Inventory management and control
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Inventory Management & Control-Latest trends and techniques
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Contents
INTRODUCTION ................................................................................................................................... 3 WHY INVENTORY CONTROL? ............................................................................................................... 5 INVENTORY MANAGEMENT AND CONTROL :- ...................................................................................... 6 OBJECTIVES OF INVENTORY MANAGEMENT AND CONTROL:-............................................................... 7 OPTIMUM INVENTORY......................................................................................................................... 7 INVENTORY TURNOVER.................................................................................................................... 8 ECONOMIC LOT SIZE CONCEPT ......................................................................................................... 8 ORDERING COST .............................................................................................................................. 8 INVENTORY COSTS ............................................................................................................................. 10 FACTORS INFLUENCING INVENTORY MANAGEMENT AND CONTROL .................................................. 10 INVENTORY MANAGEMENT ........................................................................................................... 11 Just-In-Time Concept ..................................................................................................................... 12 INVENTORY CONTROL RECORDS AND PROCEDURES .......................................................................... 16 STEPS TO SETTING-UP AN INVENTORY CONTROL SYSTEM:- ................................................................ 18 FOR BETTER INVENTORY MANAGEMENT: .......................................................................................... 19 LATEST TRENDS AND TECHNIQUES IN INVENTORY MANAGEMENT: ................................................... 21 CASE STUDY: ...................................................................................................................................... 21 CONCLUSION ..................................................................................................................................... 23 REFERENCES: ..................................................................................................................................... 24
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INTRODUCTION Getting leaner is the mantra followed by almost every inventory management professional in the world. There have been tremendous changes in the manufacturing industry with respect to inventory control and management in the recent years with the rapidly increasing international competition and new technology. One of those changes in the application of the Just In Time technique. Much publicity was given during the early 1980s to the Japanese ± style just-intime inventory concepts. The goal of JIT is simple enough; get the material to its next processing point just at the time it is needed. Theoretically, then, no inventory will be needed. JIT can be implemented with manufacturing work-in-process or with material purchased from outside vendors. Changes to recording methods include the use of different methods of information collection and processing, e.g. bar coding in retailing and manufacture and electronic exchange of information. Control methods are more computer based and are becoming part of increasingly integrated systems. The ultimate objective of all manufacturing controls is to realize a profit through the operation of the business. Failure of deliver order on time is one principal cause of loss of business and customers. Effective control of the material throughout the manufacturing cycle reduces the chance of this problem arising. Inventories are thus a necessary part of the contemporary manufacturing environment, and they must be managed if profit is to accrue. Acc to the survey by Retail Industry Leaders Association, 52 percent of retailers agree that they have a handle on matching inventory to demand. But 72 percent also agreed that they are over-inventoried on slow-moving Stock keeping units and another 53 percent said they are under-inventoried in fast-moving Stock keeping units. Inventory can be broadly classified into:
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y Raw material y Purchased parts y Work-in progress y Finished goods y Supplies Raw Material A raw material inventory includes all items that, after being received at the plant, require additional processing before becoming an identifiable part of the finished product. Purchased Parts This classification of inventory is applied to component parts of a product that need no additional processing before being assembled into the finished product. In some cases this material may be classified as raw material inventory. Work ±in Progress This classification of inventory is self-explanatory. All material that leaves either raw material stores of purchased parts stores enters the work-in-progress inventory until the product is completed and placed in finished goods. Finished Goods It is the stock of finished products. Generally speaking, this classification applied to the quantities of finished goods that are held at the factory awaiting shipment. Supplies All the materials needed for the operation of the plant that are not used as parts of the finished product are classified as supplies.
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WHY INVENTORY CONTROL? Control of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too much of their limited resource, capital, tied up in their major asset, inventory. Worse, they may have their capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal of the total operation. The ideal inventory and proper merchandise turnover will vary from one market to another. Average industry figures serve as a guide for comparison. Too large an inventory may not be justified because the turnover does not warrant investment. On the other hand, because products are not available to meet demand, too small an inventory may minimize sales and profits as customers go somewhere else to buy what they want where it is immediately available. Minimum inventories based on reordering time need to become important aspects of buying activity. Carrying costs, material purchases, and storage costs are all expensive. However, stock-outs are expensive also. All of those costs can be minimized by efficient inventory policies. Inventory control involves the procurement, care and disposition of materials. There are three kinds of inventory that are of concern to managers: Raw materials, In-process or semi-finished goods, Finished goods.
If a manager effectively controls these three types of inventory, capital can be released that may be tied up in unnecessary inventory, production control can be
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improved and can protect against obsolescence, deterioration and/or theft, The reasons for inventory control are: Helps balance the stock as to value, size, color, style, and price line in proportion to demand or sales trends. Help plan the winners as well as move slow sellers Helps secure the best rate of stock turnover for each item. Helps reduce expenses and markdowns. Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colors.
INVENTORY MANAGEMENT AND CONTROL :We shall be interested primarily in the control of material in manufacturing. Actually, we are concerned with the control of the ³flow´ of material from a ³raw´ state to a finished product. Most industries buy material, transport it to the plant, change the material into parts, assemble parts into finished products, and sell and transport the product to the customer.
Fig:- Flow of Materials through production cycle.
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OBJECTIVES OF INVENTORY MANAGEMENT AND CONTROL:The ultimate objective of all manufacturing controls is to realize a profit through the operation of the business. A more restricted objective of the control of material is to satisfy the customer by meeting the schedule for deliveries. Failure of deliver order on time is one principal cause of loss of business and customers. Effective control of the material throughout the manufacturing cycle reduces the chance of this problem arising. In any consideration of the nature of discrete part manufacturing it is plain that as material flows through the system. It is subjected to starts and stops. Material must wait for machines or materials handling equipment to become available and must be ordered in advance of production and stored in a warehouse or storage area. Inventories are thus a necessary part of the contemporary manufacturing environment, and they must be managed if profit are to accrue. It should be noted, however, that the introduction of elements of computer± integrated manu-facturing have reduced, to some extent, manufacturing management¶s dependence on some type of inventories. Also, the Japanese concept of ³just-in-time´ production scheduling may reduce manufacturing¶s dependence on inventories.
