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Inventory control is a planned approach of determining what and when to order and it also determines how much to stock. It also maximizes the efficiency in production and sales with minimum investment in the inventory.
ABC analysis is a fundamental analytical tool which could be used for a range of objects namely, finished products, items lying in inventory or customers. ABC analysis provides a way to define how stock is managed. A- Outstandingly important, B- Average Importance, C -Relatively unimportant. Each category is handled in different ways. More attention is given to A category and comparatively less attention is given to B and C categories. These rules are usually applied by managers to gain more profits through proper inventory control and to reduce cost while maintaining smooth availability of stock.
ABC analysis is the foundation of many activities related to inventory management. 'A' class items are known as 'fast moving' inventory items and hold a key value to the business. There are few of 'A' class items in an inventory. C class items are known as 'slow moving' inventory items. There may be numerous B and C class items but their contribution is less compared to the 'A' class items.
Inventory Turnover Ratio
Inventory Turnover Ratio measures how frequently a company sells its goods during the year. It can also say whether a product is selling well or not. If a company has a High Inventory Turnover Ratio it means that the product is selling well. A low inventory Turnover Ratio means a risk of holding obsolete inventory. This may reduce the profit of the company.
Inventory turnover Ratio is obtained by the following formula
Inventory Turnover Ratio = Net Sales/ Average Inventory
Inventory control at Haier Group
The Haier group is the largest home appliance company in china and also the fifth largest in the world. Haier group was originated in 1984 and in 1991 December they were recognized as a group of companies. At early stages of the company they focused on quality and average sales had increased 73.8%per year from 1984 to 2002. Currently, Haier products are sold in 50,000 retail outlets all over the world. Haier Group rises up on the competitive market with annual sales of $8.6 billion, 30,000 employees and sales in 160 countries worldwide. With the achievement of the name-brand in china by the late 1990 Haier made their concentration on the world market and Haier achieve globalization in 1998.
"In the appliance industry, product life cycles are becoming shorter," says Haishan Liang, vice president of the Haier Group. "Competition among enterprises is not only based on price and quality, but more importantly, on the speed and efficiency of the supply chain". Haier group achieved the market advantage by focusing on centralized order handling and they reengineered the method of managing the flow of products and capital based on the customer demand. With the reengineering of their processes, Haier reached the maximum throughput as well as the better customer service with minimum cost and capital investment. The manufacturing process was also transformed from Market-to-stock (MTS) to market-to-order (MTO) and they follow the Just-In-Time (JIT) inventory management principal. With this approach company was able to minimize the material inventories in Haier's production chain and was able to respond better to the market demands. In the journey of lean process, Haier needed new supply chain strategy and after a deep analysis of other alternatives, Haier chose mySAP Supply Chain Management which is related to mySAP Business Suite Solutions. "After careful consideration, we selected mySAP SCM because the solution could be adapted to support our emerging business processes, including the adoption of JIT raw material and finished goods inventory management, demand-oriented operations, and global trade," says Li Zhan, information technology manager of the Haier Central Logistics Division.
mySAP SCM was selected because of its solution capabilities maps well with the Haiers centralized order-handling procedures and associated production processes. The Implementation covers 23 divisions, all product lines etc.
Figure 1: Haier's Network Model Based on mySAP SCM1
After implementation of the mySAP SCM, the comparison of key performance indicators shows that Haier fully increased the competitiveness through the reengineering process which was focused on the centralized order handling and reduced its supply chain expenses at the same time as functioning in the severely competitive markets. Furthermore 50% increase in sales is included to these improvements.
Inventory Control at whirlpool
Whirlpool Corporation is one of the world's largest manufacturers and marketers of innovative home appliances with over 70,000 employees and owns nearly 70 manufacturing and technology research centers around the world. The company manufactures brand names such as Whirlpool, KitchenAid, Roper, Estate, Ignis and etc. According to the sources, Whirlpool's marketing strategy is market driven. The organization gains competitive advantage by their presence in a range of regional markets. Another strategy they use is being more focused on the customers.
The company's profit decreased due to mismanagement of inventory and due to several other reasons such as the recession. Problems in the flow of cash are identified and further analysis has shown that the inventory levels are high and the turns are below major competitors. Also the organization has unmet supply chain processes which is a barrier in achieving competitive advantage.
Due to not having the demand and to deal with lower sales, the company had to cut jobs and close factories in other whirlpool brands such as KitchenAid and Maytag. Whirlpool has achieved improvements in their performance with the help of Six Sigma Systems. Whirlpool uses and ERP system that enables the organization to manage their inventory in a proper manner in order to gain profits. Use of an ERP system has enabled the organization to manage the supply chain better. Whirlpool Corporation is now using the SEEBURGER which also enables the company to lower supply chain costs by reducing invoice and product shipment errors.
