MICROSOFT DYNAMICS AX 2012

INVENTORY
OPTIMIZATION
MANUAL
Contents
CHAPTER 1 INTRODUCTION .................................................................. 5
Objectives ................................................................................................. 5
Introduction ............................................................................................... 5
Inventory Optimizer Module Navigation .................................................... 5
Security role.............................................................................................. 7
License ..................................................................................................... 8
Parameters ............................................................................................... 8
System setup validation ............................................................................ 9
Why use this add-on ................................................................................. 10
What is inventory ...................................................................................... 11
Inventory optimization ............................................................................... 12
Summary .................................................................................................. 13
Quick Interaction: Lessons Learned.......................................................... 13
CHAPTER 2 INVENTORY ANALYSIS ...................................................... 15
Objectives ................................................................................................. 15
Introduction ............................................................................................... 15
ABC analysis ............................................................................................ 15
XYZ analysis............................................................................................. 20
FNS analysis ............................................................................................ 24
Combining ABC and XYZ analysis............................................................ 29
Combining ABC and FNS analysis ........................................................... 33
Summary .................................................................................................. 36
Test Your Knowledge ............................................................................... 36
Quick Interaction: Lessons Learned.......................................................... 37
CHAPTER 3 SAFETY STOCK ................................................................... 38
Objectives ................................................................................................. 38
Introduction ............................................................................................... 38
Relationship Between Stock and Service Level ........................................ 38
Service Level ............................................................................................ 40
Replenishment Lead Time ........................................................................ 42
Safety Stock ............................................................................................. 44
Summary .................................................................................................. 46
Test Your Knowledge ............................................................................... 47
Quick Interaction: Lessons Learned.......................................................... 47
CHAPTER 4 ORDER QUANTITIES .......................................................... 49
Objectives ................................................................................................ 49
Introduction .............................................................................................. 49
Lot Size .................................................................................................... 49
How Lot Sizes Affect Safety Levels .......................................................... 50
Taking Costs into Account in Economic Procedures ................................ 51
Economic Order Quantity ......................................................................... 52
Lot-sizing Procedures ............................................................................... 54
Summary .................................................................................................. 55
Test Your Knowledge ............................................................................... 55
Quick Interaction: Lessons Learned ......................................................... 55
CHAPTER 5 DEMAND PLANNING and FORECASTING ....................... 57
Objectives ................................................................................................ 57
Introduction .............................................................................................. 57
The Influence of Demand Planning on Inventories ................................... 57
The Bullwhip Effect ................................................................................... 60
Summary .................................................................................................. 65
Test Your Knowledge ............................................................................... 65
Quick Interaction: Lessons Learned ......................................................... 66
CHAPTER 6 MATERIAL REQUIREMENTS PLANNING ........................ 67
Objectives ................................................................................................ 67
Introduction .............................................................................................. 67
Objectives of MRP.................................................................................... 67
Requirements Calculation ........................................................................ 69
Accumulated Balances ............................................................................. 71
Order Calculation ..................................................................................... 74
Impact of MRP on Inventory ..................................................................... 80
Summary .................................................................................................. 87
Test Your Knowledge ............................................................................... 88
Quick Interaction: Lessons Learned ......................................................... 88
CHAPTER 7 PRODUCTION ...................................................................... 90
Objectives ................................................................................................ 90
Introduction .............................................................................................. 90
How Do Backlogs in Production Affect Stocks .......................................... 91
Why Do Backlogs happen ........................................................................ 94
Reducing of Backlogs ............................................................................... 96
Missing Parts Management in Production ................................................ 101
 Summary .................................................................................................. 105
Test Your Knowledge ............................................................................... 105
Quick Interaction: Lessons Learned.......................................................... 105
CHAPTER 8 MEASURING INVENTORY PERFORMANCE ................... 107
Objectives ................................................................................................. 107
Introduction ............................................................................................... 107
Key figures................................................................................................ 108
Inventory Health Check ............................................................................ 114
CHAPTER 1 INTRODUCTION
Objectives
The objectives are

• Describe the basic system setup and license requirement

of the Inventory optimizer module.
• Understand the inventory optimization functions, and
settings that are required to help organize the inventory
optimization data, and processes.