OPTIMUM INVENTORY
The complex relationship between modern industry and its market presents a real problem in the size of inventories that should be maintained. Large inventories in the face of declining sales mean lower profits. Small and inadequate inventories in the face of an increasing market demand may result in the loss of sales to competitors ± and a decreased profit. Recognition of these conditions should indicate that the optimum inventory is not necessarily either the minimum or the maximum level of inventory; nor is it operation at a maximum inventory turnover.
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INVENTORY TURNOVER
A very common index of inventory control, inventory turnover is the ratio of the value of the product shipped to the average investment in inventory for the same period. Inventory turnover =( value of product shipped)/( value of average inventory) Obviously, the higher this index, the lower the inventory levels and the lower the cost of maintaining the inventories. Also, it is obvious that a high index indicates a shorter manufacturing cycle with all the saving inherent therein.
ECONOMIC LOT SIZE CONCEPT
Throughout this century management scientists have devoted considerable effort to the mathematical formulation of inventory models. An elementary building block of this analysis has been the so-called economic lot size mode. Through the years, it has been used to determine manufacturing batch quantities for in-plant production orders or purchase orders and also for determination of ³optimum´ inventory levels. Rate of Usage The anticipated rate of usage of the part must be considered together with the time required to produce a replacement lot. Quantities should be established such that at all times stock will be available to the assembly departments. This principle is used by the materials control group in determining inventory levels.
ORDERING COST
Next in importance is the cost to acquire the item. In a manufacturing situation this would be a setup cost. If the part is purchased an ordering cost would
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be incurred. For a cost such as this, the quantity purchased or made is important the larger the quantity, the lower the per-piece cost. Deterioration or obsolescence Another factor to be considered is the deterioration or obsolescence of a large stock of parts. All these factors must be weighed by management and an economic lot size determined that will result in the acquisition of parts at an optimum cost per unit. Availability of productive capacity for such lot sizes must be determined and included in the considerations. Economic manufacturing lot sizes must be checked periodically, as they are subject to revision owing to sales trends and variations in the factors mentioned above. Elementary lot size model The use of economic order quantity models has been in effect for many years, and the literature abounds with the many formulations that have been proposed. One of the problems that arises in the use of mathematical model is the fact that many factors have a bearing on optimum lot sizes, and one cannot weigh all of them in a simple formula.
Fig: Cost Relationship for EOQ model
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Computer Assistance A full description of the possible and actual use of computers as an aid in the management and control of inventories is beyond the scope of this book. Obviously, how ever, when large quantities of numbers have to be kept readily available and be changed from time to time, the computer is the direction to go for assistance if its use can be justified. One can do much posting of numbers by hand for the rental or purchase price of a computer, but there will be a point in almost every company¶s operation when the inventory problem can best be handled by computer, most often using a database management system.
INVENTORY COSTS
Typically, sales personnel wish their company to stock large quantities of all items in the product line so they can meet even the most unreasonable demands of their customers. Typical production personnel wish to keep large quantities of parts on hand so there is never any danger of a production line having to shut down for lack of parts. Inventory people themselves often get carried away with descriptions of computer systems such as those just described and urge the adoption of such system often just for the sake of proving that it can be done. The point to make here is that all these things cost money, and these costs go beyond the money cost of the parts or products themselves. Since such costs are often lost in overhead cost calculations it is easy for managers to overlook them.
FACTORS INFLUENCING INVENTORY MANAGEMENT AND CONTROL Many factors influence inventory management and control. The principal effects of these factors are reflected most strongly in the levels of inventory and the degree of control planned in the inventory control system.
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Type of Product If the materials used in the manufacture of the product have a high unit value when purchased, a much closer control is usually in order. Jewelers are much more careful with their stock of diamonds than they are with display cases full of lowpriced costume jewelry. This same principle holds in manufacturing. Type of Manufacture The close relationship between the type of product and the type of manufacture makes an analysis of the effect on inventory controls somewhat repetitious. Continuous manufacture is common to the manufacture of standard products. However, some standard products are made in batches. Where continuous manufacture is employed, the rate of production is the key factor. Here, as a matter of fact inventory control is of major importance and in reality controls the production of the product. Volume The volume of product to be made, as represented by the rate of production, may have little effect on the complexity of the inventory problem. Literally millions of brass bases for light bulbs are manufactured each month involving the control of only two principal items of raw inventory.
INVENTORY MANAGEMENT
The planning of the control of inventory can be divided into two phases, inventory management and inventory control. Inventory management
accomplishes the first phase, consisting of: 1. Determination of optimum inventory levels and procedures for their review and adjustment 2. Determination of the degree of control that is required for the best results 3. Planning and design of the inventory control system
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4. Planning of the inventory control organization.
Optimum Inventory Levels Earlier, we discussed how inventory management is responsible for determining the inventory level that will result in the best profit. We have already pointed out that the trend of sales must be watched closely and inventories adjusted in advance of the change in rate of production as determined by actual sales. But this is not the only factor that must be considered by inventory management when determining inventory levels. The planning for the actual production of the product may involve problems of leveling production, that is producing at a constant rate even though sales may fluctuate. In slack times products are built to stock; the finished goods inventory is increased to offset the demand anticipated when future sales surpass the production rate of the plant. The proper evaluation of this factor requires close cooperation with the manufacturing function. Degree to Control Inventory management must decide just how much control is needed to accomplish the objective. The least control ± as evidenced by systems, records, and personnel- that is required to perform the function efficiently is the best control. This problem of the degree of control can be approached from the viewpoint of quantity, location and time.
