Inventory management - Term Paper Example

?Running head: Inventory management Inventory management 0 Background Operations management is the oversight function for the process of production and distribution of goods and services. Operations management is mainly concerned with the organization of tasks in such a way as to attain specific predetermined goals. These involve the production of goods and services. The production of goods and services can be described as the passage of raw resources known as inputs through a process to get finished goods and services known as the outputs. Inputs include information, raw materials, labor, capital and fixed and variable assets. Outputs include products for other processes, final products or services to clients. Functions within operations management include planning, setting goals, staffing, directing, controlling and organizing. An operations strategy is a well laid out, consistent and achievable set of targets, and should be related to the market and overall organizational strategy. The focus of this paper is inventory management, an important function of operations management and the operations management strategy. 2.0 Analysis 2.1 Inventory management Inventory management, also referred to as material management, is essentially the management of stock items in an organization. Inventory items are the items which are used as inputs in the production of good and services. Inventory is associated with functions such as storage, which is related to the need to keep inventory items safe and cycle, which describes the amount of stock required to be maintained at a time. Other inventory functions include fluctuations which describe contingency stock required at any time to cover unexpected shortfalls. Transportation and service encompass the movement of stock items into and out of the organization and their required maintenance (Kerber & Dreckshage, 2011). Inventory can be categorized into raw materials, work in progress or finished goods. Raw material is stock intended for the production of goods and services. Work in progress is stock that is currently undergoing processing but which is yet to be fully processed. Finished stocks refer to goods ready for sale to the end consumer and include packaged goods. Other stock categories include consumables such as office stationery and machinery spare parts that are not directly attributable to the production process. Different organizations will hold different stock varieties and quantities depending on the particular production and processes that they are involved in. While a manufacturing company for instance will hold both stocks of raw inputs and finished outputs, a supermarket will only hold stocks of finished goods and consumables (Donald & Waters, 2003). 2.2 Inventory supply management Inventory moves into and out of an organization frequently. All organizations at some point become customers, while at other times they are simply suppliers. As such, it is important to consider the handling of stock in transit. This effectively introduces the functions of the supplies department in stock management. The supply chain represents activities and organizations through which inventory passes as it heads towards its final destination. Supply chain management is an oversight function on the channels of inventory flow. Inventory supply chains can be described according to their length or breadth. Length of a supply chain is when a stock item has to pass through many suppliers before reaching the final consumer. One may for instance buy milk directly from the farmer or through a broker or from the supermarket. In the first example, the length is short as the milk does not have to pass through many people before reaching the final consumer. Breadth refers to the channels that an inventory item uses on its way to the consumer. A person can for instance get milk from the supermarket, shop, shopping mall or even from the farmer (Donald & Waters, 2003). A smooth supply chain function ensures that the business gets the right goods, in the right quantity and condition, at a reasonable price and at the required time. The economic order quantity (EOQ) helps the management to determine when and how much stock to acquire over a given time. EOQ bases its decisions on the costs associated with transportation and purchase of inventory items. Other order quantity methods include the statistical reorder point (ROP) which uses information of stocks at hand and stocks ordered to determine future order quantities. Materials requirement planning (MRP) uses forecasts of the expected material usage to determine the stock quantities to be ordered and their order times. It uses production schedules and bills of materials (BOM) (Pooler, Pooler & Farney, 2004). Just-In-Time inventory relies on the actual consumption of materials to determine the appropriate timing of buying decisions. Just-In-Time focuses on reducing inventory wastage throughout the production process. If there is a 4% normal loss for instance, rather than purchase more stock to cover the effect of the normal loss, Just-In-Time requires that the normal loss should instead be reduced. It seeks to create 100% efficiency in the use of inventory. Some major elements of Just-In-Time include using a stable production schedule at all times. It involves reduction or complete elimination of time required for set up through proper planning, product and process redesign. It also results to reduced lot sizes through enhanced cooperation with suppliers. Just-in-time reduces lead times through group technologies, thus enhancing coordination and cooperation and reducing queue lengths. The use of flexible personnel and carrying out of preventive maintenance are also important Just-In-Time tools. This approach reduces inventory holdings and wastages in production inputs such as stock and human labor (Just-In-Time Production, 2006). Inventory Supply management is crucial to the inventory management function. The supply function helps in reducing lead times and thus the level of stock required to be held at a particular time. It can also help in enhancing the supplier quality programs through training, availing technical knowledge, support and choosing supplies that are within close proximity to reduce transportation costs. The functions of the supply department should be enhanced to improve the entire inventory operations management. 