The inventory system of an organization determines when stock should be replenished, how large orders should be, and monitoring levels of inventory. Zero inventories make sure that the parts or goods are delivered by the suppliers directly. Inventory management may be used to improve customer service, ensure that supply chains are independent, makes sure that shocks and periods of calamity are taken care of. These include labor strikes, surges in demands and natural disasters. The management of inventories saves transportation costs, improves economies of production and those of purchasing. Just-in-process is used in the zero inventories to keep works-in-process at minimal. In addition, finished goods are shipped as quickly as possible in the aforementioned arrangement so that the amount of the goods will be minimal. The following are three categories of inbound logistics; basic unit cost of product/service, transaction cost and inventory carrying costs.
In many businesses, the limited resource capital is tied to the major asset inventory, and this makes it necessary to evaluate the kind of inventory so tied, and the balance among the different product lines to improve customer appeal to operations (Score, n.d.). The importance of inventory control is to avoid stock-outs, shrinkage and provide proper accounting. Inefficient management of the inventory system causes the business to suffer in these three aspects. Further, inefficient inventory systems will result to poor balancing between the stock available to meet demands and the excess of the stock available. The need to eliminate excesses exist in the evidence that the turnover on inventory does not warrant investment, while the need to have enough stock to meet demand lies in the idea that customers may shift to other places to buy what they cannot get. Thus the inventory system need be sensitive on these issues. In balancing stock-outs, storage costs, carrying costs and material costs, there are a number of things that are worth consideration. These include demand, lead time, the amount of available resources and type of commodities among others. The balancing involves establishment of strict and efficient inventory policies.
Inefficient Inventory System
A poor inventory system that manifests in loss of sales, loss of customers, loss of time as a result of poor balance between most important and highly costly goods and the less costly and less-frequently used commodities. Inefficient inventory systems may exist in different forms. For example, a big organization could be using an eyeball system of inventory control which is not able to handle the many different product lines or many processes that takes place. Even where the eyeball or any other simple system is to be made effective, many the process may take too long because the company deals with many products and services. Employing too many people for the work of tracking and tracing the products, flow and their processes may be costly. Such systems would lead to stock-outs at times when sometimes enough time is not available for the sourcing of the commodity. Inventory systems may be influenced by a number of factors. Inefficient logistics may be indicative of an inefficient system. The “logistics includes is the process of planning, implementing, and controlling the efficient, effective flow and storage of goods, services” from the origin of the goods to the point of usage so that the customer’s requirements and needs can be catered for. The logistics that are involved in the production may be
An inefficient inventory system may fail to establish link between lead-time, delivery performance, production schedules and purchasing costs. The organization for the Work-in-process influences the time used in the processing of goods, and therefore may result in delays, high production costs and unnecessary wastage of goods if not properly managed. A poor or inefficient system will not track these processes or that it does not seek to monitor the current processes with intent of improving them. The system is unable to effectively deal with different product lines in the production process. An effective planning for production which is based on the customers’ demands can influence decisions for production. Tracking inventory is important in this case especially for future purposes. A perpetual track can be used where one determines the inventory that leave inventory. Another means of tracking inventory to determine the actual level of inventories (which is important to determine the level to intake) is the Radio Frequency ID which counts inventory automatically from a remote location (Atkinson, 2005).
Work-in-process is one of the three types of inventory which need be managed. The rest are finished goods and raw materials. Reducing the amounts of batches to be ordered and doing it with more frequency can be used as a technique to reduce raw material inventory. Just-in-time production can be used to reduce the finished goods inventories because goods are produced when there is an order. One important aspect of an efficient system is to minimize WIP. A system that does not reduce WIP may manifest in work-piling between workstations. In addition, the system may have queuing problems as a result of many queues. The problem of queuing is that there is wait time before a process. Pooling the workstation reduces WIP through reduction of the workstations. Kanban (Japanese for sign) is a method of a tagging system that makes known what processes to be carried out and the time for the processes in the whole production process. The rate for some operations can be pooled together to reduce cycle time and this improves performance.