Just-In-Time Concept
Much publicity was given during the early 1980s to the Japanese ± style justin-time inventory concepts. Entire books have been written on this subject and many articles have appeared in professional and trade journals. A recent, extensive literature search was conducted and identified over 860 just-in-time articles
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published in professional journals since 1970. We will just briefly describe the concept here. The goal of JIT is simple enough; get the material to its next processing point just at the time it is needed. Theoretically, then, no inventory will be needed. JIT can be implemented with manufacturing work-in-process or with material purchased from outside vendors. The latter will require coordination with these vendors. Generally, they will cooperate if it is a case of getting the order or not, it may turn out that the vendor will carry the inventory. One truck transportation company obtains much of its business by catering to companies that must deliver parts to other companies ³just in time´. The Toyota company in Japan has developed a scheduling discipline for internal control of inprocess material movement, called kanban, which substantially reduces WIP inventories and hence reduces the associated costs. Inventory Control The inventory control group puts the plans of inventory management into operation. These plans are seldom complete in every detail. The day-to-day planning required to meet production requirements ± the second phase of planning for inventory control ±is the responsibility of this group. Inventory Control Systems Control of manufacturing inventories is basically a problem of industrial communications. Earlier, we indicated that the complexity of these systems is directly proportional to the number of items in the inventories and to the number of transactions that have to be recorded to keep abreast of the movement of the material. It should be emphasized here that a great many of the inventory control systems in use
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in industry today are computer-oriented systems, however, the initial part of the discussion in this section will be concerned with basic concepts and data associated with inventory control procedures in general, without reference to capabilities of computer systems. When inventory forms are discussed, it is implied that these could also be records associated with a file in a database management system. The basic information normally carried on perpetual inventory records includes: 1. On order. This part of the record shows the quantity of material ordered but not received. Now order are added in this column and receipts subtracted. 2. Received. All receipts are posted here; there is no balance quantity in this column. 3. On hand. This balance figure represents the quantity of the item that should be in the stock room. Receipts are added to this column and issues subtracted. 4. Issued. A record of all quantities issued to the factory is entered in this column. 5. Allocated. In this column are entered the quantities to be reserved for later issue for specific order. Reserving of materials still in this stock room will ensure their availability when they are needed on the manufacturing floor. 6. Available. This is the quantity of material ³on hand´ that is still available for assignment to future orders.
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Pricing Inventories. There are four basic ways to price inventories for accounting purposes: 1. First in ± first out (FIFO) Under this procedure, all issues are priced at the cost of the oldest lot until that lot is used up. Then the price of the next oldest lot is used, and so on. In other words the first price into the inventory is the first price out of the inventory when issuing materials. 2. Last-in-first out (LIFO) under this procedure, all issues are priced at the cost of the newest lot until that lot is used up. Then the price of the next to newest lot is used, and so on. If, in the meantime, another lot comes in, the price of this even newer lot is used when issuing material until the entire quantity involved is issued, at which time the price reverts to the next newest unused quantity. 3. Average value. Under this system, the values of issues are computed by using the weighted average cost of the material in stock. As new material is received at slightly different prices a new computation must be made as to the weighted average cost of the total material on hand. 4. Standard costs. A standard cost is established for each material, and all disbursements are charged out at this standard value regardless of the price actually paid for the material. Basic Communication Forms The basic communication forms used in perpetual inventory control are: 1. Purchase Requisition. This form is prepared by inventory control when new quantities of material should be ordered. 2. Shop order. This form is prepared by inventory control when quantities of material need to be made by the shop for stock. 3. Receiving reports. These are the records of material received by the stock room.
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4. Stores requisition. This form authorizes the issuance of any class of inventory material from a controlled storage to the shop. These requisition may be prepared by the production planner (as we well discuss under production control) or by foremen, supervisor, or other authorized personnel.
INVENTORY CONTROL RECORDS AND PROCEDURES A detailed discussion of the many records and procedures that are used for control of inventories is beyond the scope of this text. These are many commercial systems, such as Ditto, McCaskey Register, Remington Rand, International Business Machines, and others too numerous to mention. Inventory records may be posted in ledgers or on cards, with each entry made by hand. Basic data of inventory transactions may be typed into a computer terminal and the many calculations or reports can be prepared by computer; however the use of bar code and bar code scanners for point-of-transaction recording of data is fast becoming an accepted way of collecting inventory data. One can see this every day at grocery and department stores but it is also quite extensively used in industry. Bar codes, similar to those appearing on consumer goods, are seen in warehouses and production lines. Hand-held scanner/readers are interfaced with personal computers and are quite flexible for inventory control purposes. Bin Control We have discussed perpetual inventories at length. Again they are applicable to what we have previously designated as high or intermediate value inventory items. It is still evident that such procedures as we have touched on briefly are costly. For those items in which the cost of keeping such records cannot be justified, a bin control is usually adopted.
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Storerooms Storerooms (or stock rooms) are areas in which material is held in controlled storage. All material received in the area is counted and recorded, none is issued without the proper stores requisition. Controlling materials in such a manner costs money in terms of space, personnel, and handling. These costs must be offset by better service to the factory and reduced loss of materials. Physical Inventories A physical inventory is used to verify the balances shown on the perpetual inventory records and to obtain a correct count on all items of inventory that may be on a bin control system. Physical inventories may be taken in two different ways. Using the first method, plans may be made for a complete shutdown of manufacturing activity. Material Requirements Earlier sections of this chapter have presented what might be called a classical approach to inventory management and control. A some what more elaborate and computer ± based approach called material requirements planning (MRP) has been available to industry for over 25 years. The previous system placed considerable emphasis on the ³when´ and ³how much´ questions of inventory management. The ³when´ was answered by the determination of order points, and ³how much´ was determined by calculations of economic order quantities (EOQ) or economic manufacturing quantities (EMQ). The literature abounds with formulations of these two determinations under various sets of conditions.
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Fig:Coordinating role of MRP STEPS TO SETTING-UP AN INVENTORY CONTROL SYSTEM:1. Determine your ideal inventory level a. Find out average inventory turnover rate for industry b. Determine ideal inventory level based on factors such as amount of capital available, consumer demand, historical sales patterns, quantity discounts, storage space, and supply levels. c. Calculate Inventory carrying costs. d. Calculate EOQ & Inventory turnover rate. 2. Establish a purchase plan. a. Establish guidelines for buying and selling inventory items. b. Find suppliers c. Establish an incoming order inspection policy d. Calculate reorder points for each item in your inventory e. Establish a discontinuation policy. 3. Set-up an inventory record keeping system a. Pick an inventory control system and record keeping method
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b. Develop an ³Inventory In-stock Record´ & ³Period Ending Inventory Record´ 4. Other concerns a. Establish a markdown policy for products that don¶t move quickly enough at normal price levels. b. Establish a policy for valuating inventory to determine cost of goods sold.
