Inventory Management - Assignment Example

Inventory Management Unit Inventory is one of the most important items considered by companies in their current assets category. Therefore, inventory management should be done proficiently and professionally. Kotler (2000) has defined inventory management as activities that are involved in the development of inventories and the subsequent management for raw materials, the work-in-progress, as well as the final products in an effort to facilitate cost reduction. This process entails ensuring that the amount of all the inventory items is kept at optimum levels (Martin & Miller 1962, p.25). A business that has an effective management strategy is likely to have an upper hand in the market. There are diverse benefits associated with efficient operations management, including a reduction in the operational costs while enhancing customer satisfaction. Inventory management ensures that sales, customer service, and production are done effectively without interruptions, hence ensuring customer satisfaction and cost reduction. In addition, optimizations of inventory levels as well as helping in improving cash flows are major benefits derived from inventory management. Improper inventory management can lead a business to huge losses. In the modern context, several inventory management controls have been developed; some that are highly sophisticated while others are quite simplistic. Some of the available inventory management tools include ABC analysis, Economic Order Quantity (EOQ), Discounted EOQ, Vendor managed Inventory (VMI), LP, MRPII, TQM, ERP, KANBAN, and collaborative planning among others. Inventory management tools are very well applied in organizations for diverse purposes. A number of company operations are associated with the inventory management tools. Firstly, in the process of developing the company accounts, the accuracy is tremendously improved hence enhanced reporting of the company profits and losses (Silver 2008, p.16; Hilton1994). This is done based on the asset value that is attached to every item that is purchased, those within the company and the ones sold. Secondly, the management is able to identify flaws and ensure they are rectified before they get out of hand. The inventory management tools help track all the items in the company, thereby ensuring that flaws do not accrue until the stock taking date. Fourthly, customers are very important people as far as the company is concerned. The inventory management tools are able to identify items that are in shortage hence customers are able to make their bookings without being inconvenienced. In addition, the company experiences a very easy time in the re-ordering. This is because the management is able to know precisely what needs to be procured and the accompanying quantities without having to monitor the stores and warehouses. Fifthly, proper inventory management plays a vital role in ensuring that items losses are identifiable (Salgado et al 2011, p.381). Though large organizations may not be at a position of completely eliminating theft and losses, reports from inventory management tools ensure that they are minimized. Another advantage in terms of company operations is that the cost of warehousing is significantly reduced. There is no storage of unnecessary items since they are not required at that particular time within the company. The items that are on demand are the ones that are secured first. Finally, conducting end of year processes and stocktaking is done efficiently since all the tools provide a good analysis of the company assets (Janamanchi 2011). The ABC inventory analysis is a very important technique that is applicable in diverse sectors. It is grounded on the principle that a few items have a high money value of the total inventory in a company while a large number of items have a small money value (Chen, Wang & Qiao 2013, p.74). This means that all the items in the inventory have to be valued in terms of their money worth. There is a high level of inventory control for the highly valued items as opposed to the items with low value. Depending on the money value worth, items are categorized into three; A, B, and C. Denoted under the A category are items that are of high value. This category of inventory makes up less than 15% of total items but their worth is in the range of 70-80% of the money value. The second category is B and is made up of 15-25% of the company items but makes up 25-30% of the money value. Finally, the C category comprises of a number of items with very little money value; they make less than 5% of money value. Through this inventory management tool, items are accorded varied levels of control, whereby the ones in category A are controlled more than those in category C. Using this tool, the organization is capable of controlling items that play a significant role in investment and the inventory-caring costs are significantly reduced. The Annual Dollar Volume (ADV) is the money value used for calculations in ABC analysis. ADV is obtained through a calculation that involves a multiplication of the annual demand with the cost per unit. Then, a percentage ADV is calculated for each of the products hence it is capable of being categorized as either A, B, or C (Briciu & Capusneanu 2010, p. 26-28). In some cases, the money