Introduction

InventOps Inventory Optimizer is the first Dynamics AX

inventory optimization system.

In Microsoft Dynamics AX, the InventOps framework utilizes

your Dynamics AX data to help identify where your biggest
inventory improvements can be made.

The Inventory Optimization module is fully integrated with the

Inventory Management and Master Planning modules of
Microsoft Dynamics AX.

This section introduces the system setup of InventOps inventory

optimize

Inventory Optimizer Module Navigation

The Inventory optimizer module navigation is designed to be

consistent with and similar to the other modules in Microsoft
Dynamics AX.

When a user selects the Inventory optimizer module in the

Navigation pane, they can see an Area page containing menu
items that link to frequently used Inventory
optimization forms in the Content pane.

The menu items in the Content pane are organized into different
sections that includes Common, Inquiries, Reports, Periodic and
Setup based on the kind of tasks and type of data being setup and
maintained, and frequency of the task being performed.

Common – contains menu items for dashboard, safety stock

simulation tools etc.
• Inventory optimizer dashboard form shows the inventory
analysis (ABC, XYZ and FNS etc.) results.
• ABC-XYZ matrix safety stock simulation, ABC-FNS
matrix safety stock simulation forms allow user to run
safety stock simulations to achieve target service levels.
• Replenishment lead time monitor shows the overview of
planned delivery time for purchased items and in-house
production time for in-house production.
• Service level monitor shows the key figures of all orders,
customers and items in every period.
• Inventory health check cockpit shows all the necessary
indicators for assessing how well the inventory is
performing.

Inquiries – contains the menu items that are used to view the
inventory on-hand statuses, and history inquiry.

Reports – contains all the menu items to generate the Inventory

optimization reports.

Periodic – contains menu items that are run on a periodic basis

Setup – contains all the menu items that are used to setup and
configure the Inventory optimizer.
Security role
Before you begin to use InventOps Inventory Optimizer, work with
a system administrator to make sure that the AOS service account
has appropriate permissions. AOS service account must be in the
System administrator role in Microsoft Dynamics AX.

To access InventOps Inventory Optimizer, users must be assigned

to the Inventory Optimization Manager security role.
License

The received license information must be entered after the

InventOps model is installed.

Go to Inventory optimizer > Setup > InventOps license

information.

Parameters

InventOps Inventory Optimizer allows you to run inventory

analysis and inventory health check. Use the following procedures
to setup the inventory optimizer parameters. These are the preset
values and can be overwritten when you run the inventory analysis
and inventory health check.

Sections are:
1. Inventory health check
2. Safety stock simulation
3. Inventory categories
System setup validation

Before use the InventOps feature, it is recommended to run the

system setup validation to ensure the AOS service account is
assigned System Administrator role in Dynamics AX.
Why use this add-on

Having sufficient inventory on-hand without overstocking the

warehouse is often a balancing act between materials planning and
inventory management. Maintaining the right balance between
delivery performance and warehouse inventory becomes
increasingly difficult.

Many companies are facing challenges like:

• High inventory levels
• Low service levels
• Lack of system transparency
• Inconsistent use of planning parameters
• High manual effort for material data maintenance
• Poor quality of item master data

Utilizing InventOps inventory optimizer can result in tangible

benefits and process improvement and therefore InventOps
inventory optimizer should be used by every company that plans
and manages their inventory in Dynamics AX.

Benefits that you can expect are:

• Reduced inventory by 10% – 30%
• Freed working capital from unnecessary inventory buffers
• Increased inventory turns
• Reduced inventory carrying costs
• Lowered obsolescence rates
• Increased customer service performance

Process improvements that you can expect are:

• Sustainable, ongoing inventory optimization
• Support and drive high service levels at lowest inventories
possible
 • Frequent automated ABC-XYZ and ABC-FNS analysis

What is inventory

According to Generally Accepted Accounting Principles (GAAP),

the primary framework for financial accounting standards,
inventory is a current asset. In particular, inventory represents
“tangible personal property which are held for sale in the ordinary
course of business; are in process of production for such sale; or,
are to be currently consumed in the production.”