FOR BETTER INVENTORY MANAGEMENT: At time of delivery: Verify count -- Make sure you are receiving as many cartons as are listed on the delivery receipt. y Carefully examine each carton for visible damage -- If damage is visible, note it on the delivery receipt and have the driver sign your copy. y After delivery, immediately open all cartons and inspect for merchandise damage. When damage is discovered: y Retain damaged items -- All damaged materials must be held at the point received. y Call carrier to report damage and request inspection. y Confirm call in writing--This is not mandatory but it is one way to protect yourself. Carrier inspection of damaged items: y Have all damaged items in the receiving area -- Make certain the damaged items have not moved from the receiving area prior to inspection by carrier.
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y After carrier/inspector prepares damage report, carefully read before signing. After inspection: y Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier. y Do not return damaged items without written authorization from shipper/supplier.
SPECIAL TIPS FOR MANUFACTURERS
If you are in the business of bidding, specifications play a very important role. In writing specifications, the following elements should be considered. y Do not request features or quality that is not necessary for the items' intended use. y Include full descriptions of any testing to be performed. y Include procedures for adding optional items. y Describe the quality of the items in clear terms. The following actions can help save money when you are stocking inventory: y Substitution of less costly materials without impairing required quality; y Improvement in quality or changes in specifications that would lead to savings in process time or other operating savings y Developing new sources of supply; y Greater use of bulk shipments; y Quantity savings due to large volume, through consideration of economic order quantity; y A reduction in unit prices due to negotiations; y Initiating make-or-buy studies; y Application of new purchasing techniques;
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y Using competition along with price, service and delivery when making the purchase selection decision. LATEST TRENDS AND TECHNIQUES IN INVENTORY MANAGEMENT: In recent years, two approaches have had a major impact on inventory management: Material Requirements Planning (MRP) and Just-In-Time (JIT and Kanban). Their application is primarily within manufacturing but suppliers might find new requirements placed on them and sometimes buyers of manufactured items will experience a difference in delivery. Material requirements planning is basically an information system in which sales are converted directly into loads on the facility by sub-unit and time period. Materials are scheduled more closely, thereby reducing inventories, and delivery times become shorter and more predictable. Its primary use is with products composed of many components. MRP systems are practical for smaller firms. The computer system is only one part of the total project which is usually long-term, taking one to three years to develop. Just-in-time inventory management is an approach which works to eliminate inventories rather than optimize them. The inventory of raw materials and work-inprocess falls to that needed in a single day. This is accomplished by reducing setup times and lead times so that small lots may be ordered. Suppliers may have to make several deliveries a day or move close to the user plants to support this plan.
CASE STUDY: Case study 1: Best Practices in Inventory Management A leading consumer products company dealing in cosmetics and other personal care products was seeking ways to: y Reduce inventory levels across their forward supply chain.
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y Improve Inventory Record Accuracy at their storage points. y Accurately track damaged goods at various points in the supply chain. The above problems together were a significant burden to the company. Implementation of best practices after a detailed business analysis resulted in the following benefits: y Inventory Record Accuracy improved to 95% within 2 months. y Stock levels reduced by about 30% across stocking points in the supply Chain. y Complete visibility was achieved in the supply chain with respect to damaged goods inventory
ACTION STEPS ADVISED AND UNDERTAKEN
Process Improvements: 1. Bin card system was implemented for each rack at the CFAs and the delivery staff was trained in relevant bind card maintenance practices. 2. A process to regularly reconcile physical and book stocks using the cyclecount process was mandated 3. An IT solution was identified and implemented for y Accounting the Cycle count process, y providing MIS on deviations and accounting the adjustment notes, y Computing the forecast using consolidated orders, y with factoring for promotions and seasonality, y Calculating safety stock level based on number of weeks of sales target, y Facilitating communication of closing stock data from BSR and depots to logistics department, y Facilitating communication of damaged and un-saleable stock quantity to commercial department ,
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y Automatically allocating stocks using FIFO principle at the depots 4. Demand planning and forecasting were made a periodic activity using the above IT solution to align forecasting with market orders and actual sales. The process of setting safety stocks at depots was made periodic and dynamic, based on updated sales data. 5. Norms were set to act on damaged old and other dead stocks. Clear action steps were laid down to liquidate or destroy these stocks. Responsibility and accountability were set to in the organisation to monitor and authorise activities in this regard based on visibility provided by the IT solution. CONCLUSION Now that we know the importance and criticality of inventory management and control, this must be given utmost importance in both the manufacturing and manufacturing industries. There can be changes and trends and further developments in this aspect of inventory management, but it is up to the organization to decide which method is optimum for them and follow the same. The market is changing at an increasing rate as the demand of certain goods. It is thus the responsibility of every operations manager to keep a track of the latest developments in inventory control and choose optimally from the options available. The Materials Requirement Planning and the Just In Time techniques have changed the face of many businesses. The companies are now able to cut down waste and get leaner. As the survey by the Retail Industry Leaders Association shows that most of the retailers are still unable to meet the demand of the fast moving stock, it is a challenge for these retailers to meet the demand by appropriate application of the inventory management techniques. Inefficient management of inventory can lead to great losses. It requires proper understanding of these techniques to strike the balance where the supply can meet the demand of the products, raw materials etc, nothing more or nothing less. Technology changes have played a major role in the changing trends of inventory management. WalMart which is considered the pioneer in maintaining proper inventory levels across its stores in the world uses technology to its maximum to achieve accuracy in the numbers of the stock available.
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The just in time technique is being optimally applied by Wal-Mart and thus it is able to stay lean for years now. Now that Wal-Mart is entering India, it can be the benchmark for many traditional Indian retailers who have been following the traditional techniques of inventory management. It is on the other side a challenge for Wal-Mart to live up to its reputation and maintain the same consistency of inventory management as Indian market demand for products fluctuates at a greater rate than other markets across the world. It can thus be concluded that a firm to enhance its profit management needs to give first priority in understanding the concepts of inventory management and control and apply the techniques appropriately. This calls for a good study of the market demand, choosing the right technology and appointing competent a workforce to take it further. REFERENCES: 1. www.google.com 2. www.wikipedia.com 3. ³operation management´, ninth edition by Jay Heizer, Barry Render, Jagadeesh Rajasekhar.
