Inventory Management: County Road - Case Study Example

A Project Report on Inventory Management: County Road Name: Grade Course: Tutor’s Name: 10th, May, 2010 Executive Summary Inventory management is very important in operations management of a company. It is because of its creation of value that it is managed and value forms the foundation of a business success. Because of this, an analysis of an inventory management process is carried out to determine the appropriateness of the process in relation to available information from books, internet and articles about inventory management. The identified case of inventory management is also automated. Computerization of the process is also an issue and may prove to be efficient compared to the manual process of inventory management. The main idea however is on the important features and processes of inventory management in the case identified. The results show that the case has all the important components of inventory management. Recommendations are based on the fact that the globalization is causing changes in the society and this causes changes in consumer needs and operating systems of businesses as well, businesses have to manage their operations considering these changes and have to be current as well. It is for this reason that this report at the end proposes the use of automated inventory management methods. This report has described the process of inventory management and compared the components as in the literature to a developed automated inventory management system. The components are similar and the automated system shows some improvement compared to manual although not discussed. Managers should therefore research on the advantages and disadvantages of the automated system and compare with the advantages and disadvantages of the manual system and decide which system is appropriate for inventor management in the current world. There are no potential risks if appropriate inventory management processes are used by organizations. The benefits however are many for example; the organization can reduce direct dependency of a process on its predecessor (Lecture Notes 5). The organization will have improved value among other advantages of inventory management. In the case of computerized systems of inventory management, the organization will benefit from the advantages of computerized systems and may suffer the disadvantages of computerized systems. Risk analysis can be carried out and risks minimized. Advantages and disadvantages of computerized systems can be obtained from the internet, books or organizations that have implemented such systems. Introduction Inventory management is part of creating value in a business operation. This report is about inventory management of a county road. There is no specific project of inventory management of a county department selected but an analysis is carried out based on available information on books, articles and internet about inventory management. Some important information has been retrieved from the lecture notes about operations management and inventory management. The selected inventory management case is that of a county road. The inventory management of a county road is carried out by a county department. The county department selected in this case is the Ventura County Department. Information provided is not accurate considering the county, but for the purposes of analysis of inventory management processes. Information about the requirements and how inventory management should be conducted is obtained from different sources. The discussion begins with the definition of an inventory which is important for understanding the concept of inventory management and why they should be managed. The next section describes the case study then the analysis section. In the analysis section, inventory management processes and other inventory management details have been discussed and compared with the processes and procedures in the case study. Inventory Management: County Road. What makes a business successful depends on its objectives, its strategies and its processes among others. These in turn depend on the available resources, the market situation, the consumer behaviors or preferences, competition and several other factors that affect business performance not mentioned. According to the resource/profit model of operations management, value has to be created for a business to be successful. The value is determined by the customer and forms the basis of competition in a business. For value to be created, the resources of the organization have to be well managed. The resources include, inventory, lean systems, logistics, supply chain management, and demand forecasting, the organization’s work force, capacity, constraint management and facilities decisions (Lecture Notes 1). Management of the inventory therefore forms a very important part of business operations management. Inventories are the materials used to produce goods and services for example, if a company deals with manufacturing of computers, one of its goods will be computer micro chips. This in its stock will be its inventory. Müller defines inventory as the stock of goods and services that an organization holds (2003). Inventory management has its benefits. Too much inventory is harmful to a company since the company aims at making profits and the inventories are investment. Too little is also not good for business since it will produce late sales or deliveries. It is therefore appropriate to maintain a balanced stock of goods and services (Lecture Notes 5). There are different types of inventory and the one/s used in a county road have to be established for the purpose of this report. The type of project however has to be considered in the case of a count roads. In different county departments, different levels of road management have been reached. Some concentrate on maintenance of already build roads which also includes improving the roads, some concentrate on building new roads and some repair roads as a way to ensure that the public gets what they need. In all these, there are projects and the projects need goods and services for the road infrastructure building or maintenance to be complete. Management of these goods and services is the focus in this case. The types of inventory include; Materials and components which are required for the production of a finished product, Work in Progress inventory (WIP) which are partially completed materials and the finished goods which are the finals products that ca be purchased by consumers (Müller, 2003). The product required in the case on this report is the road. The materials and components needed for road construction or road repair are the organization’s inventory. The Case Ventura County Road Construction Repair and Maintenance The road constructions, maintenance and repairs are done by a company (Nissi Road Projects Management ERP) under a five year contract with the department of Ventura County. The Company uses a new technology road and construction management system known as Infraconsoft. This software is used to manage the inventory and activity in an organization. In the county department for example, the company provides the software for inventory management as well as a tracking system for the inventory. The company has trained employees on how the software is used and has to install the software for a client before use (NRPM ERP, 2010). It has the following features: FIFO/LIFO method stores Email alerts of reorder level Purchase order generations and approvals that are integrated and centralized Online bill passing Stock transfer from one branch to another An inventory with details on vehicle spare parts Tally integration Vendor management Insurance renewal alerts Devices for fuel consumption and monitoring (NRPM ERP, 2010). This software replaces the local serves used in inventory management It also provides inventory reports such as purchase order report, stock summary, ledger, indent reports, daily issue cost report, stock transfer report and purchase requisition status report among others (NRPM ERP, 2010). The software also has a vehicle maintenance reports which are part of inventory management. In this case, inventory management will be considered generally and no specific attention will be paid to a specific inventory like the vehicles. The software has the ability to store daily progress report about vehicles, a transferring report, a Tyre tracking report, renewal reports and so many other reports. It is not important to outline all the reports included in the software but the purpose of the software and how it ensures inventory management, which is important for this analysis (NRPM ERP, 2010). The analysis of inventory management using this software will be compared with the inventory analysis procedures, principles and processes as described in different literatures. The features of the software will be compared with the effective inventory management procedures, models and theories to determine its effectiveness and recommendations made. Analysis Process Inventory Management Inventory management is all about balancing the cost and the benefits of inventory (Hedrick et al, 2010). It involves keeping the right stock as demanded by the customers considering the available resources. An inventory manager has to ensure that there is not too much or too little inventory. He or she should ensure that the stock is well and widely assorted, the inventory turn over is increased, purchase is made at lower prices for example by purchasing in bulk so that the cost of inventory is reduced, maintaining the right stock in terms of quantity and validity and keeping low stock (Hedrick et al, 2010). A publication on inventory management (Inventory Management Chapter 13) indicates that for effective management of inventories, the idea of the organization and control has to be considered. An organization of the inventory has to be considered in that, the level of detail needed to carry an inventory is important. Such kind of information is such as the number of stock available, the type, the size of the material if appropriate and so on. Organization of an inventory requires determination of the level of information that is important for inventory management. Not all information about the materials is important. If for example the size of the product used in a road construction is worth noting because of the different sizes of the same material, then it is appropriate to know the size of the material, the number, those in use and so on (Inventory Management). Control: This is a step taken after determining the level of detail needed for inventory management. It involves procedures that are necessary for inventory updates. The procedures have to be organized in a manner that the people who use them can be able to inform the manager about withdrawals, sales, purchases and what an item was used for (Inventory Management). The organization and control of the case of the country road inventory management is very clear. The kind of information needed for inventory management is clear for example, in the case of vehicles. There are reports about vehicle maintenance, details about vehicle spare parts and other inventory reports outlined above. The control procedures are such as stock transfer between branches which has the data about what stock are transferred, the amount and so on. The fuel consumption monitoring is also another process that controls stock (NRPM ERP, 2010). Inventory Functions The primary function of an inventory is to serve the customer. The customer’s viewpoint considering the availability of the right quantity, availability of the product in the right place at the right time and at the right cost has to be considered when managing the inventory. In the case of the county road construction materials inventory management, the function of the inventory is to satisfy road construction. The customer is the public. The people’s view on what where the road should be, the quality of the road and its maintenance does not apply much even though it is their tax that funds the road constructions. They are however the reason why the new roads are constructed, already constructed roads are repaired and maintained. The point here is that, the influence the customers have on other inventory is not the same as the inventory in road construction. According to Inventory Management, a county highway department’s control of an inventory is to ensure the assets that had been purchased before using the tax payer’s money for specific purposes has to be safeguarded. The aim of inventory management in a county department therefore is to ensure the assets of the department are not wasted (Inventory Management) Inventory Goals The goal of an inventory management is to minimize investments while still providing customer