To ensure your ability to deliver at any time and to guarantee that

your deliveries are always prompt, the stocks in your warehouse
must be sufficient. Your ability to deliver depends directly on your
safety stocks: the greater the demand for your ability to deliver, the
greater the need for you to maintain an appropriate amount of
safety stock. Large buffer stocks in production enable cost-
optimized manufacturing that doesn’t require frequent setup
changes and can constantly utilize existing resources. This reduces
the variable production costs.

On the other hand, you can rapidly improve your ability to deliver
by maintaining high inventories. But by increasing your
inventories, you also increase the overall costs, which means you
pay a high price to ensure customer satisfaction. Low inventories,
on the other hand, clearly show you the products for which your
ability to deliver is insufficient. With low inventories, it is easier to
examine the supply chain processes and thereby ensure a long-term
deliverability based on improved processes instead of simply an
increase in inventory.
 One of the primary goals of supply chain management is to ensure
that operations within and across firms in a supply chain are
efficient. In many cases, the means to ensure efficiencies is in
inventory; more specifically, in inventory reductions. Considering
this, inventory is often viewed as a liability to efficient supply
chain management. While supply chain managers recognize the
necessity of inventory, the unwritten (and in many cases, written)
rule is to keep inventory at a bare minimum.

Inventories are held for a variety of reasons. Usually, large

amounts are invested in them and therefore, a proper control over
them is necessary. In the context of inventory management, the
three questions needed to be addressed to are

• How much to order?

• When to order?
• How much safety stock be kept?

Inventory optimization

Optimizing inventory levels is an important part of a supply chain’s

success, and is a topic of discussion in every company, in one way
or another. To optimize stock holdings, you must find a way to
balance the capital tied up in inventory with your company’s
service level goals under ever-changing demand and supply
situations. Keeping the right stock levels can be challenging, as you
neither want to cause disruptions in the supply chain processes due
to insufficient stock, nor have high storage costs due to excess
inventory. Inventory optimization should never be seen as quick
fix or a one-time balance sheet improvement effort; it’s not a
project with a set start and end date. Rather, it requires continuous
efforts and initiatives in order to achieve sustainability and
performance excellence. That being said, inventory optimization
addresses the ongoing effort to provide maximum material
 availability while simultaneously keeping minimum or optimal
inventory levels at any given time for any given demand situation.

Summary

InventOps inventory optimizer is embedded within Microsoft

Dynamics AX, and is fully integrated with the Inventory and
warehouse management, General Ledger, Account Receivable and
Account Payable modules.

The Inventory optimizer module helps Dynamics AX customers to

maintain the right balance between delivery performance and
warehouse inventory. The navigation of the Inventory optimizer
module is designed to be very similar to other modules in Microsoft
Dynamics AX.

The following chapters of this training manual will explain the

navigation, setup, and configuration in the Microsoft Dynamics
AX 2012 InventOps module.
Quick Interaction: Lessons Learned

Take a moment and write down three Key Points you have learned
from this chapter:

1.

2.

3.
CHAPTER 2 INVENTORY ANALYSIS
Objectives
The objectives are

• Explain the options available for analyzing inventories and

describes
the measures you should undertake based on the analysis
results.
• Learn more about the ABC/XYZ/FNS analysis, which is a
critical factor for inventory management.

Introduction
This chapter introduces three options for inventory analysis: ABC
analysis can be used as an inventory analysis instrument. Then a detailed
analysis can be carried out using an XYZ analysis. XYZ and FNS
analysis are two classic secondary analyses that is based on the ABC
analysis. The combination of ABC and XYZ analyses represents the
ABC-XYZ matrix, and the combination of ABC and FNS analyses
represents the ABC-FNS matrix. This chapter will describe the basic
instruments of the ABC, XYZ and FNS analyses in more detail.

