IQR stands for Inventory Quality Ratio. This is a very powerful and effective tool for inventory valuation, reduction and review.
Inventory managers find it very difficult to distinguish the good from the bad inventory in their facilities. You spent too much time and effort justifying the amount of work in progress and on-hand inventory in your facility. Much of the inventory is necessary for proper linkage and flow throughout the value stream. Management wants the inventory “right sized” however they can’t quantify that number so the directive simply becomes “less inventory.” In frustration across the board cuts to all inventory is implemented. This has a negative impact on customer service levels. You’re now not only cutting excess but necessary inventory as well.
Inventory Quality Ratio (IQR) is a tool that can easily distinguish where to begin making the necessary adjustments in inventory.
This is how Inventory Quality Ratio (IQR) works. Begin by dividing your inventory into four quality categories. You can change parameters based on your industry.
Active– Items with future requirements and usage within the last six months.
Slow Moving– Items with future requirements but no usage for 6 months.
Excess– Items with no demand and no usage for 6 months.
Obsolete – Items with no demand and no usage 12 months.
Using your current ERP (Enterprise Resource Planning) systems find the dollar amount for each category. The Inventory Quality Ratio (IQR) is simply active inventory divided by total inventory.
A perfect IQR would be 100% meaning all inventory dollars are in the active category. Don’t be surprised if your manufacturing company is operating around 40-45% range. That is the range I would expect to begin. With this tool Inventory professionals can drill down to the specific item and update order policies or make other corrections as needed. Once the quality of the inventory is identified you can target the reductions without negatively impacting customer service levels.
Inventory dollars alone don’t tell the full story. Below is an example of two warehouses with 150K of inventory. IQR clearly identifies, which warehouse has better managed inventory and where to look for reductions.
Warehouse 1
Active – 45K
Slow Moving – 80K
No Moving – 20K
Obsolete – 5K
Total Inventory- 150K
IQR Percentage: – 30%
Warehouse 2
Active – 75K
Slow Moving – 43K
No Moving – 25K
Obsolete – 7K
Total Inventory -150K
IQR Percentage: – 50 %
One thing to remember most ERP software packages are configured to provide messages (expedite, defer, damper e.g.) on WIP (Work in Progress) inventory only. In the future I would recommend ERP systems incorporate IQR messages for items completed to stock.
With messages for items in stores such as “Slow Moving, Excess or Obsolete – Please Review” you might just beat that call from the accounting department!