Inventory Management Methods
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Published: Mon, 13 Aug 2018
Success of an inventory management process entails the balance of costs of inventory with the benefits of the inventory (Alison et al., 2005). Inventory in business is one of the tangible and visible components of a company. Inventory management is the act of keeping and placing stock in a business. Many businesses have problem keeping the inventory. Each and every service provided anywhere is concerned with operation management technique in one way or another. Its objectives are to provide goods and services that the customers demand for in the right quantity, quality and cost at the appropriate time (Waller et al., 1999).
The ABC analysis groups inventory into three classes. Class A contains 80 percent of the total value of inventory. Class B contains 15 percent of the total value of inventory while class C contains 5 percent of the total value of inventory (Bowersox & Cooper, 1992). The ABC analysis gives a simple and quick review of the inventory. The ABC analysis also gives a clear view and meaning of the whole assortment of products in the inventory, thereby making it an efficient method to control inventory investment. The ABC analysis makes it easy for an inventory manager to devote resources to only those places where it will have the biggest positive feedback. Nike, Inc is an American manufacturer of shoes. In their ABC analysis, leather forms class A, sole forms class B while shoe lace forms class C (Cousins & Spekman, 2003). ABC analysis is a vital method for management of inventory.
Economic Order Quantity (EOQ)
EOQ is a technique for inventory management that minimizes ordering and holding costs for the year. EOQ is a crucial accounting formula that determines when the combination of inventory carrying cost, order and costs are the least (Simchi et al., 2003). The result obtained from the formula gives the most effective quality to order. There are two models used in EOQ: Q and P models. In the Q model, whenever the stock on hand reaches the recorder point, a fixed quantity of materials is ordered. Advantages of the Q model are that the inventory materials are at the most economical quantity and inventory control personnel automatically devote attention to stocking the only items that are needed, when they are needed. A major disadvantage of the Q model is that the suppliers may be inconvenienced by orders that are raised at irregular intervals. In the P model, the stock position of every item in the inventory is closely monitored. Advantages of the P model are that the inventory and ordering costs are low and the model can be used on materials that are used irregularly or in seasons. Sales estimates are easily calculated for seasonal materials and the purchase of these materials can be planned in advance. A disadvantage of the P model is that is inefficient because it compels a periodic review of inventory.
At Best Buy, the demand for desktop computers is 1000 units per month. Every time an order is placed, Best Buy incurs 4000 dollars in order cost. Best Buy incurs further costs in purchasing each computer at 500 dollars and the retailer charges a holding cost of 20 percent. The annual demand, D, is equal to 12000 dollars (1000 multiplied by 12). S, the order cost per lot is 4000 dolars. C, the price per unit, is 500 dollars. The annual holding cost, h, is 0.2. From these values the optimal order size and the optimal order frequency can be calculated. The formula for optimal order size, Q*, is given by SQRT((2DS)/hC) (Russ, 1999). Substituting the letters with the corresponding values gives the number 980, which is the optimal order size.
Vendor Managed Inventory (VMI)
This is a process where the vendor makes orders for clients and customers according to the demand information they get form the customers. Both the customer and the vendor are held together by an agreement that conclude the costs, the inventory level and the fill rates.VMI use IDE (Electronic Data Interchange) to specify their delivery quantities which are sent to clients and customers by the use of distribution channel (John et al., 2008). VMI is an inbound logistic plan based on the idea that the dealer should be in charge of managing customer’s inventories by using the demand information provided by the customer himself. This eliminates a step in the information chain and creates a better demand visibility for the supplier, who can synchronize his manufacturing process to the actual demand with the result of having less inventories and lower logistic costs (Disney & Towill, 2003).
Hennes & Mauritz (H&M) AB, a new clothing retailer situated in Sweden is famous for its cheap but chic fashion. While other vendors are struggling, H&M sees the economic slowdown as a chance to enlarge, go into new markets and to put in new brands. In September 2008, H&M was all set to go into Japan, known as one of the world’s most competitive fashion markets. It was to open another store in Japan in November and a third one was to be launched soon. In Japan, H&M decided to enter into a collaboration of design with designer Rei Kawakubo, who was the creator of well-established fashion brand, Comme des Garçons. Last year, H&M got into China and has established itself in 30 more countries with more 1,600 stores worldwide. As a result of effective vendor management inventory skills, it was able to establish in other countries. This has come as a result of planning which is essential in VMI, knowing the demand, improved quality of production. As a result they H&M increased its inventory annual turns and reduced material obsolescence and hence a considerable increase in assets. It was able to improve its customer services and responsiveness through scheduling forecasting of the fluctuations.
VMI has some benefits to the supplier and the customer.VMI ensures that the company operation of production is not interfered with by shortage of material. Secondly, they make sure that the distributor is not caught short on products. Moreover it helps in ensuring that the customers and the suppliers do not have more inventories that are necessary to meet the needs of the customers.VMI also improve the planning processes that are beneficial to the business. Some of the pros and cons of VMI to the supplier include: bullwhipping effect reduction, lowering reliance to forecasting, it reduces the order of modifications and simplifies production plan. To the customers, it assists in reduction of stock, reduces financial cost, simplify the purchase process and increases sales. To both the customers and the suppliers, VMI helps in reducing the data entry errors, improves the speed of the process, reduces stocks level and it improves the service level (Vereecke & Muylle, 2006).
