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Methods of Inventory Management - Business Plan Example

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This plan demonstrates that there are various methods of inventory management such as ABC analysis, EOQ, VMI, CMI etc…
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Methods of Inventory Management
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Download file to see previous pages Often, in a typical organization only 5-20% of the items incur about 60-75% of the inventory expense; these items are called ‘A-items’.  The items in this class call for close attention, and continuous reviewing. The ‘B’ class of items generally accounts for 20-50% of the entire items and are about 15% of the inventory items. The remaining items that are of the minimum costs and require minimum controls are the items of ‘C-Class’ (Silver and Peterson, 1985). The type of inventory management that is based on this Pareto principle is called ABC inventory management. This type of inventory management is shown in Figure 1.
Efficient ABC inventory management results in selective controls on the inventory leading to better management and avoid wastage of precious management time. Selective controls also reduce the confusion that may arise out of too many management controls. The technique results in improvement in inventory cycle time and service levels. However, ABC Inventory management calls for record accuracy and Cycle counting. Moreover, the technique may lead managers to completely ignore the C category which may result in delays in production.
Most of the ERP packages available in the market provide ABC analysis tools. For example JD Edwards can be used by organizations to classify items on the basis of total sales, gross margin, or on-hand value. The package also enables different ranking percentages in each category. Besides this, SAP, PeopleSoft and Oracle E-business suite also enable ERP analysis. Small and medium sized companies can implement ABC analysis using a simple spreadsheet application.
One of the basic requirements of an efficient inventory management requires inventory to be low enough to avoid excessive inventory holding costs but high enough to reduce the ordering and setup costs. The quantity that balances these contrasting pressures and represents the best cycle inventory level for an item is called the Economic Order quantity.  ...Download file to see next pagesRead More
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