Methods of Inventory Management - Admission/Application Essay Example

Methods of Inventory Management Introduction Success of an inventory management process entails the balance of costs of inventory with the benefits of the inventory (Alison et al. 2005). Inventory in business is one of the tangible and visible components of a company. Inventory management is the act of keeping and placing stock in a business. Many businesses have problem keeping the inventory. Each and every service provided anywhere is concerned with operation management technique in one way or another. Its objectives are to provide goods and services that the customers demand for in the right quantity, quality and cost at the appropriate time (Waller et al. 1999). ABC analysis The ABC analysis groups inventory into three classes. Class A, B and C contain 80, 15 and 5 percent of the total value of the inventory respectively (Bowersox & Cooper 1992). The ABC analysis gives a simple and quick review of the inventory. The ABC analysis also gives a clear view and meaning of the whole assortment of products in the inventory, thereby making it an efficient method to control inventory investment. The ABC analysis makes it easy for an inventory manager to devote resources to only those places where it will have the biggest positive feedback. Nike, Inc is an American manufacturer of shoes. In their ABC analysis, leather forms class A, sole forms class B while shoe lace forms class C (Cousins & Spekman 2003). ABC analysis is a vital method for management of inventory. Economic Order Quantity (EOQ) EOQ is a technique for inventory management that minimizes ordering and holding costs for the year. EOQ is a crucial accounting formula that determines when the combination of inventory carrying cost, order and costs are the least (Simchi et al. 2003). The result obtained from the formula gives the most effective quality to order. There are two models used in EOQ: Q and P models. In the Q model, whenever the stock on hand reaches the recorder point, a fixed quantity of materials is ordered. Advantages of the Q model are that the inventory materials are at the most economical quantity and inventory control personnel automatically devote attention to stocking the only items that are needed, when they are needed. A major disadvantage of the Q model is that the suppliers may be inconvenienced by orders that are raised at irregular intervals. In the P model, the stock position of every item in the inventory is closely monitored. Advantages of the P model are that the inventory and ordering costs are low and the model can be used on materials that are used irregularly or in seasons. Sales estimates are easily calculated for seasonal materials and the purchase of these materials can be planned in advance. A disadvantage of the P model is that is inefficient because it compels a periodic review of inventory. At Best Buy, the demand for desktop computers is 1000 units per month. Every time an order is placed, Best Buy incurs 4000 dollars in order cost. Best Buy incurs further costs in purchasing each computer at 500 dollars and the retailer charges a holding cost of 20 percent. The annual demand, D, is equal to 12000 dollars (1000 multiplied by 12). S, the order cost per lot is 4000 dolars. C, the price per unit, is 500 dollars. The annual holding cost, h, is 0.2. From these values the optimal order size and the optimal order frequency can be calculated. The formula for optimal order size, Q*, is given by SQRT ((2DS)/hC) (Russ 1999). Substituting the letters with the corresponding values gives the number 980, which is the optimal order size. Vendor Managed Inventory This is a process where the vendor makes orders for clients and customers according to the demand information they get form the customers. Both the customer and the vendor are held together by an agreement that conclude the costs, the inventory level and the fill rates.VMI use IDE (Electronic Data Interchange) to specify their delivery quantities which are sent to clients and customers by the use of distribution channel (John et al. 2008).VMI is an inbound logistic plan whose basis is that a dealer is supposed to be in charge of the management of inventories belonging to customers. The customer is the source of the demand information. A step in the demand chain is eliminated which then leads to the creation of a better demand that is visible to the supplier. The supplier then synchronizes his manufacturing process to the real customer demand. The result is that the manufacturer has less inventories and lower logistic costs (Disney & Towill 2003). Sweden is home to a new clothing retailer company named Hennes & Mauritz. This company is famous for its chic but surprisingly cheap fashion. Other clothing retailers struggle with the economic slowdown, but Hennes & Mauritz seizes this as a chance to enlarge, put in new brands and to go into new markets. As of September 2008, Hennes & Mauritz was set to expand their business into Japan. In 2009, Hennes & Mauritz expanded their venture into China. As of today, Hennes & Mauritz has 1,600 stores that are established self 30 more countries. As a result of effective vendor management inventory skills, it was able to establish in other countries. This has come as a result of planning which is essential in VMI, knowing the demand, improved quality of production. As a result they H&M increased its inventory annual turns and reduced material obsolescence and hence a considerable increase in assets. It was able to improve its customer services and responsiveness through scheduling forecasting of the fluctuations. VMI has some benefits to the supplier and the customer.VMI ensures that the company operation of production is not interfered with by shortage of material. Secondly, they make sure that the distributor is not caught short on products. VMI also improve the planning processes that are beneficial to the business. Some of the pros and cons of VMI to the supplier include: bullwhipping effect reduction, lowering reliance to forecasting, it reduces the order of modifications and simplifies production plan. To the customers, it assists in reduction of stock, reduces financial cost, simplify the purchase process and increases sales. To both the customers and the suppliers, VMI helps in reducing the data entry errors, improves the speed of the process, reduces stocks level and it improves the service level (Vereecke & Muylle 2006). VMI plays a major role in cost management. In this case, the supplier holds stock near the buyer or on site. As a result, the customer can instantly access the stock and he or she has the power to get stock while they pay for only what they have sold. This increases the stock turnover and reduces investments in the stock. The supplier is mandated to replenish the stock in many VMI business partnerships. By doing this, the expenses are handled by the supplier and hence they are responsible for regulation of the prices to the customers. Another benefit of VMI is that they distinguish variations of demands and