VMI plays a major role in cost management. In this case, the supplier holds stock on site or near the buyer. By doing this, the customer is given instant access and the power to get stock while they pay for only what they have sold. This increases the stock turnover and reduces investments in the stock. The supplier is mandated to replenish the stock in many VMI business partnerships. This also comprises of stock ordering, logistics and freight management and counting and stocking the stock. By doing this, the expenses are handled by the supplier and hence they are responsible for regulation of the prices to the customers. Another benefit of VMI is that they distinguish variations of demands and errors of forecasting between the downstream and the upstream chain supply associates. This type of decoupling assists in reducing the levels of stock and the linked stock maintenance costs (Hollensen, 2001).
VMI as a supply chain practice is very essential in monitoring, planning and managing the inventory or stocks of an organization by a vendor for the organization.VMI has many advantages which range from cost, delivery and also quality. It is necessary to have VMI in a business as they play a big role in the management of the inventory. The advantages of the VMI outweigh the disadvantages and hence they are vital in an organization which requires major stock taking during business. Vendor-managed inventory (VMI) systems have been proven to be a technique for improving the efficiency of supply chain operations. VMI is made efficient by the execution of an electronic means that eradicate many of the built-in delays associated with traditional ordering systems and enable the establishment of shared inventory management systems (Xu et al., 2001).
Part 2:- Recent trends in operations and supply chain management.
Modern company may choose to cooperate through supply chain arrangements that combine their personal strengths and distinctive resources. In the past year, supply chain management has showed organizations that they can attain sustainable competitive advantage whether they are in competition with other suppliers of not (Vergin & Barr, 1999). Due to this, many companies have been involved in outsourcing logistic functions which has provided a great opportunity to many companies to operate efficiently, be flexible, improve their service levels and have a better focus on their main benefit of the organization.
Outsourcing logistics has been one of the trends that have been on the rise in supply chain management (Walter et al., 2003). Many companies have really gained from outsourcing and thus they have improved their involvement with providers and facilitated the integration of the whole supply chain. Outsourcing has led to development of various partnership initiatives which have been successful in exploiting the logistics flow and the customer demand. For instance, Dell Computer Corporation opened up the Direct Model of sale and service of PCs directly to the consumers. This is a way of outsourcing which ha been of great impact on Dell Inc. Dell Computer Corporation a leading computer systems company was started in 1984. Dell trades its computer systems straight to end customers, avoiding distributors and retailers. Dell matches supply and demand because its consumers order computer configurations online computer configurations are built up from components that are available. Its strategy is to give customized, low cost, and quality computers that are distributed on time. Dell successfully employed this strategy via its resourceful manufacturing operations, better supply chain management and direct sales model. Dell uses the phone or online through the internet to take orders directly from its customers.
Other recent trends in operations and supply chain management include, planning for the demand; as more manufacturing companies come up, the level of quality of products increases and hence the demand has to be planned for. Having a demand focused approach assists an organization deliver and have a demand driven model (Alan, 2008). Planning for the demand improves the management efforts and helps overall costs and customer services efforts .The other trend is globalization; the business market becomes global as a result of improvement in communication. Processes like manufacturing, distribution, selling, invoicing, returns have a big impact on the thirdly, increased competition is another trend the trend in supply and operation management. Due to the increase in market, demand and supply, there is high competition form all the companies selling the same products. This comes as a result of high demand and also having many suppliers. Dell has decreased the cost of intermediaries that would increase the cost of PC for the customer. Dell also saves time on handing out orders that other organizations normally incur in their sales and distribution system. Moreover, by dealing directly with the customer Dell gets a clearer indication of market inclination. This helps Dell to plan for the future apart from having better managing its supply chain (Walter et al., 2003).
The company with the products of highest quality has an upper hand over the other companies (Wikner et al., 1991). As a result of competition, the prices are also affected and hence they reduce due to many suppliers in the market. Many companies are viewing their supply chains in two ways to help offset this trend. Dell Inc looks at ways to decrease cost and still create a more efficient value chain to remain cost competitive. Second, companies are looking at ways they can offer value-added services to get together the demands of more complicated customers (Vivek, 2009). Dell Inc does this by taking orders direct form the customers and delivering their products at home. Reorganization of the procedures with better design, better collaboration across networks and new services will help your company stay competitive and strengthen relationships with your customers.
Many recent trends in operations and supply chain management have come up in the business industry. Vendor-managed inventory (VMI) systems have been proven to be a technique for improving the efficiency of supply chain operations. Experience has shown that developments in these two areas can lead to eradication of between 20 percent and 30 percent of the previously required supply chain inventory. Nevertheless, in order to achieve this level of success, it is vital for those companies that have not yet applied VMI to follow a best practice approach. Flourishing VMI programs take benefit of a key supply chain association that has been reaffirmed many times over (Michael & Nigel, 2003).
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