2.3 Inventory valuation methods There are different methods of valuing inventory. These include the first in first out (FIFO) method. This method values stocks depending on their arrival date with the oldest stock items leaving the storage facility first and at their purchase cost. Last in first out (LIFO) is a reverse of this whereby stocks that enter the storage facility last are the first to leave and are valued at their purchase price. Average cost methods use the average of the purchase costs of all stocks in the store. The standard cost method sets a fixed value for all stock over a given period of time, for instance one year. Replacement cost method values stocks at their replacement cost. The actual cost method values inventory according to their actual acquisition costs (Pooler, Pooler, & Farney, 2004). 2.4 Inventory control systems 2.4.1 Two bin System As the name suggests, the system is comparable to a two storage facility system. One of the storage facilities is used to store inventory that has just been delivered while the other stores inventory of the production processes. Immediately the first store goes empty, a reorder is done to refill it. This ensures that there is sufficient stock in the organization for production at all times. The differentiating factor between a two bin system and a physical counting system is that a two bin system is electronic (Inventory Management Review, 2005). 2.4.2 Batch system A batch refers to the quantity of a product whose production involves similar units of production added to a distinguishable product over a period of time. As such, the end product is homogeneous. Inventory control through batches groups together similar inventory items. It may also group inventory that is intended for the production of homogeneous products. In batch processing, process outputs appear in the form of material quantities or lots. The output of a batch process is called a batch and is defined as the item produced at the end of a clearly distinguishable batch process (Barker & Rawtani, 2005). An example would be the quantity of sugar required to be mixed with milk to produce chocolate. These quantities are brought together in batch processing. Most of the computerized manufacturing systems use batches for recording and controlling stock inputs. 2.4.3 Perpetual Tracking Perpetual tracking is an inventory tracking system that involves actual counting of stock items. This method counts inventory items leaving the system only and not those in the system. Through balancing of the amount of inventory entering a system and the amount of inventory leaving a system, it is possible to ascertain the quantity of inventory in the system. Perpetual tracking relies on demand to track inventory quantities. Demand can be recorded after a period of time, such as a day or week, in batches or it can be recorded in real time. Real time tracking involves recording each inventory item independently as it leaves the system. This system is ideal for organizations with few product lines (Inventory Management Review, 2005). 2.4.4 On line system These are electronic inventory control records. An inventory system enhances the management of inventory and eases the reorder and ascertainment of available stock quantities. A good inventory system should have clear and well organized location names, readable and unambiguous labels. It should also have short and unique inventory codes, specific units of measure for all inventory, good inventory policies and competent staff. On line systems enable control and access of inventory information remotely. This enhances oversight and overall inventory control. 2.4.5 Point of sale system A point of sale system is an electronic cash register that doubles up as an inventory control electronic system. It is used in retail organizations such as supermarkets. The system is used by cashiers in organizations that deal with the sale of inventory items to record cash and inventory movements. The system can be used, with the Universal Product Code (UPC), to track stock items through recording and deduction product numbers of outward moving stocks (Inventory Management Review, 2005). Once inventory items are supplied, the stores officer records these items in the electronic system. Each item that leaves the system is deducted at the point of sale. At any time therefore, the system holds accurate inventory levels information. Over time however, reconciliations have to be made between actual stock levels and system stock levels. 2.4.6 Radio frequency identification system A radio frequency identification system (RFID) is the method of tracking inventory movements through automatic inventory counting. The RFID is better than the UPC in that it counts actual stocks and its figures are inclusive of stock losses as a result of scrapping, stealing or any other reason. Unlike the UPC’s, this system can be used to establish actual whereabouts of all stock items. As such, its figures are accurate and match with actual stock figures (Inventory Management Review, 2005). 2.4.7 Physical system This involves the physical counting of the items in stock. It is manual and does not involve electronic systems. In this system, counting can be continuous or periodic such as after one day, one week and so on. Physical counting is tedious as it involves labor intensive methods. This system makes it difficult to track inventory movements in real time thus resulting in losses through unauthorized means. 3.0 Conclusions Operations management is an important function for every business. The success or failure of a business is directly attributed to the level of efficiency in its operations. An organization’s competitiveness is also affected by its operational efficiency. Inventory management is among the key pillars of operations management. It aids in reducing business costs and lead times, while increasing operational efficiency. Inventory management is therefore an important function of operations management. References Barker, M., & Rawtani, J. (2005). Practical batch process management. Oxford: Elsevier. Inventory Management Review (2005). Different Inventory Systems. Retrieved October 3, 2011, from http://www.inventorymanagementreview.org/2005/10/different_inven.html Donald, C., & Waters, J. (2003). Inventory control and management. West Sussex: Wiley Publishers. Just-In-Time (JIT) Production. (2006, January). Retrieved October 3, 2011, from http://personal.ashland.edu/~rjacobs/m503jit.html Kerber, B., & Dreckshage, B. J. (2011). Lean Supply Chain Management Essentials: A Framework for Materials Managers. Boca Raton: CRC Press. Pooler, V. H., Pooler, D. J., & Farney, S. D. (2004). Global purchasing and supply management: fulfill the vision. New York: Kluwer Academic Publishers. Read More