errors of forecasting between the downstream and the upstream chain supply associates. This type of decoupling assists in reducing the levels of stock and the linked stock maintenance costs (Hollensen 2001). Conclusion VMI as a supply chain practice is very essential in monitoring, planning and managing the inventory or stocks of an organization by a vendor for the organization.VMI has many advantages which range from cost, delivery and also quality. It is necessary to have VMI in a business as they play a big role in the management of the inventory. The advantages of the VMI outweigh the disadvantages and hence they are vital in an organization which requires major stock taking during business. Sufficient prove exists to show that vendor-managed inventory systems are a technique, which when properly implemented, can be used to ensure that the efficiency of a company’s supply chain operations are improved. The efficiency of a VMI is enhanced by the execution of electronic means. Electronic means are more advantageous to the traditional ordering systems because they eradicate many of the built-in delays. Using electronic means enables the company to have a networked and centralized inventory management system (Xu et al. 2001). Part 2:- recent trends in operations and supply chain management. Introduction Modern company may choose to cooperate through supply chain arrangements that combine their personal strengths and distinctive resources. In the past year, supply chain management has showed organizations that they can attain sustainable competitive advantage whether they are in competition with other suppliers of not (Vergin & Barr 1999). Due to this, many companies have been involved in outsourcing logistic functions which has provided a great opportunity to many companies to operate efficiently, be flexible, improve their service levels and have a better focus on their main benefit of the organization. Overview Outsourcing logistics is a trend that has been on the rise in management of supply chains (Walter et al. 2003). Many companies have really gained from outsourcing and thus they have improved their involvement with providers and facilitated the integration of the whole supply chain. Outsourcing has led to development of various partnership initiatives which have been successful in exploiting the logistics flow and the customer demand. For instance, Dell opened up the Direct Model of sale and service of PCs directly to the consumers. This is a way of outsourcing which ha been of great impact on Dell Inc. Dell was started 1984, and it has grown to become one of the leading companies that deal with manufacturing computer systems. Dell avoids selling its computer systems to retailers and distributors. Instead, the company sells its computer systems directly to its customers. To avoid manufacturing systems that are not needed, Dell first receives online orders from customers. From these orders, Dell is able to match supply and demand, thereby giving customers low cost and good quality computers that are customized for the customer’s needs. Dell was successful in employing this strategy because the company has a direct sales model, has resourceful operations in manufacturing computer systems and it has an excellent management in its supply chain. Dell uses the phone or online through the internet to take orders directly from its customers. Other recent trends in operations and supply chain management include, planning for the demand; as more manufacturing companies come up, the level of quality of products increases and hence the demand has to be planned for. Having a demand focused approach assists an organization deliver and have a demand driven model (Alan 2008). Planning for the demand improves the customer services and management efforts as well as helping reduce overall costs. The other trend is globalization; the business market becomes global as a result of improvement in communication. Processes like manufacturing, distribution, selling, invoicing, returns have a big impact on the thirdly, increased competition is another trend the trend in supply and operation management. Due to the increase in market, demand and supply, there is high competition form all the companies selling the same products. This comes as a result of high demand and also having many suppliers. Dell has decreased the purchasing price that the customer buys a computer at by reducing the cost of intermediaries. Other companies normally incur sales and distribution costs that. Dell, on the other hand, saves time on handing these orders. By selling their computer systems directly to the customer, Dell is also in a position to get a clearer indication of the inclination of the market. Apart from having better supply chain management, Dell is able to plan for the future (Walter et al. 2003). The company with the products of highest quality has an upper hand over the other companies (Wikner et al. 1991). As a result of competition, the prices are also affected and hence they reduce due to many suppliers in the market. To help them offset this trend, many companies are viewing their supply chains in two ways. Dell Inc looks at a balanced way that can reduce cost but at the same time creates a more efficient value chain that will ensure that the company remains cost competitive. The second thing that companies are doing is looking at ways that they can get together the demands of more sophisticated customers, and still be able to offer value-added services to them (Vivek 2009). Reorganization of the procedures with new services, better collaboration across networks and better design helps companies to stay competitive. It also helps companies to strengthen relationships with its customers. Conclusion Outsourcing is a business trend that can be adopted by a company to ensure that the company concentrates on its business issues, while at the same time having details being taken care of by experts from the outside (Michael & Nigel 2003). Before incorporating outsourcing or globalization into the business strategy, a company should evaluate itself to verify that these are viable options. Effective supply chain planning is an important service for a company that provides customer services. Such a company needs to have an accurate picture of buying plans, demand, distribution and demand. Planning for demand is a great tool for overcoming these challenges. References Alison, B, David, M & Tarek, T 2005, Operations management: A strategic approach, SAGE. Alan, EB 2008, Global supply chain management and international logistics, Taylor & Francis. Bowersox, D & Cooper, M 1992, Strategic marketing: Channel management, McGraw-Hill, New York. 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Wikner, J, Towill, DR & Naim, MM 1991, “Smoothing supply chain dynamics”, International Journal of Production Economics, vol. 22, No. 2, pp. 48-231. Xu, K, Dong, Y & Evers, PY 2001, Towards better coordination of the supply chain, Transportation research, Logistics and Transportation Review, vol. 37, No. 1, pp. 35-54. Read More