Component and types of Inventory Systems
A proper inventory system need have a mechanism of recording the customer demand, replenishment lead time data. In addition, analyzes for this data is needed. The system should also be capable of computing demand forecasts and lead time on a regular basis. The forecasts can be reviewed by the inventory managers when there is information that is available to them and not to the automatic system. The inventory system also need posses the ability to calculate and update the ordering costs as the latter may change with change in the method of procurement and other factors. In order for the system to take care of the ordering cost, the owner must be sure that it takes care of the components of the ordering costs including costs for paying the vendor, inspection costs, receiving cost, selecting supplier, placing the material in storage, preparing the purchase request, and reviewing the stock position.
The cost for holding each additional unit of inventory is estimated by the inventory holding cost which should also be integrated into the inventory system for regular update. On this aspect, the system needs include various aspects of the inventory holding costs such as inventory shrinkage as a result of damages and theft among other things, interests on inventory investment and obsolescence. It is a widely accepted notion that reducing inventories may lead to increased profits. Therefore, the system should deal with issues of acquiring new assets in circumstances of available or limited funds. Before purchase requests for inventory items or requisition orders are released, the system need be able to validate the available funds and that the system need be able to check whether funds are available or not before the approval of the request for acquisitions are made.
The resources for inventories must be budgeted for using the system and such budgeting must be based on the future inventory needs as determined by managers’ estimate decisions, and customer orders which are determined from the history of the customer activity. Quality standards are very necessary in consideration of the inventory system in order to make sure that the customers are satisfied not only by the processes but also the procedures and processes. The quality of the commodities needs monitoring from the supplier end even before the commodity arrives to the producer. Some companies place the need for the inspection of the supplier and the establishment of a relationship between them and the supplier in order to improve on the delivery processes and the quality of the goods delivered. Because quality involves testing, inspection and other processes, the inventory system must be bale to provide for this. The system should also be able to establish production targets which will be used to meet the customer orders and the operating schedules.
One of the most important aspects of the organization is information. Generation of the accurate and correct type of information is as important as storage, sharing and retrieval, and security of the information. The inventory system must therefore be able to record customer information and material information, store it and also use this information to benefit the organization such as through calculation of prospects and estimates. The information to be recorded includes invoice information to aid in payments, receipt information, and purchase order/contract. In this respect, purchase order numbers, vendors and quantities, item numbers and units of measures. An efficient inventory system will ensure that information on demand, procurement lead time, rates of utilization of funds, budgeted versus the actual figures and information, the funds that are available for the operations determined, the assets available, the procurement cycle and the requirements. This and other information such as items sold, items received and those ordered need be shared so as to enhance the running well of the operations of the organization (GAO, 1998).
The type of inventory systems depend on the degree of control required. They can either be ABC classification according to the Pareto Principle; A items which have very tight control, complete and accurate records and frequent reviews; B-items which do not have very tight controls, have good records and regular reviews; C Items which have simplest controls possible, periodic review and reorder, large inventories and minimal records.
An anticipatory type of planning the supply chain allocates supply to warehouses based on the forecast while specific needs of warehouses act as the basis for response-based type of planning to replenish inventory with order sizes.
Anticipatory Inventory Control
In this type of systems, stocks are purchased, replenishment and production is made when it is ascertained by the need for product downstream. The stock requirements are determined on the basis of the most immediate planning period (about 3 weeks). This type of arrangement involves lower volume of orders that are more frequent and on shorter cycle time (Inventory Management 1).
Perpetual Inventory Systems
Perpetual inventory systems include computer-operated systems, card-oriented and manual systems. The computerized system involves automated trigger of the system once there is fall in the supplies. The appropriate vendor receives a programmed instruction. This type of system may be used to avoid stock-outs for single and the various product lines. The system provides for monitoring of sales on a constant basis, which can be used as basis of selling and buying decisions in the future. The system can also be used to monitor different product lines. Perpetual systems that are computer-based will be more accurate, quicker and efficient in a complex setting that involves several production lines, and many processes. In addition, the system can be used to achieve other advantages such as efficient communication between the supplier and the producer.
