Improving Inventory Management - Assignment Example

Inventory Management Inventory management involves controlling the amount of units into and out of existing inventory.Depending on the nature and business of a company, inventory may range from raw materials, as is the case in manufacturing companies to finished and ready to sell goods. The basic reasons for keeping inventory include; time, that is due to time lag between supplier and user and the need to have inventory to use during lead time; Uncertainty, that is inventory are maintained to meet uncertainties in supply, demand and stock movement; Economies of scale due to bulk moving of inventory and appreciation in value, as is the case with wine and tobacco. An inventory control system is a system that encompasses all aspects of managing a companys inventories; purchasing, shipping, receiving, tracking, warehousing and storage, turnover, and reordering. Buffer stock is additional units above and beyond the minimum number required to maintain production levels. Buffer stock is usually used for production before the new ordered items have arrived. Companies frequently have a stock taking day, mainly in the period near the end of their financial years. The values obtained on the stock taking day are compared with those from the various stocks taking methods used to check for discrepancies. Compare 2 companies with inventory and their type of inventory. 1 Manufacturing company; in a manufacturing company, the inventory will include raw materials, work-in-progress and finished goods. The raw material includes the materials required to make the needed products; the work-in-progress include the items in the work floor that have began their conversion to finished products; finished goods include items ready for sale to consumers. 2 In retail a company; the inventory includes the stock in shelves that are for resale Role Inventory plays in company performance. The basis of inventory management is to prevent inventory levels from being too high or too low, such that the company’s operation may be in jeopardy. If inventory levels are too high than needed, there is accompanying inefficiencies including; additional cost for storage and warehousing, the risk of spoilage due to items staying in storage too long, past their expiry date. In addition, there is the risk of depreciation and even obsolescence. When inventory level is too high than needed, it may prove ineffective in that cash that could otherwise be put to other urgent needs is tied up in stock. Old inventory can be very hard to move, and a company might end up marking it down and selling at discounts. When inventory levels are too low, they will be insufficient to meet the quantity demand. Therefore a system that allows for optimum inventory levels should be maintained. Poor inventory management that causes a company to lack what consumers need at a particular time, which in turn might cause a reduction in sales. If the customers do not find the product needed from a company, then they will look for alternative products from alternative companies. Stocking less of a popular product, either by error or mismanagement, therefore causes customer dissatisfaction and a company might even end up losing loyal customers. Knowing the optimum lead time, that is the appropriate time for replenishment of inventory leads to operational efficiencies. This involves the costs of warehousing, risk of depreciation and obsolescence. Therefore an appropriate lead time helps to keep this cost at a minimum. 4 different layouts found in each company Types of inventory management systems include; 1 Just in time delivery: is a type of inventory management whereby the supplier is expected to make just-in –time delivery expected to just have arrived when consumers need these products. This method tries to save on wastage of resources needed in storage of unused inventory. Just-in-Time inventory system focus is having “the right material, at the right time, at the right place, and in the exact amount”. A disadvantage of JIT is that because Just-In-Time manufacturers do not store raw materials, they can be affected more drastically by the effects of changing prices. Another disadvantage is that production may be adversely affected by fluctuations in supply, In the U.S., the 1992 railway strikes caused General Motors to idle a 75,000-worker plant because they had no supply. Another disadvantage of JIT is that take a lot of time to research into buying habits, seasonal demand, and location-based factors in order to make it effective. 2 FIFO and LIFO First In First Out or Last In First Out Kind of system: in this kind of system, is usually used for commodity items that one cannot track individually. FIFO regards the first item that arrived in inventory as the first one sold. LIFO assumes the last arriving unit of inventory as the first one sold. Which method an accountant decides to use has a significant effect on net income and book value. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation. This generally results in lower taxation. 3 ABC, Activity Based Costing analysis: This is an inventory management system that gives priority to items that are urgently needed by customers. The inventory in an organization is divided into three categories; A, B and C. Category A items are very important to the organization. Category B is fairly important items, but less important than A items while category C items are marginally important for example, might only generate 10% of sales revenue while category A and B items generate 90% of sales revenue. Other methods used in classifying the class A, B and C items include; a proportion of the annual consumption. This method helps a company to focus on items that matter the most. ABC enables a company to know how long it will take to re-order certain items based on their group. The disadvantage for ABC analysis is that it still requires a lot of work to maintain healthy inventory levels. 4 Two-Bin System. In this system, you have a main bin and a backup bin of products. You normally use the main bin, but once you run out and need to reorder, you use the backup bin to fill orders until the new products are received. The advantage of this method is that spare products are available for emergencies and sudden rise in demand. The cons of this method is that the excess stock in the back-up bin could become obsolete or expire and also carrying costs for the excess back up might increase. 2 metrics to evaluate the supply chain performance of companies Supply chain metrics provide a means by which a company can measure if its supply chain has improved or degraded. A good supply chain metric will go a long way in improving a company’s supply chain objective. Picking wrong measures and leaving out important ones, can hinder effective measurement of a company’s supply chain performance. 1 Balanced scorecard: from the above discussion, it is observed that cost is a major factor in inventory management. JIT delivery was designed to minimize on the costs of storage of raw materials. Therefore, a good supply chain method should minimize on inventory management costs. A balanced scorecard measures 4 perspectives of supply chain’ that is; financial costs, customer satisfaction, internal business perspective and innovative and learning perspective. 2Logistics scorecard: This mostly measure the efficiency of movement of products to consumers. Among items measured under logistics scorecard include; Logistics financial performance- i.e. expense; logistics productivity measure for example number of orders shipped per hour; inventory quality measure for example, inventory accuracy and shipment damage; and logistics cycle time for example, transit times. Other metrics for measuring supply chain performance include; Forecast accuracy; this focuses on the ability of a supply chain method to correctly determine the amount of products that will be needed. This is a major measure as it cuts off excess storage and reduces chances of stock going obsolete. Ways to improve inventory management Improving inventory management to a large extent involves managing the vast amount of information associated with those goods. 1 Use of inventory optimization tools: These are software tools that use data from WMS and ERP systems. They take into account demand variability, supply variability, and replenishment parameters to determine how much inventory to hold in order to guard against that variability. 2 Calculating safety stocks level on a regular basis to ensure they are up to date. 3 Optimizing the ABC analysis that is focusing on the 20% that makes 80% of volume so as to maximize sales and profit. 4 Checking on the reliability of suppliers ‘if you order 1000 cases of pencil and only 900 show up on the door, then there is a problem’. Unreliable suppliers can be identified and the issue resolved. 5 Use of mobile devices; the mobile devices capture stock movement at mobile user interfaces. From this data, it can easily be spotted when the inventory is low, and replenishment can be timely ordered. 6 Controlling of slow moving and obsolete items as these items occupy space and utilize labor and resources. 7 Using efficient storage methods like slotting, whereby fastest moving items are placed closer to docks. Work Cited Liker, Jeffrey The Toyota Way: 14 Management Principles from the Worlds Greatest Manufacturer, First edition, McGraw-Hill,2013. ISBN 0-07-139231-9 Schonberger, Richard J., Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity, Free Press, 1982. ISBN 0-02-929100-3 Wadell, William, and Bodek, Norman. The Rebirth of American Industry, PCS Press 2005. ISBN 0-9712436-3-8 Read More