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Inventory Management & Control-Latest trends and techniques
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Contents
INTRODUCTION ................................................................................................................................... 3 WHY INVENTORY CONTROL? ............................................................................................................... 5 INVENTORY MANAGEMENT AND CONTROL :- ...................................................................................... 6 OBJECTIVES OF INVENTORY MANAGEMENT AND CONTROL:-............................................................... 7 OPTIMUM INVENTORY......................................................................................................................... 7 INVENTORY TURNOVER.................................................................................................................... 8 ECONOMIC LOT SIZE CONCEPT ......................................................................................................... 8 ORDERING COST .............................................................................................................................. 8 INVENTORY COSTS ............................................................................................................................. 10 FACTORS INFLUENCING INVENTORY MANAGEMENT AND CONTROL .................................................. 10 INVENTORY MANAGEMENT ........................................................................................................... 11 Just-In-Time Concept ..................................................................................................................... 12 INVENTORY CONTROL RECORDS AND PROCEDURES .......................................................................... 16 STEPS TO SETTING-UP AN INVENTORY CONTROL SYSTEM:- ................................................................ 18 FOR BETTER INVENTORY MANAGEMENT: .......................................................................................... 19 LATEST TRENDS AND TECHNIQUES IN INVENTORY MANAGEMENT: ................................................... 21 CASE STUDY: ...................................................................................................................................... 21 CONCLUSION ..................................................................................................................................... 23 REFERENCES: ..................................................................................................................................... 24
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INTRODUCTION Getting leaner is the mantra followed by almost every inventory management professional in the world. There have been tremendous changes in the manufacturing industry with respect to inventory control and management in the recent years with the rapidly increasing international competition and new technology. One of those changes in the application of the Just In Time technique. Much publicity was given during the early 1980s to the Japanese ± style just-intime inventory concepts. The goal of JIT is simple enough; get the material to its next processing point just at the time it is needed. Theoretically, then, no inventory will be needed. JIT can be implemented with manufacturing work-in-process or with material purchased from outside vendors. Changes to recording methods include the use of different methods of information collection and processing, e.g. bar coding in retailing and manufacture and electronic exchange of information. Control methods are more computer based and are becoming part of increasingly integrated systems. The ultimate objective of all manufacturing controls is to realize a profit through the operation of the business. Failure of deliver order on time is one principal cause of loss of business and customers. Effective control of the material throughout the manufacturing cycle reduces the chance of this problem arising. Inventories are thus a necessary part of the contemporary manufacturing environment, and they must be managed if profit is to accrue. Acc to the survey by Retail Industry Leaders Association, 52 percent of retailers agree that they have a handle on matching inventory to demand. But 72 percent also agreed that they are over-inventoried on slow-moving Stock keeping units and another 53 percent said they are under-inventoried in fast-moving Stock keeping units. Inventory can be broadly classified into:
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y Raw material y Purchased parts y Work-in progress y Finished goods y Supplies Raw Material A raw material inventory includes all items that, after being received at the plant, require additional processing before becoming an identifiable part of the finished product. Purchased Parts This classification of inventory is applied to component parts of a product that need no additional processing before being assembled into the finished product. In some cases this material may be classified as raw material inventory. Work ±in Progress This classification of inventory is self-explanatory. All material that leaves either raw material stores of purchased parts stores enters the work-in-progress inventory until the product is completed and placed in finished goods. Finished Goods It is the stock of finished products. Generally speaking, this classification applied to the quantities of finished goods that are held at the factory awaiting shipment. Supplies All the materials needed for the operation of the plant that are not used as parts of the finished product are classified as supplies.
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WHY INVENTORY CONTROL? Control of inventory, which typically represents 45% to 90% of all expenses for business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, to prevent shrinkage (spoilage/theft), and to provide proper accounting. Many businesses have too much of their limited resource, capital, tied up in their major asset, inventory. Worse, they may have their capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shopworn, obsolete, or the wrong sizes or colors, or there may be an imbalance among different product lines that reduces the customer appeal of the total operation. The ideal inventory and proper merchandise turnover will vary from one market to another. Average industry figures serve as a guide for comparison. Too large an inventory may not be justified because the turnover does not warrant investment. On the other hand, because products are not available to meet demand, too small an inventory may minimize sales and profits as customers go somewhere else to buy what they want where it is immediately available. Minimum inventories based on reordering time need to become important aspects of buying activity. Carrying costs, material purchases, and storage costs are all expensive. However, stock-outs are expensive also. All of those costs can be minimized by efficient inventory policies. Inventory control involves the procurement, care and disposition of materials. There are three kinds of inventory that are of concern to managers: Raw materials, In-process or semi-finished goods, Finished goods.
If a manager effectively controls these three types of inventory, capital can be released that may be tied up in unnecessary inventory, production control can be
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improved and can protect against obsolescence, deterioration and/or theft, The reasons for inventory control are: Helps balance the stock as to value, size, color, style, and price line in proportion to demand or sales trends. Help plan the winners as well as move slow sellers Helps secure the best rate of stock turnover for each item. Helps reduce expenses and markdowns. Helps maintain a business reputation for always having new, fresh merchandise in wanted sizes and colors.
INVENTORY MANAGEMENT AND CONTROL :We shall be interested primarily in the control of material in manufacturing. Actually, we are concerned with the control of the ³flow´ of material from a ³raw´ state to a finished product. Most industries buy material, transport it to the plant, change the material into parts, assemble parts into finished products, and sell and transport the product to the customer.
Fig:- Flow of Materials through production cycle.
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OBJECTIVES OF INVENTORY MANAGEMENT AND CONTROL:The ultimate objective of all manufacturing controls is to realize a profit through the operation of the business. A more restricted objective of the control of material is to satisfy the customer by meeting the schedule for deliveries. Failure of deliver order on time is one principal cause of loss of business and customers. Effective control of the material throughout the manufacturing cycle reduces the chance of this problem arising. In any consideration of the nature of discrete part manufacturing it is plain that as material flows through the system. It is subjected to starts and stops. Material must wait for machines or materials handling equipment to become available and must be ordered in advance of production and stored in a warehouse or storage area. Inventories are thus a necessary part of the contemporary manufacturing environment, and they must be managed if profit are to accrue. It should be noted, however, that the introduction of elements of computer± integrated manu-facturing have reduced, to some extent, manufacturing management¶s dependence on some type of inventories. Also, the Japanese concept of ³just-in-time´ production scheduling may reduce manufacturing¶s dependence on inventories.
