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 good inventory from bad in their facilities. You spent too much time and effort justifying the amount of work in progress and available inventory at your facility. Much of the inventory is necessary for proper linkage and flow throughout the value chain. Management wants inventory to be the “right size”, however they cannot quantify that number, so the directive simply becomes “less inventory”. In frustration, blanket cuts are implemented across all inventory. This has a negative impact on customer service levels. Now you are cutting not only excess but also necessary inventory.
The Inventory Quality Ratio (IQR) is a tool that can easily distinguish where to start to make necessary inventory adjustments.
This is how the inventory quality index (IQR) works. Start by dividing your inventory into four quality categories. You can change the parameters according to your industry.
Active– Items with future requirements and use in the last six months.
slow movement– Items with future requirements but not used for 6 months.
excess– Articles without demand and without use for 6 months.
Obsolete – Articles without demand and without use 12 months.
Using your current ERP (Enterprise Resource Planning) systems, find the dollar amount for each category. The inventory quality ratio (IQR) is simply the active inventory divided by the total inventory.
A perfect IQR would be 100%, which means that all inventory dollars are in the active category. Don’t be surprised if your manufacturing company is operating in a range of around 40-45%. That is the range I would expect to start with. With this tool, inventory professionals can drill down to the specific item and update order policies or make other corrections as needed. Once inventory quality is identified, you can target reductions without negatively impacting customer service levels.
Inventory dollars alone don’t tell the whole 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 Motion – 80K
No movement – 20K
Obsolete – 5K
Total Inventory – 150K
RIC percentage: – 30%
Warehouse 2
Active – 75K
Slow Motion – 43K
No movement – 25K
Obsolete – 7K
Total inventory -150K
RIC percentage: – 50%
One thing to remember: Most ERP software packages are configured to provide messages (speed up, defer, buffer, for example) only on WIP (work in progress) inventory. In the future, I would recommend that ERP systems incorporate IQR messages for completed items to put away.
With messages for items in stores like “Slow Moving, Excess or Obsolete – Please Check”, you could beat that call from the accounting department!