Inventory Control Methods - Research Paper Example

Inventory Control Methods Table of Contents Table of Contents 1 Introduction 2 Statistics in Business 3 Six Sigma 3 Statistics in Inventory Control 5 Use of ABC Method 5 Information Technology (IT) in Business 6 Information System in Inventory Control 6 Business Intelligence (BI) Tools 7 Information Technology (IT) in Supply Chain 9 Conclusion 12 Works Cited 13 Introduction In present day context, majority of business enterprises confront the challenges of using vast amount of data. The business data not only comprises of simple databases but also include information regarding e-mails, customer calls, messages, and other files which are important for organization. The main difficulty that the organizations are facing is that data are available but turning the data into useful information for organization is at times not quite up to the desired level. In this context, the statistical techniques and the Information Technology (IT) are useful for exposing hidden information of business. The thesis will describe the role of statistics and IT in inventory control. Besides, it will also describe how better management of inventory can lead to organizational success. Statistics in Business Statistics is the assortment of approaches, methods and activities employed by any company to control the production, product quality and service. Statistical Process Control (SPC) starts with product development where the elements of product are determined to maintain the quality. Through SPC a company can observe the production in each phase. Several control charts let organizations to understand about the status of any process and thus minimizes the rate of defective product. Companies such as Ford, Ferrari and BMW among others, focus strictly on product quality and control the processes of assembly line effectively (Lind, D. & Et. Al., “Statistical Techniques in Business and Economics”). Six Sigma Six Sigma is a statistical package which aims to improve the superiority of products and services. It helps to decrease the disparity in the production process and provides quality services to customers. The main objective of Six Sigma is to minimize defective products and error rate which can lead to customer satisfaction and higher revenue. Six Sigma uses several statistical methods to gather and examine data that are required to minimize variation in production procedure (Lind, D. & Et. Al., “Statistical Techniques in Business and Economics”). The practical example of Six Sigma in business is Wipro. It was the first Indian organization which had implemented Six Sigma in their business. With the help of Six Sigma, Wipro had successfully improved the business performance by understanding customers’ demand. The waste in production has been minimized significantly in Wipro and it has experienced 35% increase in productivity. The rate of failure has reduced to 1%. The rate of defective software products has also reduced to 5%. Six Sigma has brought undeniable accomplishment for Wipro with respect to customer satisfaction and development of internal performance (Sharma & Et. Al., “Six Sigma at Wipro Technologies: Thrust on Quality”). Several big organizations such as General Electric use Six Sigma technique to improve the quality and reduce unnecessary expenses. In business, statistics help organizations to make appropriate decisions. Organizations need to be very quick and precise and must understand the preference of customers. Statistics can help to plan according to consumers’ preferences. Through statistical technique the quality of any product or service can be evaluated more effectively. Based on the statistical data, an organization can decide which item it is going to sell and in what amount. Majority of activities in an organization depend on information generated by statistics. Thus, based on the statistical data, an organization can take decisions regarding product, investment and marketing (emathzone, “Importance of Statistics in Different Fields”). Statistics is also vital for economics. Financial research is based on statistical analysis. One important tool for statistics is hypothesis testing which is used in several researches. Factors such as demand and supply analysis, inflation rate, earnings from interest, calculation of per capita income are all conducted by using statistical approach (emathzone, “Importance of Statistics in Different Fields”). Statistics in Inventory Control One of the most important uses of statistics is to manage and control the inventory. The purpose of inventory control is to reduce the total expenditure of inventory. The three major factors regarding inventory control are controlling the charge for holding inventory, placing order and managing insufficient inventory. ABC method is a useful technique for inventory control in business (Arsham, “Economic Order Quantity and Economic Production Quantity Models for Inventory Management”). Use of ABC Method ABC method was first applied in manufacturing industry, but at present many business organizations are attempting to use ABC method. One example of using ABC method is PCS Health System. It is a service enterprise which had implemented ABC method for switching the physical data input system of company’s ledger and timekeeping records. It is useful for a service based company as there are no warehouse systems. It helps to determine which activity or procedure