value is not the only criteria used in the process of ABC analysis. Aspects such as production costs, design changes of quality issues can be used. Another tool used in the management of stock is the Economic Order Quantity (EOQ). Through this model, a company is able to manage its inventory using the EOQ equation. The equation determines the optimum quantity order that is achievable for a company, taking into consideration the cost of production among other factors. The reason for the application of this tool is in its ability to define the order quantity that results in cost reduction (Piasecki 2001). Using this tool, the inventory system costs (procurement, ordering, inventory holding, and inventory shortage costs) are minimized. Through a mathematical model, it is possible to have proper scheduling of deliveries among other business operations. In order to establish EOQ, an expression for the ordering cost is determined as the first step followed by an expression of the inventory of the holding cost. Consequently, an expression for the total cost is developed which aids in obtaining the optimal order quantity (Roach 2005). The following equation is used in determining the EOQ. This model is based on different assumptions; first, the cost of the items is assumed to be fixed. Secondly, it is assumed that the lead time is constant while the ordering and holding costs are said to be fixed. Thirdly, there are no quantity discounts. Finally, the demand rate is considered relatively uniform and known (Al-Salamah 2011, p. 62). The assumption that the cost of items is fixed does not always hold since as we know the price of items are affected by many factors some of which are beyond the control of the company. Therefore, in such instances the assumption is biased. In addition, he consideration of demand rate to be constant can only be in an ideal business setup but does not occur in reality. The demand rate for commodities just like the price is influenced by diverse factors. Inventory management tools are very vital in the running of the company operations. A high advancement has been witnessed in the use of inventory management tools in an attempt to provide solutions for optimum utilization of the assets within an organization. Most corporate organizations have acknowledged that keeping inventories is a major strategy towards asset management. The company is able to track all its assets including the idle stock that could otherwise be ignored, this is done under minimal costs. Through the EOQ tool, the company is able to identify the items that are on stock and the ones that have gone out of stock (Hines 2004, p. 124). This means that there is no time the company misses to make sales on the ground that some items are out-of-stock. On the other hand, inventory management tools ensure that there is no money held through unnecessary overstocking. The company is able to procure what it requires at a given time and the rest of the resources are channeled elsewhere. Though this, it will be possible to identify products that are slow moving products and be able to reduce their production. References Al-Salamah, M. (2011) Economic order quantity with imperfect quality, destructive testing acceptance sampling, and inspection errors, Advances in Management and Applied Economics, 1(2), 59-75. Briciu, S., & Capusneanu, S. (2010) Effective cost analysis tools of the activity-based costing (ABC) Method.Annales Universitatis Apulensis : Series Oeconomica, 12(1), 25-35.  Chen, L., Wang, S., & Qiao, Z. (2013) Product profitability analysis based on EVA and ABC,  International Journal of Business and Management, 8(12), 73-82, Retrieved from http://search.proquest.com/docview/1419401074?accountid=45049 Hilton, R. W. (1994) Managerial Accounting, McGraw-Hill,Inc Hines, T. (2004) Supply chain strategies: Customer driven and customer focused, Routledge, 2004. Janamanchi, B. (2011) Analysis of economic order quantity under ecommerce paradigm, Competition Forum, 9(2), 339-347, Retrieved from http://search.proquest.com/docview/912867917?accountid=45049 Kotler, P. (2002) Marketing Management, 2nd Ed, New Delhi: Prentice Hill of India. Martin, K. S. & Miller, D. W. (1962) Inventory Control, NJ: Prentice Hall, print. Piasecki, D. (2001) Optimizing economic order quantity, IIE Solutions, 33(1), 30-39, Retrieved from http://search.proquest.com/docview/231421769?accountid=45049 Roach, B. (2005) Origin of the economic order quantity formula; transcription or transformation? Management Decision, 43(9), 1262-1268, Retrieved from http://search.proquest.com/docview/212070165?accountid=45049 Salgado, A. P., Junior, Novi, J. C., Pacagnella, A. C., Junior, & de Oliveira, M.,Mattos Borges. (2011), E-SCM and inventory management: a study of multiple cases in a segment of the department store chain/o e-scm e a gestão dos estoques: um estudo de múltiplos casos em um segmento de cadeia de lojas de departamento, Journal of Information Systems and Technology Management : JISTEM, 8(2), 367-388, Retrieved from http://search.proquest.com/docview/892053593?accountid=45049 Silver, E. A. (2008) Inventory management: An overview, Canadian publications, practical applications and suggestions for future research, INFOR, 46(1), 15-27, Retrieved from http://search.proquest.com/docview/228464766?accountid=45049 Read More