OPTIMUM INVENTORY
The complex relationship between modern industry and its market presents a real problem in the size of inventories that should be maintained. Large inventories in the face of declining sales mean lower profits. Small and inadequate inventories in the face of an increasing market demand may result in the loss of sales to competitors ± and a decreased profit. Recognition of these conditions should indicate that the optimum inventory is not necessarily either the minimum or the maximum level of inventory; nor is it operation at a maximum inventory turnover.
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INVENTORY TURNOVER
A very common index of inventory control, inventory turnover is the ratio of the value of the product shipped to the average investment in inventory for the same period. Inventory turnover =( value of product shipped)/( value of average inventory) Obviously, the higher this index, the lower the inventory levels and the lower the cost of maintaining the inventories. Also, it is obvious that a high index indicates a shorter manufacturing cycle with all the saving inherent therein.
ECONOMIC LOT SIZE CONCEPT
Throughout this century management scientists have devoted considerable effort to the mathematical formulation of inventory models. An elementary building block of this analysis has been the so-called economic lot size mode. Through the years, it has been used to determine manufacturing batch quantities for in-plant production orders or purchase orders and also for determination of ³optimum´ inventory levels. Rate of Usage The anticipated rate of usage of the part must be considered together with the time required to produce a replacement lot. Quantities should be established such that at all times stock will be available to the assembly departments. This principle is used by the materials control group in determining inventory levels.
ORDERING COST
Next in importance is the cost to acquire the item. In a manufacturing situation this would be a setup cost. If the part is purchased an ordering cost would
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be incurred. For a cost such as this, the quantity purchased or made is important the larger the quantity, the lower the per-piece cost. Deterioration or obsolescence Another factor to be considered is the deterioration or obsolescence of a large stock of parts. All these factors must be weighed by management and an economic lot size determined that will result in the acquisition of parts at an optimum cost per unit. Availability of productive capacity for such lot sizes must be determined and included in the considerations. Economic manufacturing lot sizes must be checked periodically, as they are subject to revision owing to sales trends and variations in the factors mentioned above. Elementary lot size model The use of economic order quantity models has been in effect for many years, and the literature abounds with the many formulations that have been proposed. One of the problems that arises in the use of mathematical model is the fact that many factors have a bearing on optimum lot sizes, and one cannot weigh all of them in a simple formula.
Fig: Cost Relationship for EOQ model
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Computer Assistance A full description of the possible and actual use of computers as an aid in the management and control of inventories is beyond the scope of this book. Obviously, how ever, when large quantities of numbers have to be kept readily available and be changed from time to time, the computer is the direction to go for assistance if its use can be justified. One can do much posting of numbers by hand for the rental or purchase price of a computer, but there will be a point in almost every company¶s operation when the inventory problem can best be handled by computer, most often using a database management system.
INVENTORY COSTS
Typically, sales personnel wish their company to stock large quantities of all items in the product line so they can meet even the most unreasonable demands of their customers. Typical production personnel wish to keep large quantities of parts on hand so there is never any danger of a production line having to shut down for lack of parts. Inventory people themselves often get carried away with descriptions of computer systems such as those just described and urge the adoption of such system often just for the sake of proving that it can be done. The point to make here is that all these things cost money, and these costs go beyond the money cost of the parts or products themselves. Since such costs are often lost in overhead cost calculations it is easy for managers to overlook them.
FACTORS INFLUENCING INVENTORY MANAGEMENT AND CONTROL Many factors influence inventory management and control. The principal effects of these factors are reflected most strongly in the levels of inventory and the degree of control planned in the inventory control system.
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Type of Product If the materials used in the manufacture of the product have a high unit value when purchased, a much closer control is usually in order. Jewelers are much more careful with their stock of diamonds than they are with display cases full of lowpriced costume jewelry. This same principle holds in manufacturing. Type of Manufacture The close relationship between the type of product and the type of manufacture makes an analysis of the effect on inventory controls somewhat repetitious. Continuous manufacture is common to the manufacture of standard products. However, some standard products are made in batches. Where continuous manufacture is employed, the rate of production is the key factor. Here, as a matter of fact inventory control is of major importance and in reality controls the production of the product. Volume The volume of product to be made, as represented by the rate of production, may have little effect on the complexity of the inventory problem. Literally millions of brass bases for light bulbs are manufactured each month involving the control of only two principal items of raw inventory.
INVENTORY MANAGEMENT
The planning of the control of inventory can be divided into two phases, inventory management and inventory control. Inventory management
accomplishes the first phase, consisting of: 1. Determination of optimum inventory levels and procedures for their review and adjustment 2. Determination of the degree of control that is required for the best results 3. Planning and design of the inventory control system
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4. Planning of the inventory control organization.
Optimum Inventory Levels Earlier, we discussed how inventory management is responsible for determining the inventory level that will result in the best profit. We have already pointed out that the trend of sales must be watched closely and inventories adjusted in advance of the change in rate of production as determined by actual sales. But this is not the only factor that must be considered by inventory management when determining inventory levels. The planning for the actual production of the product may involve problems of leveling production, that is producing at a constant rate even though sales may fluctuate. In slack times products are built to stock; the finished goods inventory is increased to offset the demand anticipated when future sales surpass the production rate of the plant. The proper evaluation of this factor requires close cooperation with the manufacturing function. Degree to Control Inventory management must decide just how much control is needed to accomplish the objective. The least control ± as evidenced by systems, records, and personnel- that is required to perform the function efficiently is the best control. This problem of the degree of control can be approached from the viewpoint of quantity, location and time.