requires reengineering. ABC method helps PCS Health System to examine quality of procedure, cycle time for any procedure and cost of a particular procedure (IDG Enterprise, “Computerworld”). Another practical example of ABC method in business is in the US Postal Service (USPS). ABC method is also used in USPS for costing. It supports the organization to become more reasonable and also associate the business performance of several mail processing services. At the initial phase ABC system was applied in 58 processes and 9 cost related entities of USPS. The cost entities comprise of management of letters, small and big packages, urgent mail, fast mail, registered mail and mail containers. As a result of ABC system the cost of mail processing had decreased by 13%. ABC method is also used to regulate the cost variances in processing payments through money, credit card and cheques. ABC method helps USPS to apply productive and cost–effective approaches for business (The McGraw-Hill Companies, “Activity-Based Costing and Management”). Information Technology (IT) in Business The introduction of inexpensive data storage tools and broad convenience of internet networks have made easier for any company to access huge heterogeneous data. The accessibility of huge data has generated prospects and scenarios for companies to develop useful information and general awareness. This information is useful for taking important decisions and improves the domination power of any organization. Business Intelligence (BI) is regarded as an IT tool and analysis procedure which can be used to exploit the data for making information (Vercellis, C., “Business Intelligence: Data Mining And Optimization For Decision Making”). Information System in Inventory Control Managing inventory is a great challenge for today’s business organizations. One of the major roles of a company is to maintain the stock level. It is easy for a company to know the quantity that is available in stock but it is hard to know which products are selling quickly, which sales is seasonal and how much time is needed to get fresh stock. This information is vital for a company and is very difficult to obtain. IT such as accounting software with inventory element can help to accomplish better control on stock level, lucrative pricing and superior cash flow management. There are several applications such as Quick Books Premium, Peachtree and MYOB Premier Account Edge among others that provide better inventory control. For instance, ‘oovoo Design’, a handbag manufacturer company uses Quick Books Premium to manage the stock of handbags. Through Quick Book Premium, oovoo Design can automatically receive notification about any product before it runs out of stock. It minimizes the risk of empty stock and the company can replenish any product before it finishes. Quick Book Premium application helps the company to stay up-to-date with stock level. It can help any organization to understand the individuality of the business. Through IT, oovoo Design evaluates the customer report which helps to identify the most valuable customer for any particular season or product. Also the purchasing activities and patterns of customers can be identified and accordingly the company can customize the customer service by maintaining the desired stock. IT tools let oovoo Design to spend money effectively and serve the customers with tailored approach (DePasquale, “Managing Inventory for Profitability”). Business Intelligence (BI) Tools Appropriate BI tools can improve inventory management in business. Several electronic manufacturing organizations have accomplished almost faultless inventory management with higher accuracy with the help of BI tools. It has been seen that major difficulties that an organization faces in controlling inventory are: Inaccuracy Transparency of data to understand the status of inventory Ineffective utilization of production space Estimation of the requirement of stock at the right time Effective utilization of surface mount technology (SMT) tools The mismanagement of inventory can lead towards lost opportunity cost in several ways. BI system can improve the processes of production i.e. from quality control to cost effectiveness. It can help to fully utilize the ground space and minimize the non-value added expenses. The BI system is also termed as decision support system (DSS) as it helps to take decisions for organization (Douglas, “Inventory Management: Combining Business Intelligence & Material Handling Hardware”). Organizations use the DSS tools for managing inventory. It is a high-tech system which can help to take valuable decision regarding inventory. An example of DSS tools in inventory management is GlaxoSmithKline (GSK). It is an international pharmaceutical organization. GSK deals with several products category which comprises of drugs, medicines, healthcare products and nutritional products among others. The availability of adequate products is essential for GSK to stay competitive in the business. The excess inventory can result is unnecessary expenditure and inadequate inventory can lead to ineffective customer service. Thus, GSK needs to maintain an optimum level of stock to generate maximum profit. GSK seeks to assess the inventory strategy and developed new strategy for improving the performance of inventory. Thus, the company gathers data of sales and product demand by supply chain formation system. This system