satisfaction as previously discussed. It is to maintain a balance between purchased stocks and sold stock so that there is no too much in stock nor little in stock. The software provided has a feature that enables the control of the amount of stock that an organization should have. The re-order level email alerts feature is meant for informing the manager that more stock is needed. A good manager would set the level of stock that when reached, more stock are ordered. Calculation of the amount of days required for the stock to reach the destination should be done before setting the re-order level in the computer software. If for example the amount of stock remaining in store are enough to sustain the road construction project or repair for two days (for example 70 kgs of gravel) and the amount of days required for the ordered materials to be delivered is also two days, the process of road construction may be disrupted because of unavailability of the materials. It is therefore appropriate to set the reorder level higher than 70 kilograms of gravel for example (140 kgs). To calculate the number of days required for the next reorder, the following formula can be used: Days of Supply= On-Hand Inventory/Average Daily Demand (Lecture Notes 5). The Purchasing Plan Control of inventory requires planning which ensures there is enough stock at the right time and in the right place for the right customer. In order to plan, the characteristics of the inventory that the company deals with should be studied. For retailers for example, planning ahead is very important. They should be able to make buying plans for intelligent buying so that no last minute panic purchases are done. This is because they offer new items to be bought before the actual date for the new season of the product (Hedrick et al, 2010). This does not mean that purchasing plan is not required for other businesses. Government organizations also need to plan on how to purchase the products needed for their operations. Purchase of products is affected by the demand of the product. If the demand of the product is low, the purchase from the suppliers has to be reduced and future demand expectations analyzed based on market history. There are two types of demand. These are independent demand and dependent demand. Independent demand is that influenced by market place requirements so that when the demand of a product is low the purchase from the suppliers is affected, for example the market demand for consumers goods such as automobiles is independent demand. Dependent demand is the demand that is based on the requirements of another product. If the demand of a specific product is high, then its demand would be high too. For example, electric motors required for refrigerator manufacturing is a dependent demand to the refrigerator manufacturers but independent to the manufacturer of the electric motors (Toomey, 2000). In road construction, the materials needed for road construction would be considered dependent since they are needed for the road construction. The demand of contractors for example depends on the demand for construction of roads; Contractors’ hiring therefore is dependent on the availability of road construction jobs for them. Road construction has a lot of different jobs for example for contractors and need different materials for construction. A purchasing plan would include hiring of the contractors whenever needed. Additionally, road constructions are done in phases making it more appropriate to have a plan on how the different phases will be completed. According to Toomey inventory management planning should have a resource planning (ERP) system (2000). This system plans on how and when to purchase inventory based on the information available about the demand and supply of a specific product, taken from across the entire network of inventory management (Toomey, 2000). The aim of such a system is to balance the demand and supply of a product at each transaction point. This satisfies the first requirement of inventory management that there should be a balance between supply and demand (Not too much stock and not too little). It involves inter-company communication using electronics communication techniques for example Electronic Data Interchange (EDI) (Toomey, 2000). The system has to have the capacity to meet the required plan, be it a purchasing plan, distribution’s requirement plan or an enterprise resource plan (Toomey, 2000). From the case study above, the system used for inventory management is a resource planning system. The name given to the company (“NISSI ROAD PROJECT MANAGEMENT ERP”) proves that it is an ERP system and even the components. Its communication system is electronic and is also intercompany for example, the Intraconsoft has an online billing passing system which enables communication between companies about the bills (owed, paid, to be paid and so on). It as has the email alert system that can alert the manager or the supplier when more supplies are needed. Control of an Inventory Control of an inventory ensures a stable in stock position. Here are several methods that can be used for inventory control. These are; a) Visual control: where the manager just checks the level of stock by visually to determine if more is needed. b) Click Sheet Control: where the manager records information about the stock on a sheet of paper (for example about its use, quantity remaining and so on) and uses this to reorder. c) Tickler controls: where the manager just counts the inventory available on a daily basis. The inventory is counted in segments. Information obtained from this count is used to make a reorder. d) Stub control: where the manager retains a price ticket and uses it to record information about the inventory, that is, date of sale, and amount and so on. This record will help the manager in determining what to reorder. This is however used by retailers. The case of county road construction has not used any of the above control methods. Stable stock position is however maintained by a method almost similar to the click sheet control. The ERP system of planning and inventory management of Nissi road projects and management has purchase order generations, emails alerts on when the next order is required and purchase approvals indicating that data has to be collected about the details of the inventory before analysis and determination of when to reorder and the development of a