Just-In-Time Concept
Much publicity was given during the early 1980s to the Japanese ± style justin-time inventory concepts. Entire books have been written on this subject and many articles have appeared in professional and trade journals. A recent, extensive literature search was conducted and identified over 860 just-in-time articles
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published in professional journals since 1970. We will just briefly describe the concept here. The goal of JIT is simple enough; get the material to its next processing point just at the time it is needed. Theoretically, then, no inventory will be needed. JIT can be implemented with manufacturing work-in-process or with material purchased from outside vendors. The latter will require coordination with these vendors. Generally, they will cooperate if it is a case of getting the order or not, it may turn out that the vendor will carry the inventory. One truck transportation company obtains much of its business by catering to companies that must deliver parts to other companies ³just in time´. The Toyota company in Japan has developed a scheduling discipline for internal control of inprocess material movement, called kanban, which substantially reduces WIP inventories and hence reduces the associated costs. Inventory Control The inventory control group puts the plans of inventory management into operation. These plans are seldom complete in every detail. The day-to-day planning required to meet production requirements ± the second phase of planning for inventory control ±is the responsibility of this group. Inventory Control Systems Control of manufacturing inventories is basically a problem of industrial communications. Earlier, we indicated that the complexity of these systems is directly proportional to the number of items in the inventories and to the number of transactions that have to be recorded to keep abreast of the movement of the material. It should be emphasized here that a great many of the inventory control systems in use
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in industry today are computer-oriented systems, however, the initial part of the discussion in this section will be concerned with basic concepts and data associated with inventory control procedures in general, without reference to capabilities of computer systems. When inventory forms are discussed, it is implied that these could also be records associated with a file in a database management system. The basic information normally carried on perpetual inventory records includes: 1. On order. This part of the record shows the quantity of material ordered but not received. Now order are added in this column and receipts subtracted. 2. Received. All receipts are posted here; there is no balance quantity in this column. 3. On hand. This balance figure represents the quantity of the item that should be in the stock room. Receipts are added to this column and issues subtracted. 4. Issued. A record of all quantities issued to the factory is entered in this column. 5. Allocated. In this column are entered the quantities to be reserved for later issue for specific order. Reserving of materials still in this stock room will ensure their availability when they are needed on the manufacturing floor. 6. Available. This is the quantity of material ³on hand´ that is still available for assignment to future orders.
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Pricing Inventories. There are four basic ways to price inventories for accounting purposes: 1. First in ± first out (FIFO) Under this procedure, all issues are priced at the cost of the oldest lot until that lot is used up. Then the price of the next oldest lot is used, and so on. In other words the first price into the inventory is the first price out of the inventory when issuing materials. 2. Last-in-first out (LIFO) under this procedure, all issues are priced at the cost of the newest lot until that lot is used up. Then the price of the next to newest lot is used, and so on. If, in the meantime, another lot comes in, the price of this even newer lot is used when issuing material until the entire quantity involved is issued, at which time the price reverts to the next newest unused quantity. 3. Average value. Under this system, the values of issues are computed by using the weighted average cost of the material in stock. As new material is received at slightly different prices a new computation must be made as to the weighted average cost of the total material on hand. 4. Standard costs. A standard cost is established for each material, and all disbursements are charged out at this standard value regardless of the price actually paid for the material. Basic Communication Forms The basic communication forms used in perpetual inventory control are: 1. Purchase Requisition. This form is prepared by inventory control when new quantities of material should be ordered. 2. Shop order. This form is prepared by inventory control when quantities of material need to be made by the shop for stock. 3. Receiving reports. These are the records of material received by the stock room.
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4. Stores requisition. This form authorizes the issuance of any class of inventory material from a controlled storage to the shop. These requisition may be prepared by the production planner (as we well discuss under production control) or by foremen, supervisor, or other authorized personnel.
INVENTORY CONTROL RECORDS AND PROCEDURES A detailed discussion of the many records and procedures that are used for control of inventories is beyond the scope of this text. These are many commercial systems, such as Ditto, McCaskey Register, Remington Rand, International Business Machines, and others too numerous to mention. Inventory records may be posted in ledgers or on cards, with each entry made by hand. Basic data of inventory transactions may be typed into a computer terminal and the many calculations or reports can be prepared by computer; however the use of bar code and bar code scanners for point-of-transaction recording of data is fast becoming an accepted way of collecting inventory data. One can see this every day at grocery and department stores but it is also quite extensively used in industry. Bar codes, similar to those appearing on consumer goods, are seen in warehouses and production lines. Hand-held scanner/readers are interfaced with personal computers and are quite flexible for inventory control purposes. Bin Control We have discussed perpetual inventories at length. Again they are applicable to what we have previously designated as high or intermediate value inventory items. It is still evident that such procedures as we have touched on briefly are costly. For those items in which the cost of keeping such records cannot be justified, a bin control is usually adopted.
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Storerooms Storerooms (or stock rooms) are areas in which material is held in controlled storage. All material received in the area is counted and recorded, none is issued without the proper stores requisition. Controlling materials in such a manner costs money in terms of space, personnel, and handling. These costs must be offset by better service to the factory and reduced loss of materials. Physical Inventories A physical inventory is used to verify the balances shown on the perpetual inventory records and to obtain a correct count on all items of inventory that may be on a bin control system. Physical inventories may be taken in two different ways. Using the first method, plans may be made for a complete shutdown of manufacturing activity. Material Requirements Earlier sections of this chapter have presented what might be called a classical approach to inventory management and control. A some what more elaborate and computer ± based approach called material requirements planning (MRP) has been available to industry for over 25 years. The previous system placed considerable emphasis on the ³when´ and ³how much´ questions of inventory management. The ³when´ was answered by the determination of order points, and ³how much´ was determined by calculations of economic order quantities (EOQ) or economic manufacturing quantities (EMQ). The literature abounds with formulations of these two determinations under various sets of conditions.
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Fig:Coordinating role of MRP STEPS TO SETTING-UP AN INVENTORY CONTROL SYSTEM:1. Determine your ideal inventory level a. Find out average inventory turnover rate for industry b. Determine ideal inventory level based on factors such as amount of capital available, consumer demand, historical sales patterns, quantity discounts, storage space, and supply levels. c. Calculate Inventory carrying costs. d. Calculate EOQ & Inventory turnover rate. 2. Establish a purchase plan. a. Establish guidelines for buying and selling inventory items. b. Find suppliers c. Establish an incoming order inspection policy d. Calculate reorder points for each item in your inventory e. Establish a discontinuation policy. 3. Set-up an inventory record keeping system a. Pick an inventory control system and record keeping method
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b. Develop an ³Inventory In-stock Record´ & ³Period Ending Inventory Record´ 4. Other concerns a. Establish a markdown policy for products that don¶t move quickly enough at normal price levels. b. Establish a policy for valuating inventory to determine cost of goods sold.