helps to access the historical data of product demand, inventory record of each month, and size of production lot. GSK had developed model for calculating the above data to generate correct estimation of safety stock that needs to be maintained. Through this model, GSK is able to govern about how the fluctuations in safety stock can impact on the customer service. The model was made by Excel oriented DSS system. The system enables GSK to assess ‘what-if’ situation and examine how uncertainty in demand can change the optimum level of safety stock. DSS has proved very beneficial for inventory management in GSK (Turban, E. & Et. Al., “Decision Support and Business Intelligence Systems”) Information Technology (IT) in Supply Chain Organizations are developing into more comprehensive business operations; the role of supply chain is also shifting. These days, the suppliers are also involved in the decision regarding product development and brand promotion. The perception of continuous information with relation to company is a vital element of combined supply chain system. It can help organizations to incorporate the relationship between information and functions of organizations such as selling, distributing, marketing, and production. IT allows smooth and harmonized stream of data and product between the suppliers, traders and customers throughout supply chain. IT incorporates planning, decision–making procedures, business functioning and information sharing for managing business which result in greater supply chain competences and returns (Baltzan, P. “Business Driven Information Systems”). Apple is a successful example which uses IT for improving the supply chain management. Apple’s business is distributed in the whole world and it requires advanced business model which can improve the performance of the organization. Thus, Apple had deployed cutting–edge technology in their management system. IT has provided the following advantages and facilities to Apple: Increased manufacturing abilities Web based configuration for easy review of order status of customer Direct purchasing from website Real–time approval of customers’ credit card Greater allocation of stocks Innovative planning system By the help of IT, Apple has experienced substantial advantages in several areas such as production procedure, reduction of cycle time for processing order, maintaining the order of customer for configuration of products and increasing the capacity to processes i.e. above 6000 orders per day. Dell computer has also incorporated IT in the supply chain management system. The high efficient ‘built–to–order’ system empowers the company to serve customized products to customers without any processing delay. Dell deploys the IT tools for understanding the estimated demand of product by global perspective; know the material necessities, develop advanced scheduling of plant and better inventory control. The result was remarkable as the business has expanded by 17% per annum and revenue has become 40 billion USD. Many organizations are now implementing IT for improving the business performance by proper management of inventory and business processes (Baltzan, P., “Business Driven Information Systems”). Conclusion Inventory control is vital for organizations as it helps to maintain the perfect level of stock and timely delivery for better customer satisfaction. Implementing IT and statistical methods can help organizations to improve the fields of production, stock, supply chain management and cost efficiency. Detail information with respect to inventory status, stock adjustment, supplier delivery and safety stock can help organizations to predict the sales and meet the target. As the competition has increased, organizations are applying BI tools and inventory management software to analyze the internal processes and forecast the trends of customers. Without these tools it is hard to understand customers’ choices and aspects that are directly related to sales. IT helps to increase the visibility of stock and thus allows organization to control inventory without hindering the daily business activities. Works Cited Arsham, Hossein. “Economic Order Quantity and Economic Production Quantity Models for Inventory Management”. September 14, 2011. Business Stat, 2011. Baltzan, Paige. Business Driven Information Systems McGraw-Hill Companies, Inc., 2011. DePasquale, Ellen. “Managing Inventory for Profitability”. September 14, 2011. Mansueto Ventures LLC, 2008. Douglas, Bob. “Inventory Management: Combining Business Intelligence & Material Handling Hardware”. September 14, 2011. Global SMT & Packaging, 2006. emathzone. “Importance of Statistics in Different Fields”. September 14, 2011. Basic Statistics, 2011. IDG Enterprise. “Computerworld”. The Newspaper of Information System Management, 28.21 (1994): 108. Lind, Douglas. & Et. Al. Statistical Techniques in Business and Economics McGraw-Hill Ryerson, Limited, 2004. Sharma, Manish. & Et. Al. “Six Sigma at Wipro Technologies: Thrust on Quality”. September 14, 2011. Jaipuria Institute of Management, No Date. Turban, Efraim. & Et. Al. Decision Support and Business Intelligence Systems Pearson Education India, 2011. The McGraw-Hill Companies. “Activity-Based Costing and Management”. September 14, 2011. Introduction to Cost Management, 2008. Vercellis, Carlo. Business Intelligence: Data Mining And Optimization For Decision Making John Wiley and Sons, 2009. Read More