purchase order and so on. The click sheet control in this case may be a computerized form (NRPM ERP, 2010 ). Hedrick et al, however explain that because of the technological changes and the reducing cost of computers, computer based systems have been implemented to perform accounting and billing procedures (2010). This justifies the use of computers to perform the accounting and billing procedures of inventory management by Nissi road projects management ERP. There are two computer based control methods. These are; Off-line of-sale terminals where information is relayed directly to the supplier, who then acts on the information by delivering more inventory and point–of-sale terminals where information about each item sold is relayed to the manager and the manager reviews the information on regular basis and acts on it (Hedrick et al, 2010). Development of an Inventory According to Hedrick and other authors, there are two approaches to inventory management. These are: Material Requirements planning and Just in time inventory management. In material requirements management is a system where sales are converted to loads and the information used to reduce inventories. It reduces the delivery time and is more predictable hence efficient management. The just in time inventory management approach is based on supply of inventory according to the daily requirements. This is time consuming to the suppliers since they have to make a lot of deliveries in a day (Hedrick et al, 2010). The case has the use of information about inventories for inventory management but has not indicated any daily need for supplies. It is therefore clear that the approach used by the Nissi road projects management system (NRPM ERP, 2010). Inventory Costing Methods As discussed earlier, the value of an inventory is very important to the organization. Value is one of the foundations of success in an organization (Lecture Notes 1). The methods of inventory costing are; Averaging FIFO LIFO Averaging This type of costing determines the value of an inventory by use of the current value of similar items. The calculation is in average uits and is as follows: “Value of all Items on hand (adding all purchase prices together to come up with a lump sum value)/Total Quality on Hand =Average Unit Rate of All Items on Hand at the Current Time” (inventory 3 p. 3). LIFO (Last-In-First-Out) This means that the last inventory bought will be the first to be used. The costing rate is similar to the cost of when it was purchased. With this kind of costing method, it is important to keep records about the inventory history with details of when it was purchased and its value when purchased (inventory 3). FIFO (First-In First-Out) This means that the first inventory purchased will be the first inventory to be used and the costing rate will be similar to the rate at the time when it was purchased. It also needs keeping of records about the inventory prices, cost and date at the time of purchase (inventory 3). The costing methods used in the case are FIFO/LIFO but no averaging (NRPM ERP, 2010). Conclusion Because of the changing needs of people, the rapid changes in technology and general globalization, businesses have to adapt to different operation management systems. The operation management systems have to ensure the business can meet the needs of the customers which change over time and contribute to the changing technology of the world. The systems should have the ability to operate in new technology environments. As indicated earlier, the case of county roads inventory management has the public as the customers. The changing needs of the people, the development of new technology and changing business systems lead to the adaptation of the government departments to new technology, and new systems. The government may not aim at making profits but still they have the role of providing the needs of the people. Infrastructure is one of them. The tax payer’s money has to be used efficiently without waste. Using an appropriate system for inventory management is therefore important. The software explained in the case study is a result of new technology development, which has also come as a result of changing needs of the public and the growth of businesses and companies. Its components have demonstrated its ability to manage the inventory of the county road appropriately. It has an appropriate organization and control procedures as the analysis has revealed. Recommendations Inventory management process involves determination of the level of details needed for management and the control procedures. All that is required in inventory management has been discussed above and compared to the inventory management procedures of the case study. From the findings, it is clear that the processes of inventory management are appropriate and can be effective although not shown. The method of inventory management is computerized (automated) which is different from the manual type of management. This offers an area of decision making between the two. The automated inventory method discussed above has all the components of inventory management as described in the literature hence no need for further changes. It is only advisable to encourage the managers to compare the automated and the manual inventory management systems and determine which is appropriate considering their aims and organizational aims. Resources also matter when selecting an inventory management approach. Additionally, due to changes in the world and technological developments, it would be advisable if organizations selected a faster and accurate way of inventory management. References Hedrick, F. D., Barnes, P. E., Davis, E. W., Whybark, D. C. and Krieger, M., 2010, Inventory Management, U.S. Small Business Administration. Retrieved on 9th, May, 2010 from: http://www.sba.gov/idc/groups/public/documents/sba_homepage/pub_mp22.pdf. Inventory Management: Chapter 13. Retrieved on 9th, May, 2010 from: http://www.dot.state.mn.us/safinance/sa_manual/chapter13.pdf. Lecture Notes 1, 2010, Operations Management Lecture Notes 5, 2010, Inventory Control. Müller, M., 2003, Essentials of Inventory Management, New York, US: AMACOM Div American Mgmt Assn. Nissi Road Projects Management ERP (NRPM ERP), 2010, Retrieved on 10th, May, 2010 from: http://www.roadprojectserp.com/ Toomey, J. W., 2000, Inventory Management: Principles, Concepts and Techniques, New York, US: Springer. . Read More