Inventory Classification

GLENCORE
INTERNATIONAL AG
INVENTORY CLASSIFICATION
AND KPI REPORTING
GIP BEST PRACTICE DOCUMENT
Document Information
General
Project Name Inventory Classification and KPI Reporting
Document Location GIP Procurement Portal (http://procurement.glenore.net/documentation )
Document Type GIP Best Practice
Peer Review
Function Name Department Last Review Date
Author Peter McMaw Global Inbound Procurement 6th July 2016
Reviewer Regional Co-ordinators Glencore Canada Corp., 3rd Aug 2016
Copper Africa, Copper South
America, Global Inbound
Procurement
Approval
Function Name Department Signature Date
Project Gavin Heale Global Inbound 3rd Aug 2016
Sponsor Procurement
Technical
Validation
Document History
Version Date Name Description
1.0 6 July 2016
th Peter McMaw First publication of Best Practice Document
1.1 31st Sept 2016 Peter McMaw Clarification of ‘Total New stock added’ and ‘Total
stock Removed’ in Section 3 ‘Inventory
Management Reporting’. [reviewed by G Heale]
1.2 28th June 2017 Peter McMaw (i) Consolidation of ‘Strategic’ and ‘Consumable’
inventory types. (ii) Removal of ‘Items classified by
Inventory Type’ examples removed. (iii)
Modification of ITO description 3.1. to delete
reference of ‘including or excluding consumables’. .
[reviewed by G Heale]
Revision# 1.2 Review Period 2 Years Reviewed by GIP Regional Coordinators

Revision Date 28 Jun 2017 Next Review 1 Jul 2019 Authorised by Gavin Heale
INVENTORY CLASSIFICATION AND KPI REPORTING Page 2 of 12

Table of Contents
1 Inventory Management Best Practice ........................................................ 4
1.1 Purpose ........................................................................................................................ 4
1.2 Objective ...................................................................................................................... 4
2 Inventory Analysis & Classification .......................................................... 5
2.1 Inventory Analysis ..................................................................................................... 5
2.2 Inventory Types.......................................................................................................... 6
2.3 Business Impact Codes and Service Level .............................................................. 7
2.4 Movement Class ......................................................................................................... 8
3 Inventory Management Reporting ............................................................. 9
3.1 Inventory Turnover Ratio (‘ITO’) .......................................................................... 11


1 Inventory Management Best Practice
1.1 Purpose
The purpose of this Best Practice document is to:
 Establish a set of definitions for the classification of all material types (with the exception of the
production process’ primary input eg ore, concentrate, feedstock) held as inventory at any point in
time of an Asset’s economic life, based on the assessed materiality of the impact on an Asset’s
continued operations resulting from a stock-out.
 Propose a Best Practice Service Level associated with each material type to be maintained
 Propose a set of Key Performance Indicators (KPIs) based on the aforementioned material type
classification definitions, enabling consistency in the KPIs’ presentation across comparable Assets
 Defined a standardised calculation methodology for each KPI
This Best Practice does not address, without limitation, the following topics:
 Assessment of the historical or future probability of a stock-out
 The identification of an appropriate inventory strategy or defined inventory management processes
for materials required by the Asset during its economic life in respect of its material type, required
service level and probability of a stock-out.
 Inventory ageing
1.2 Objective
Definition of a recognized and universally-accepted approach to the classification of inventory material types
across Glencore’s activities, establishing the foundation necessary for the calculation and communication of
a set of Best Practice inventory management KPIs.


2 Inventory Analysis & Classification
2.1 Inventory Analysis

Multiple methods to analyze and classify inventory exist, depending on the outcome sought. Such
methodologies are typically based on variety of characteristics such as the frequency of issues (fast/slow
moving items), annual value consumed, criticality to the continuity of production, replacement lead time or
the unit price as outlined in the table below.
Example inventory classification methodologies
Assessment Description
Business Impact The impact resulting from the absence of an item from inventory or
which cannot be sufficiently quickly sourced or repaired from
internally within the Group or from an third party provider
Likelihood of Often a qualitative assessment, supported with past experience/
Occurrence operational performance and maintenance records where possible
Frequency of Classification of items in accordance with their frequency of issuance
Issues/Use from inventory storage. Key trigger in review of items for sale or
disposal.
Availability Average lead time (in days) for a supplier to deliver a replacement
stock Item to the Asset
Glencore’s Best Practice approach is based on:

1. The classification of all Items by Inventory Type
2. The materiality of the impact on the continuity of the Asset’s continued operations due to the stock-
out of an Item.
The business impact assessment is to be made by the local Asset’s management team in accordance with its
own procedures. It is routine practice that this analysis is made and signed-off by a multi-functional work
group typically comprising of, amongst others, representatives from Production, Maintenance, Logistics as
well as Procurement.


2.2 Inventory Types
Depending on their role in the continued operations of an Asset, all Items purchased can be classified
according to the following four ‘Inventory Type’ categories:
Inventory Type Purpose Inventory Type Typical Characteristics
Insurance  Mitigate risks from catastrophic failure  High Value, long lead time Items that are
of major plant or equipment to not expected to be consumed in the normal
Production, for which the downtime life of the plant and equipment - act as an
costs are very high. insurance against failure
 Proper care of these items required whilst in
storage to prevent their damage or
deterioration
Critical  Mitigate risks from failure of key  Expected to be installed and used as a
components of equipment to replacement part at a planned, future point
Production; or in the normal life/capital repair of the
 Mitigate indirect risks of extended stock- production equipment.
outs of general use items impacting  Available either off the shelf at the supplier
Production or its local dealer, ex-stock at warehouse, in
consignment, VMI1 or VHS
Consumable2  Items demonstrating regular  Any Item consumed in the production of
consumption and required for the finished goods; or
ongoing operation and maintenance of  Any Item subject to regular wear and tear in
an Asset the course of operation of an Asset’s plant
and equipment, requiring replacement after
a finite number of hours of operation.
The classification of Items by Inventory Category will vary across Glencore’s Assets and will be based on the
local management team’s assessment of multiple factors relevant to the continuity of the Asset’s operation
output such as:
 Geographic location and logistical complexity of the supply chain,
 Process and production requirements,
 Supplier lead time and number of potential alternative suppliers,
 Political instability,
 Any other relevant factor identified in the Asset’s risk management register.
It is important to note that depending in which section of the production process an Item [defined at the level
of a Product Category] is destined to be consumed or installed, the Item could in fact be classified in more
than one Inventory Type.
An accurate understanding of the local context driving the chosen Inventory Type classification is a
prerequisite to interpreting the indicators presented by an individual Asset. Particular caution is to be
exercised when attempting to draw parallels between ‘comparable’ Assets.
1 VMI: Vendor Managed Inventory, VHS: Vendor Held Stock

2 Previously identified as two separate Inventory Types (‘Strategic’ and ‘Consumable’) in earlier ‘Best
Practice’ versions. Now consolidated into one Inventory Type to prevent different interpretations of the
Inventory Type’s purpose across the Group. The local Assets’s management team however retains the right
to split this Inventory Type as it deems fit. The principle aim of the exercise remains highlighting the
difference in approach required to manage individual Inventory Types and to track their quarterly
movements.


2.3 Business Impact Codes and Service Level
Business Impact Codes provide an indication of the relative financial, safety or environmental impact of an
Item’s stock-out within an Inventory Type category. An overview of the considerations to be taken into
account when identifying a Product Category’s or individual Stock-Keeping Unit’s (SKU) Business Impact
Codes are detailed in the following table:
Business
Impact Description
Impact Code
A Major Major unrecoverable loss:
Disruption  A major production capacity loss of a key asset within a
processing or beneficiation area that cannot be recovered, or
 An extreme, high or significant risk to safety, or
 An extreme, high or significant risk to the environment, or
 Reduced equipment utilisation of bottleneck processes.
B Significant Significant recoverable loss:
Disruption  A significant production loss that may be recovered, or
 A moderate or low risk to safety, or
 A moderate or low risk to the environment, or
 Significant disruption to maintenance or production activities, or
 Reduced equipment utilisation of non-bottleneck processes.
C Minor Task may be delayed, rescheduled or a Work-Around is possible:
Disruption  Significant inconvenience to operations or maintenance activity, or
 Inconvenience results in additional major labour costs, or
 Loss of plant redundancy.
The extent and quantification of a ‘Major unrecoverable’ or ‘Significant recoverable’ production interruption
is to be defined by the Asset Management team in view of the operations production processes and capacity
constraints. The identification of risks to employee safety is to be aligned with the Asset’s HSEC risk
assessment.
Due to the comparatively precise definition of ‘Insurance’ and ‘Critical’ Inventory Types with regards to the
associated business impact it is relatively early to define and measure the required level of inventory Service
Level. However since the impact of a ‘Strategic’ or ‘Consumable’ Item’s stock-out can in fact span several
Business Impact Codes, the definition of the Service Level necessary to mitigate the risk of a stock-out by
Inventory Type becomes more dependent on a range of other demand drivers, as illustrated in the following
table.