ABC analysis

ABC analysis is an organizational procedure that can be used to classify

large quantities of data. The data can represent material or processes. For
inventory analyses, these classifications can represent material
consumptions, goods movements, and material stocks. It is roughly
divided into three classes (A, B, and C).
The quantity portions of materials in class A are usually approximately
20 %, whereas the value portion represents approximately 80 %. This
means those materials are the most important ones and have the biggest
potential for optimization. The quantity portion of materials in class B
is 35 %, whereas class C contains 45 % of the materials. Thus, class C
materials occur most often. However, the value of 5 % is the smallest
one. They mainly involve automatic processes to keep the costs as low
as possible.

A general problem that occurs when performing ABC analysis is the

definition of the borders between the classes. Neither the number of
classes (A, B, C) nor the class boundaries (A = 20 %, B = 35 %, C = 45
%) are fixed values.

The definition of class boundaries for specific critical value portions is

therefore a subjective decision and can vary depending on the purpose
of use. Although the InventOps inventory optimizer does suggest some
standard boundaries, you can also use your individual ones.

16
ABC analysis is used predominantly in materials management and in
sales and distribution departments to classify material types and
products to be procured and used, as well as to classify and prioritize
customers. Typically, a small number of materials tends to represent a
large portion of the overall value; however, note that the actual
relationships between quantities and values can differ by organization.

The following typical classification has been generally established:

Class A materials

Materials of the most valuable class represent 5–10 % of the total

number and account for approximately 70–80 % of the entire usage
value per period. These are high-quality materials, which have a high
value, and therefore must be handled with more care by planners than
lower-quality materials.

The prioritized handling of A materials is often reflected in the use of

exact, program-driven requirement planning procedures, an exact
inventory maintenance and control, an intensive market observation, and
the closing of master contracts with particularly efficient vendors. The
cost structures must be controlled precisely, and the determination of
procurement proposals should be carried out based on well-defined lot-
sizing processes.

Class B materials

Class B contains all types of materials that represent 15–20 % of the total
number and 15–20 % of the entire usage value per period. For these
average materials it makes sense to implement a differentiated
procedure. This means you must decide separately on the planning and
analysis methods you want to use for each material group and even for
each individual material within the B class.

Class C materials

Class C materials contain material types that represent 70–80 % of the

total number and the remaining 5–10 % of the entire usage value per
period. Class C materials are therefore of a low value, and their handling
is intended to simplify work processes and reduce costs.

Class C materials eat up your yield return. The process costs are
disproportionately high. They tie up capacities and cause approximately
60 % of all procurement processes. Here, you should consider other
strategies such as single sourcing or even outsourcing.

Class C materials should be driven in an automated way through the

supply chain without any manual effort, because the small value portion
should not be inflated by additional manual activities. Class C materials
can generally be planned using fixed or periodic lot sizes. You should
avoid doing a time-consuming inventory analysis if at all possible.
However, class C materials can have a substantial influence on the
production costs, for example, if a class C part is missing, which would
obstruct the downstream production process. This can lead to production
downtimes or delays for the B and A materials.

ABC Models

There are four ABC codes to set, depending on which classification

model is used in the company. They are defined as follows:

• Value: Specify the item's ABC code for inventory value.

Inventory value refers to the worth of the items in inventory. For
example, if A is specified in this field, the selected item is
categorized as an A item, that makes up 20 percent of the total
inventory and accounts for 80 percent of the total value of
inventory.

• Margin: Specify the item's ABC code for marginal income. For
example, if A is specified in this field, the selected item is
categorized as an A item, that makes up 20 percent of the total
inventory and accounts for 80 percent of the total marginal
income.

• Revenue: Specify the ABC code for sales. For example, if A is

specified in this field, the selected item is categorized as an A
item, that makes up 20 percent of the total inventory and accounts

18
 for 80% of the company's total revenue.

• Carrying cost: Specify the item's ABC code for attachment to

inventory. Inventory attachment refers to how long an item
remains in inventory. For example, if A is specified in this field,
the item selected is categorized as an A item, that makes up 20
percent of the total inventory and is in inventory for two weeks.
That means that A items are an expense in inventory for two
weeks.