FOR BETTER INVENTORY MANAGEMENT: At time of delivery: Verify count -- Make sure you are receiving as many cartons as are listed on the delivery receipt. y Carefully examine each carton for visible damage -- If damage is visible, note it on the delivery receipt and have the driver sign your copy. y After delivery, immediately open all cartons and inspect for merchandise damage. When damage is discovered: y Retain damaged items -- All damaged materials must be held at the point received. y Call carrier to report damage and request inspection. y Confirm call in writing--This is not mandatory but it is one way to protect yourself. Carrier inspection of damaged items: y Have all damaged items in the receiving area -- Make certain the damaged items have not moved from the receiving area prior to inspection by carrier.
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y After carrier/inspector prepares damage report, carefully read before signing. After inspection: y Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier. y Do not return damaged items without written authorization from shipper/supplier.
SPECIAL TIPS FOR MANUFACTURERS
If you are in the business of bidding, specifications play a very important role. In writing specifications, the following elements should be considered. y Do not request features or quality that is not necessary for the items' intended use. y Include full descriptions of any testing to be performed. y Include procedures for adding optional items. y Describe the quality of the items in clear terms. The following actions can help save money when you are stocking inventory: y Substitution of less costly materials without impairing required quality; y Improvement in quality or changes in specifications that would lead to savings in process time or other operating savings y Developing new sources of supply; y Greater use of bulk shipments; y Quantity savings due to large volume, through consideration of economic order quantity; y A reduction in unit prices due to negotiations; y Initiating make-or-buy studies; y Application of new purchasing techniques;
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y Using competition along with price, service and delivery when making the purchase selection decision. LATEST TRENDS AND TECHNIQUES IN INVENTORY MANAGEMENT: In recent years, two approaches have had a major impact on inventory management: Material Requirements Planning (MRP) and Just-In-Time (JIT and Kanban). Their application is primarily within manufacturing but suppliers might find new requirements placed on them and sometimes buyers of manufactured items will experience a difference in delivery. Material requirements planning is basically an information system in which sales are converted directly into loads on the facility by sub-unit and time period. Materials are scheduled more closely, thereby reducing inventories, and delivery times become shorter and more predictable. Its primary use is with products composed of many components. MRP systems are practical for smaller firms. The computer system is only one part of the total project which is usually long-term, taking one to three years to develop. Just-in-time inventory management is an approach which works to eliminate inventories rather than optimize them. The inventory of raw materials and work-inprocess falls to that needed in a single day. This is accomplished by reducing setup times and lead times so that small lots may be ordered. Suppliers may have to make several deliveries a day or move close to the user plants to support this plan.
CASE STUDY: Case study 1: Best Practices in Inventory Management A leading consumer products company dealing in cosmetics and other personal care products was seeking ways to: y Reduce inventory levels across their forward supply chain.
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y Improve Inventory Record Accuracy at their storage points. y Accurately track damaged goods at various points in the supply chain. The above problems together were a significant burden to the company. Implementation of best practices after a detailed business analysis resulted in the following benefits: y Inventory Record Accuracy improved to 95% within 2 months. y Stock levels reduced by about 30% across stocking points in the supply Chain. y Complete visibility was achieved in the supply chain with respect to damaged goods inventory
ACTION STEPS ADVISED AND UNDERTAKEN
Process Improvements: 1. Bin card system was implemented for each rack at the CFAs and the delivery staff was trained in relevant bind card maintenance practices. 2. A process to regularly reconcile physical and book stocks using the cyclecount process was mandated 3. An IT solution was identified and implemented for y Accounting the Cycle count process, y providing MIS on deviations and accounting the adjustment notes, y Computing the forecast using consolidated orders, y with factoring for promotions and seasonality, y Calculating safety stock level based on number of weeks of sales target, y Facilitating communication of closing stock data from BSR and depots to logistics department, y Facilitating communication of damaged and un-saleable stock quantity to commercial department ,
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y Automatically allocating stocks using FIFO principle at the depots 4. Demand planning and forecasting were made a periodic activity using the above IT solution to align forecasting with market orders and actual sales. The process of setting safety stocks at depots was made periodic and dynamic, based on updated sales data. 5. Norms were set to act on damaged old and other dead stocks. Clear action steps were laid down to liquidate or destroy these stocks. Responsibility and accountability were set to in the organisation to monitor and authorise activities in this regard based on visibility provided by the IT solution. CONCLUSION Now that we know the importance and criticality of inventory management and control, this must be given utmost importance in both the manufacturing and manufacturing industries. There can be changes and trends and further developments in this aspect of inventory management, but it is up to the organization to decide which method is optimum for them and follow the same. The market is changing at an increasing rate as the demand of certain goods. It is thus the responsibility of every operations manager to keep a track of the latest developments in inventory control and choose optimally from the options available. The Materials Requirement Planning and the Just In Time techniques have changed the face of many businesses. The companies are now able to cut down waste and get leaner. As the survey by the Retail Industry Leaders Association shows that most of the retailers are still unable to meet the demand of the fast moving stock, it is a challenge for these retailers to meet the demand by appropriate application of the inventory management techniques. Inefficient management of inventory can lead to great losses. It requires proper understanding of these techniques to strike the balance where the supply can meet the demand of the products, raw materials etc, nothing more or nothing less. Technology changes have played a major role in the changing trends of inventory management. WalMart which is considered the pioneer in maintaining proper inventory levels across its stores in the world uses technology to its maximum to achieve accuracy in the numbers of the stock available.
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The just in time technique is being optimally applied by Wal-Mart and thus it is able to stay lean for years now. Now that Wal-Mart is entering India, it can be the benchmark for many traditional Indian retailers who have been following the traditional techniques of inventory management. It is on the other side a challenge for Wal-Mart to live up to its reputation and maintain the same consistency of inventory management as Indian market demand for products fluctuates at a greater rate than other markets across the world. It can thus be concluded that a firm to enhance its profit management needs to give first priority in understanding the concepts of inventory management and control and apply the techniques appropriately. This calls for a good study of the market demand, choosing the right technology and appointing competent a workforce to take it further. REFERENCES: 1. www.google.com 2. www.wikipedia.com 3. ³operation management´, ninth edition by Jay Heizer, Barry Render, Jagadeesh Rajasekhar.
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