Definition of Service Levels by Business Impact and Inventory Types
Business Impact
Code
Inventory Type A B C Service level
 100%
Insurance  Managed on a case-by-case basis
 Typically purchased with original equipment
 95%
Critical  Inventory levels and ordering managed between
pre-defined Min/Max levels, as per ERM
 Ordering conducted according to pre-defined
Consumable Max/Min inventory levels or taking into account
the Production forecast in ERM
2.4 Movement Class
This classification helps management of the organization decide where to allocate resources for purchase of
spare parts as well as to take decision strategically whether the non-moving spare parts inventory is
continued to be stored or disposed of to release the working capital locked in these spare parts.
Insurance spares typically fall into the Non-Moving category
(This should be calculated in the number of months moved in a 12 month period)
Fast Moving (F): Issued at least once a month for 5 months in a 12 month period
Slow Moving (S): Issued at least once in a 12 to 24 month period but less than that required for Fast
Moving
Non-Moving (N): Not issued in a 24 month period
Obsolete (O): Items that are not issued from stores for more than 5 years, but excluding
‘Insurance’ Items
Note: The above classification will be highly depended on the type of operation and the
regional/geographic conditions in which an Asset is operating. For example, a particular environment may
require that an Asset imports a large portion of its spares that not locally available, driving up inventory
levels.
Therefore it is important to treat each Asset individually and not to draw comparisons with other
operations.


3 Inventory Management Reporting
The inventory measurements and KPIs listed below represent a consolidated view of those in use across
Glencore and deemed most effective in the tracking an Asset’s monthly management of inventory in terms
of:
 Value
 Slow moving items
 Inventory Turnover Rate
 Service level rendered to operations
It is however important to note that further measures and KPIs may be tracked and reported at the local
operational level (e.g. Stock over Max, Returns to Stores, Stock Accuracy, etc.), as required by the local Site
management team and is free to continue to pursue. Clarification in the calculation of any of the below KPIs
can be sought by contacting the GIP team
Inventory Measures Definition

Total Actual Inventory Balance  Balance by Inventory Type at end of reporting period
[value and #SKUs]
 Includes Inventory ‘In Transit’3
 Matches balance reported by Accounting
Total New Stock Added  Increase by Inventory Type since last report
[value and #SKUs]
Total Stock Removed  Reduction by Inventory Type since last report
[change in value and #SKUs]
Net Inventory Change  Net change in stock by Inventory Type since last report
[change in value and #SKUs]
Surplus Stock by Inventory Type  Value of Surplus Stock by Inventory Type
Total Actual Inventory Balance by  Value of Stock by Movement Class, split by Inventory
Movement Class Type
Inventory KPI Definition

Inventory Turnover Ratio  Inventory turnover: total stock issuances over a rolling
(Total Inventory & by Inventory Type) 12 month period / rolling average inventory value for
same period
Service Level at Warehouse  %Number of times that an Item could be issued on or
before its forecast required/usage date
Note ‘Total New Stock added’ and ‘Total Stock removed’ are not to be interpreted as ‘Inventory Receipts’
and ‘Issues’. Any significant changes in stock are to be explained, eg write-down, sale, reduction of
maximum re-order quantities, new stock requirements, transfer of excess stock from Project ‘XY’ etc
The format of a typical inventory report is inserted in the following page.
3Conditional on the risks and rewards associated with the Item’s ownership having been transferred to the
Asset.