Executing ABC Analysis

When you run an ABC analysis, all item numbers are categorized
according to the selected ABC classification and are based on the ABC
model.

This ABC analysis batch job causes automatic setup of ABC

classifications and used in other inventory optimization procedures.

Procedure: Executing ABC Analysis

This procedure shows how to set up and run an ABC classification.

1. Open the Inventory optimizer dashboard form located in

Inventory optimizer > Common > Inventory optimizer dashboard.

2. Click the ABC analysis button.

3. Enter From date and To Date.

4. Enter percentages for A, B and C materials.

 5. Specify the ABC model.

6. Click OK to commence the ABC analysis.

XYZ analysis

XYZ analysis is a classic secondary analysis that is based on the ABC

analysis. It is a method for weighting the parts according to their
consumption pattern. This means a consumption fluctuation key figure
is determined for each unit.

20
This results in the necessity of a safety stock. The goals of the XYZ
analysis are as follows:

• Identifying items that can be planned well and have a high value
portion

• Reducing the warehouse stock, especially for AX items

• Reducing inventory and process costs by increasing individual

planning costs for AX items and by significantly reducing these
costs for CZ items

• Supporting the forecast selection

There is no out-of-box XYZ analysis in standard Dynamics AX. Using

InventOps inventory optimizer, you can implement combined ABC-
XYZ analyses and create an ABC-XYZ matrix. In the following section
we’ll explain the combined ABC-XYZ analysis in InventOps inventory
optimizer.

To create an XYZ analysis, you must analyze the material movements.

For this purpose, the materials including their time series are read.
Subsequently, the standard deviation is calculated to determine the
variation coefficient. To determine the standard deviation, use the
following formula:

Then use the following formula to determine the average value of the
period values:
We calculated the variation coefficient using the following formula:

Variation coefficient = Standard deviation/average value

Executing XYZ Analysis

When you run an XYZ analysis, all item numbers are categorized
according to the selected XYZ classification and are based on the XYZ
model.

This XYZ analysis batch job causes automatic setup of XYZ

classifications and used in other inventory optimization procedures.

InventOps inventory optimizer provides two ways to determine XYZ

categories:

• Number of items in percentage

• Variance coefficient value

Procedure: Executing XYZ Analysis – Number of items in

percentage

This procedure shows how to set up and run an XYZ classification –

Number of items in percentage.

1. Open the Inventory optimizer dashboard form located in

Inventory optimizer > Common > Inventory optimizer dashboard.
22
 2. Click the XYZ analysis item percentage button.

3. Enter From date and To Date.

4. Enter percentages for X, Y and Z materials.

5. Choose the period type.

6. Click OK to commence the XYZ analysis.

Procedure: Executing XYZ Analysis – VC

This procedure shows how to set up and run an XYZ classification –

VC.

1. Open the Inventory optimizer dashboard form located in

Inventory optimizer > Common > Inventory optimizer dashboard.

2. Click the XYZ analysis item percentage button.

3. Enter From date and To Date.

 4. Enter percentages for X, Y and Z materials.

5. Choose the period type.

6. Click OK to commence the XYZ analysis.

FNS analysis

FNS analysis is a classification based on Frequency of Issues/Use:

F, N and S stand for Fast moving, Normal moving and Slow moving
items. This form of classification identifies the items frequently issued,
or less frequently issued. This classification helps inventory
management in establishing most suitable stores layout b locating all the
fast moving items near the dispensing window to reduce the handling
efforts. Also, attention of the management is focused on the Slow-
Moving items to enable decision as to whether they are required in the
future of they can be salvaged. Experience show that many industries
which are more than 15 years old have more than 50% of the stock as
slow-moving items.

24
FNS Analysis aims at classifying items on the basis of their movement
from Inventory. Here the items are classified as Fast, Normal and Slow
moving items taking into consideration both

1) Average stay of the item in Inventory and

2) Consumption rate of the item.

The various steps involved in carrying out an FNS analysis are listed out
here with an illustration:

Let there be 10 items under consideration for the FNS Analysis at the
location level. For Item code 4001, the transactions are shown as below.
Here, the total period for which the Analysis is being done is half a
month (15 days).

