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Inventory profile analysis (IPA) is a technique developed by the author to analyze aggregate finished goods inventory and predict customer service level as measured by item fill rate or, given a desired service level, calculate inventory requirements in a make-tostock environment. Though originally developed for a manufacturer, IPA can be used by any organization attempting to manage inventory stocked in multiple locations. IPA compares actual to desired available quantities of each stockkeeping unit (SKU) [51 and summarizes the data as shortage and excess. Unlike inventory turnover, months on hand (MOH), and similar aggregation techniques, IPA does not "net" excesses in one SKU against shortages in another.
SOLA Optical USA, a major manufacturer of prescription lenses for eyeglasses [10], conducted a sixmonth parallel study of IPA and MOH. The results showed IPA to have a higher correlation to service levels than did MOH. In addition, IPA indicated inventory reduction opportunities not apparent using MOH. IPA has been used at SOLA for new-product planning, management of established products, and disposition of discontinued products.
SOLA sells about 200,000 lenses a day (approximately 15,000 part numbers) from eight distribution centers (DCs) in the United States. Customer service objectives are 95 to 99% same-day fill rate from the customer's local DC. In early 1997 service levels and backorders had reached unacceptable levels. Through the use of IPA and other techniques, backorders have been reduced by 90% and service levels are at or near their objectives. With IPA, SOLA is providing better customer service with less inventory.
Make-to-stock (MTS) is an inventory strategy in which goods are manufactured and held in anticipation of future demand. MTS is frequently used as a competitive strategy, providing immediate response to customer orders. If the desired item is not available when the customer orders it, either the item is backordered, the demand is satisfied by the competition, or the customer goes without-a disappointing situation for both the customer and the manufacturer. Unsold inventory, on the other hand, consumes working capital and must eventually be written off. The goal in an MTS organization is to have exactly the right quantity of each item, at the right location, at the right time [7].
One measurement of success would be a 100% fill rate, but because of...