Report Date: June 30 2017 Inventory Type
Measures Unit Insurance Critical Consumable Total Definition
M$
Value and #SKUs of inventory at end of reporting period. Includes inventory 'In Transit'
Total Actual Inventory Balance %Total 0.0% 0.0% 0.0% (conditional on the risks and rewards associated with the Item’s ownership having been
transferred to the Asset). Matches balance reported by Accounting.
#SKUs 0
M$
Total New Stock Added Increase by Inventory Type since last report
#SKUs 0
M$ $0.00
Total Stock Removed Decrease by Inventory Type since last report
#SKUs 0
Net Inventory Change M$ $0.00 $0.00 $0.00 $0.00

Net change in stock by Inventory Type since last report
(Increases in RED) #SKUs 0 0 0 0
Surplus Stock by Inventory Type M$ $102.55 $101.10 $74.62 $63.87 Surplus Stock = Stock on Hand - Maximum Quantity (as stipulated by ERM)
M$ $0.00 Items issued from stores at least once a month for 5 months in a 12 month period.
Fast Moving
% 0.0% 0.0% 0.0% %'s expressed in terms of Total Actual Inventory Balance by Inventory Type
M$ $0.00 Items issued from stores at least once in a 12 to 24 month period but less than that required
Total Actual Slow Moving for Fast Moving inventory. %'s expressed in terms of Total Actual Inventory Balance by
Inventory Balance % 0.0% 0.0% 0.0% Inventory Type
by Movement M$ $0.00 Items not issued from stores in a 24 month period.
Class Non-Moving
% 0.0% 0.0% 0.0% %'s expressed in terms of Total Actual Inventory Balance by Inventory Type
M$ $0.00 Items that are not issued from stores for more than 5 years, but excluding ‘Insurance’
Obselete
% 0.0% 0.0% 0.0% Items. %'s expressed in terms of Total Actual Inventory Balance by Inventory Type
Inventory KPIs Unit Insurance Critical Consumable Total Definition
Inventory turnover (ITO) is calculated by dividing total stock issuances over a rolling 12
Inventory Turnover Ratio
month period by the rolling average inventory value for the same period
%number of times that an Item could be issued on or before its forecast required/usage
Service Level at Warehouse %
date
3.1 Inventory Turnover Ratio (‘ITO’)
3.1.1 Example Calculation
The following values for the previous 12 months are required to calculate the Inventory Turnover Ratio
(‘ITO’) of an Inventory Type:
1. Total value of issuances;
2. Rolling average inventory value ;
Example:
Value of Issuances (April 1, 2015 – March 31st, 2016) = $12’000’000
Rolling average inventory value for previous 12 months (April 1, 2015 - March 31, 2016) = $7’500’000
ITO = $12’000’000 / $7’500’000 = 1.6
APPENDIX A - DEFINITIONS
Typical Definitions
Business Impact Code Signifies the impact on primary production of an organisation resulting from a
stock-out situation of that particular Item.
Inventory The collection of catalogued Items owned by the Asset and held available for use at
short notice.
Item Any item purchased from a 3rd party or related supplier, required for the continued
operation of an Asset at any point in its life cycle.
Maximum Quantity Maximum stock of an SKU to be kept in inventory at any given time, as stipulated
in the ERM.
Minimum Quantity Minimum stock of an SKU to be kept in inventory at any given time, as stipulated
in the ERM.
Min/Max Minimum Quantity and Maximum Quantity of an Item required to be kept in
inventory at any one time.
Service Level It is the % of number of times that an Item could be issued before its forecast
required/usage date. An inventory optimisation software tool uses it in Min/Max
optimisation calculations.
SKU Stock Keeping Unit
Stock on Hand Quantity of a particular Item in storage, either at the Asset’s on site warehouse
locations or offsite stored by a 3rd party, but explicitly excludes consignment
inventory
Surplus Stock Surplus Stock = Stock on Hand - Maximum Quantity.
VHS Vendor Held Stock
VMI Vendor Managed Inventory


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GLENCORE

Revision# 1.2 Review Period 2 Years Reviewed by GIP Regional Coordinators