Step I: Calculation of Average Stay and Consumption rate (for Item

4001)

Average Stay for the item = Cumulative Inventory Holding days / (Total
Receipt quantity + Opening Balance)

= 1161/115 = 10.09 days

Consumption Rate = Total Issue Quantity / Total period duration

= 46/15 = 3.06 /day

The Average Stay and Consumption rate calculations are done

individually for all the items (in this case 10 items) for which the analysis
is being done. Let the Average stay and Consumption rates be as given
below:

FNS Classification on the basis of Average stay of the items.

The items are arranged on the descending order of their Average stays
and the Cumulative Average stay calculated. 10% of the Cumulative
average stay are categorized as F Class, 20% of the Cumulative average
stay for N Class and 70% of the Cumulative average stay for S Class.

26
After arranging the items in the descending order of their Consumption
rate, the Cumulative Consumption rate is calculated. Generally, 70% of
Cumulative Consumption rate for F Class, 20% Consumption rate for N
Class and 10% Consumption rate for S Class.

For each of the items for which Average stay and Consumption rate were
calculated and F classification done individually on the basis of both the
Average stay and the Consumption rate, the final FNS classification is
done on the basis of the matrix as shown below:
Executing FNS Analysis

When you run an FNS analysis, all item numbers are categorized
according to the selected FNS classification and are based on the FNS
model.

This FNS analysis batch job causes automatic setup of FNS

classifications and used in other inventory optimization procedures.

Procedure: Executing FNS Analysis

This procedure shows how to set up and run an FNS classification.

1. Open the Inventory optimizer dashboard form located in

Inventory optimizer > Common > Inventory optimizer
dashboard.

2. Click the FNS analysis button.

3. Enter From date and To Date.

4. Enter average stay percentages for F, N and S materials.

5. Enter consumption rate percentages for F, N and S materials.

6. Click OK to commence the FNS analysis.

28
Combining ABC and XYZ analysis

In the ABC-XYZ matrix, you can combine the results of the two
analyses and obtain important information on your materials and
inventories that enables you to define appropriate measures for
optimizing your inventory.

Optimization Using the ABC-XYZ Matrix

The combined analyses result in a matrix that contains nine values. This
enables you to implement a specific inventory optimization process for
each value. Experience has shown that this process can uncover
substantial optimization potentials.

The ABC-XYZ matrix enables you to derive actions to optimize your

inventory. For example, you can clearly see that AX materials have a
high potential for rationalization, whereas CZ materials only show a low
economic potential. This means CZ materials should be planned to be
 fully automated, thereby not wasting any of your planners’ valuable
time. However, if your planners do expend time on these materials, there
is a potential for optimizing the process at this point.

Optimization Potentials Derived from the ABC-XYZ Matrix

A B C

X High value portion Medium value portion Low value portion

Constant requirement Constant requirement Constant requirement

High forecast value High forecast value High forecast value

Y High value portion Medium value portion Low value portion

Fluctuating requirement Fluctuating requirement Fluctuating requirement

Medium forecast value Medium forecast value Medium forecast value

Z High value portion Medium value portion Low value portion

Irregular requirement Irregular requirement Irregular requirement

Low forecast value Low forecast value Low forecast value

Inventory Optimization Actions Derived from the ABC-XYZ

Matrix

X Y Z

A Automatic MRP High inventory risk

procedure

High potential for

reducing

30
 B

C Automatic MRP Level of safety stock

procedure shouldn’t be too high

Low risk

The planning process for AX materials should be automated as much as

possible. It is vital that the planner receive information on variances and
exceptional situations as soon as these fluctuations occur. The planner
should focus on AZ materials and plan them manually, because class Z
materials cannot be automated due to their fluctuating consumption
values. AZ materials show a substantial potential for reducing the
inventory.

The AX materials have highest inventory optimization potential,

because the consumption and the value are highest.

The AZ materials represent another segment. The MRP controller

should pay particular attention to this group because it includes materials
with a high value and an irregular consumption. You should implement
a smart monitoring system that automatically notifies the material
requirements planning (MRP) controller of exceptional situations.

