 2009: A disturbing study of the popular Min/Max ordering system
May 4, 2009
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So you love Min/Max.
Yeah, I know: “It’s so easy.” And, “I just set my levels and the ordering takes care of itself!” Parts managers love it, and I see it everywhere I go.
But in my last shop visit I got curious. The parts crew swore by Min/Max, and had been using it for years. They set the minimum, and when the on-hand fell through that level, their computer system ordered it back to the maximum, which they had also set. Easy as pie.
But I wondered what happened when the part was declining in activity. What was going on when it hit the reorder point, was brought in and then … you get my drift? What does Min/Max do when there are no sales? The answer: It orders, and then does … nothing — completely content with its maximum on-hand quantities. Everybody’s happy.
So, I ran a little report. Tell me, computer, of those parts that are sitting at the maximum on-hand quantity, how long have they been there? In other words, for those parts at the maximum level, how many days has it been since they showed a sale? They were hot. We ordered more in. And now what? Disaster. Eighty percent of all part numbers at the maximum had not had a sale in 18 months. A year and a half, sitting at the maximum point, with no activity. They had each been ordered back to the maximum when they dipped below the re-order point, months ago, and now, there they sat: $50,000 worth of parts, sucking up capital, space, insurance, inventory tax and whatever else you can attribute to the cost of carrying inventory.
This bugged me. So when I returned to my office, I ran the tests against the parts inventories of more than 300 dealers from all across the nation. Same question: Computer, tell me, of those parts using Min/Max, how is the on-hand and how are they doing in sales?
Again, disaster. But more than that, it was mega-disaster. Look at the chart. I had almost $29 million of Min/Max parts inventory in front of me, and the results were damning. The value of parts on the shelf that were turning (sales within the year) were about $15 million, or 50 percent. And the other 50 percent? Some had sold up till a year ago, others 2 years back, then 3, 4 and on, up to a large group, $5 million worth, that had sat 10 years at the max. No sales. Ten years. All toll? About $15 million turning, and about $15 million just sitting, eating up space. Pretty obvious. Min/Max works great when the part is moving. You will absolutely not be out of this baby, ever, because you will always hit the re-order point that you set in time to get more in. A conservative parts manager will set those re-order points high, and maybe even set the maximums high, so that he or she will absolutely not run out. Ever again. No sir. Can you say, “I N S U R A N C E?”
But does that same parts manager watch to see when the part stops moving? And then, does that parts manager adjust the Min/Max down to a more realistic point? The answer is obvious: Nope.
Any good computer inventory control system will look three directions when calculating a suggested order. It will first look back: sales history, lost sales, actual usage over at least a year in that shop, in that town, in that county, with their customers. Every place is different, and only your past sales will predict your future sales.
Second, that helpful computer system will look at the present. What is your on-hand today? What do you have on order today?
And third, that computer will look into the future, try to see through the mist and tell you what it thinks you will need tomorrow: What is the general pattern of sales in your store? What months are historically high, and which months are low? All of this goes into ordering. And if you leave out any piece of it or if you allow the computer to ramble on with outdated information and instructions, you are headed for a wreck. And in this case, the wreck just cost this dealer $50,000.
Yes, use Min/Max, but use it wisely.
This study shows that it works well where it was intended to work: Fast-moving parts, with the complete assurance that they will continue to move. The second those parts start to slow down, somebody has to put on the brakes.