This type of system of inventory control is simple in application and used by a vast majority of small retail and small manufacturing operations. This system involves the monitoring or inspection of the stock levels by the manager or an individual. This system lacks efficiency because the items are not effectively monitored. The company may incur some loss on sales before discovering that some items are missing. This type of inventory control is not efficient in eliminating stock-outs and ensuring balance among the various production lines in the system. Inconsistencies may eliminate particular trends and this may cause some production processes to suffer as the managers may stress on the production of missing items. The idea of continuous and efficient monitoring process helps because production may also be well distributed overtime as it is well planned, and this eliminates or reduces the possibility of bundling production tasks.
Reverse Stock (or Brown Bag) System
A reverse stock of items is kept aside, and this is opened when the last unit of open inventory is used. A reorder is to be placed immediately. The quantity of the reverse stock is determined through the consideration of the order cycle delivery time and the rate of product usage.
The ABC System
This system is based on the Pareto principle. The concept in an inventory system is that while the inventory costs for most items are low, that of some items is large (the ratio is 20:80 percent respectively). Those items contributing larger amount of inventory cost will require high level of control as compared to those contributing less. The type of inventory involves the classification of items according to their importance, frequency or rate of their usage and item value. Items with high rate of usage cannot be compared with those of low rate of usage because they exhaust quickly. Replacement of those items with a high rate of usage is higher, while those items of high value would require a lot of money and therefore must not be stocked at higher levels than necessary. Those items that are used frequently need be controlled more carefully than those that are not used so frequently (Tanwari, Lakhiar and Shaikh, 2000).
In an ABC system classification, items (10-20% of all items) on “A” class are expensive and require special care because they contribute to 70-80% of total inventory costs. Those items in class “B” are ordinary and require special care (make up about 20-40% of all the items and contribute to about 15-20% of the total costs). Items in class “C” are cheap, make about 40-70% of the total items, contribute 5-10% of the total cost and they require little care. This system requires a study to be carried out based on the past records and future forecasts to place proper estimates of quantity levels of class “A”. The organization can reduce the level of safety stock and increase lead time variance by establishing a relationship with vendors. Items in category A should be ordered in Economic Order Quantity (FOQ) batches. The organization can allow the levels of safety stock to fall as well as that of optimal EOQ for class “B” items so as to reduce the operation costs. Some of the items in class “C” can be ordered semi-annually or annually (Tanwari, Lakhiar and Shaikh, 2000).
In the whole of ABC system, automation of various processes such as the evaluation, communication of the levels of stock in different lines of production can help in increasing the process efficiency and reducing the associated costs. In addition, the number of mistakes in the process can be greatly reduced with automation.
Perpetual Inventory Systems
This type of system may be used to avoid stock-outs for single and the various product lines. The system provides for monitoring of sales on a constant basis, which can be used as basis of selling and buying decisions in the future. The system can also be used to monitor different product lines. Perpetual systems that are computer-based will be more accurate, quicker and efficient in a complex setting that involves several production lines, and many processes. In addition, the system can be used to achieve other advantages such as efficient communication between the supplier and the producer.
References and Bibliography
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General Accounting Office. (1998). Inventory System Checklist. Web.
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Score. Inventory Control. Web.
Stack N., Staurt C., Christine H., Alan K., and Robert J. (1998). Operations Management. 2nd Ed. Pitman Publishing, London
Tanwari Anwaruddin, Abdul Lakhiar and Ghulam Shaikh. (January-June, 2000). ABC analysis as a inventory technique. Quiaid-E-Anwam University Research Journal of Engineering, Science & Technology, Vol. 1.no.1. Web.