Inventory Optimization Actions Derived from the ABC-XYZ

Matrix

X Y Z

A < 30 Days < 60 Days < 80 Days

 B < 40 Days < 80 Days < 120 Days

C < 60 Days < 80 Days < 120 Days

Also there are deriving actions based on the relationship between storage
volume and procurement costs. In the case of high procurement costs
(A) and materials with a high storage volume (X), the storage range
should be small (< 30 days) so that the capital tie-up can be kept as low
as possible and the storage space used is minimal. For materials with
low procurement costs (C) and a low storage space requirement (Z), the
storage range can be < 120 days.

Creating An ABC-XYZ Matrix using inventory optimizer

After you run the ABC an XYZ analysis, you can open ABC-XYZ
matrix safety stock simulation form.

Procedure: Open ABC-XYZ matrix stock simulation form

1. Open the ABC-XYZ matrix safety stock simulation form

located in Inventory optimizer > Common > ABC-XYZ
matrix safety stock simulation.

32
Combining ABC and FNS analysis

In the ABC-FNS matrix, you can combine the results of the two analyses
and obtain important information on your materials and inventories that
enables you to define appropriate measures for optimizing your
inventory.

Optimization Using the ABC-FNS Matrix

In the ABC-FNS matrix, you can combine the results of the two analyses
and obtain important information on your materials and inventories that
enables you to define appropriate measures for optimizing your
inventory.

The combined analyses result in a matrix that contains nine values. This
enables you to implement a specific inventory optimization process for
each value. Experience has shown that this process can uncover
substantial optimization potentials.

Combining ABC and FNS analysis, we note that all slow-moving items
are grouped under S category, this will include A, B and C sub-
categories. Action for identification of obsolescence should be taken
 initially on the category AS which is slow-moving with high inventory
values. Thus movement analysis combined with inventory value helps
to plan the purchase quantities by not purchasing items under S category,
and going slow with regard to the normal moving items. This is
discussed in below:

Optimization Potentials Derived from the ABC-FNS Matrix

A B C

F High value portion Medium value portion Low value portion

Fast moving Fast moving Fast moving

N High value portion Medium value portion Low value portion

Normal moving Normal moving Normal moving

S High value portion Medium value portion Low value portion

Slow moving Slow moving Slow moving

Inventory Optimization Actions Derived from the ABC-FNS

Matrix

F N S

A Fast moving items Dispose off slow-moving

should be kept in high items
levels

High potential for

reducing

34
 B

C Fast moving items Reduce stocks

should be kept in high
levels
Low risk

Creating An ABC-FNS Matrix using inventory optimizer

After you run the ABC an FNS analysis, you can open ABC-FNS matrix
safety stock simulation form.

Procedure: Open ABC-FNS matrix stock simulation form

1. Open the ABC-FNS matrix safety stock simulation form

located in Inventory optimizer > Common > ABC-FNS matrix
safety stock simulation.
Summary

The ABC-XYZ and ABC-FNS classifications are two of the most

critical instruments of supply chain management. With of these
analyses, you can evaluate or separately control items.

Based on the ABC-XYZ analysis and ABC-FNS analysis, you can

develop your tactics for material requirements planning and even the
entire supply chain management.

ABC-FNS analysis will help in timely prevention of obsolescence.

Test Your Knowledge

1. What is meant by inventory analysis?

2. What is ABC method of classification of inventory?

3. What are the benefits of ABC analysis?

4. What is XYZ method of classification of inventory?

5. What are the benefits of XYZ analysis?

6. What is FNS method of classification of inventory?

7. What are the benefits of FNS analysis?

8. How ABC analysis is combined with XYZ analysis to result in

effective control of inventory?

9. How ABC analysis is combined with FNS analysis to result in

effective control of inventory?

10.Compare and contrast between ABC analysis and XYZ analysis?

11.Compare and contrast between ABC analysis and FNS analysis?

36
Quick Interaction: Lessons Learned
Take a moment and write down three key points you have learned from
this chapter

1.

2.

3.
38