Panasonic Corporation is a globally known consumer marketing company which has been in business since 1955. However the Panasonic Corporation has a very long history beginning from 1918. The brand was founded by Konosuke Matsushita. The Brand was first used to market audio speakers. The Panasonic Corporation also markets consumer electronic goods under the brand name of National for the Japan region. Panasonic Corporation is one of the worlds largest electronic products manufactures in the world. The Corporation is comprised of over 600 companies worldwide.
The company conducts business in several diverse fields from home appliances to digital AVC networks and other interests. Consolidated group sales until the 31st of December 2009 decreased 16% to 5,219.9 yen from 6,223.7 a year earlier. The loss of profit in the company has been attributed to the loss of sales due to the global financial crisis and a decrease in strength of the yen as well as mismanagement of inventory. As a result Panasonic had to cut 15,000 jobs and close down 27 manufacturing sites.
For the year 2010 Panasonic will continue with the stock reduction 200 activities, which is a plan designed to reduce inventories. Under the plan the company aims to reduce inventories by 20.0 billion yen over a period of 2 years. The company is also implementing other programs in a bid to increase profit.
The corporation intends to respond to the difficulties in 2010 by rebuilding its management structure and implementing the GP3 plan. The changes will be carried out according to improvement in the global financial crisis as well as expanding into emerging markets and the demand shift to lower priced products. The company is also following the itakona program which is a program that optimizes cost by analyzing costs at the raw materials level as well as i2 technology.
Use of Demand Solutions by Sony Canada to Gain better Inventory Control
Sony Canada established in 1955 as a division of Sony Corporation of Japan, with the responsibility for the marketing, sales, and distribution of both consumer and professional electronics products to customers throughout Canada with headquarters in Toronto, sales offices and distribution centers throughout the country. Approximately there are about 900 employees, 500 authorized dealers and over 60 Sony retail locations across Canada. It also operates 71 company-owned retail stores. These statistics implies that the Sony products have a high demand in Canada. Sony Canada has recognized the need of a proper solution to prevent business risks such as customer dissatisfaction which will directly impact on the profit.
To meet these demands of the consumers, company initially devised supply chain using Advanced Planner and Optimizer (APO) to better collaborate with customers to predict demand, vendor-managed inventory (VMI) to make its replenishment processes more productive and efficient enough to avoid the business risks. APO and VMI are set of supply chain management software applications used by Sony Canada and they are developed by the German-based software company SAP. But to get the exact numbers of the customer demand on each product, the number of sales in each outlet and to observe ups and downs in demand during different seasons in order to provide continuous supply of products it is important to predict the needed quantity of products in inventories.
Sony Canada has been using customer-generated forecasts to get the statistics to manage the inventories till 2002. But the efficiency and accuracy factors made Sony Canada's management to rethink about the strategic accounts with demand solutions.
In 2002, Sony Canada extended the VMI application by introducing Demand Solutions Requirements Planning (DS RP) as a solution to above facts to analyze customers' Point-of-Sale (POS) data. Demand Solutions Requirements Planning (DS RP) provides analysis of the projected demand for items against current inventory, providing the ideal inventory level according to the data gathered in POS. Also the DS RP can forecast the optimal inventory level for every item produce by the company on daily, weekly or monthly basis.
According to Mike Campbell, president and CEO of Demand Management, Inc. Sony Canada came up with a solution to meet the challenge with a better inventory control. Also he states that the accuracy and time-saving benefits of bringing control of its forecasting in-house provide Sony Canada with competitive advantages that will lead not only to enhanced customer service, but also to improvements in the company's bottom line. These factors conclude that the expansion of the existing software system used in Sony Canada with the consumer demand has solved the problems in inventory control and made positive effect on the profit.
All the applications mentioned above [APO, VMI, DA & RP] can be integrated to ERP Systems.
LG is a large scale organization in the global market. LG was established in 5th of January in 1947. LG has 53 companies and there are four major business domains which are Home Entertainment, Mobile Communication, Home Appliances, Air Conditioning and business solutions. LG is a global leader of Home Appliances Industry and providing home solutions through supplying so many superior products which ensures customer satisfaction. Major products of LG include washing machines, refrigerators, cooking appliances, vacuum cleaners, and built-in appliances.
LG has reported KRW 4.2 trillion (USD 3.6 billion) in sales. 7.4% lower than their 2009 4th quarter of their business and operating profit was KRW 55.8 billion (USD 48 million) resulting in a margin of 1.3% in 2009 year period. There was a 5% decline from Handset revenues from 4th quarter in 2008 and Handset revenues were KRW 3.9 trillion (USD 3.3 billion) in that period while operating profit has arrived up to KRW 66.5 billion (USD 57 million), occurring a margin of 1.7%. There was an increase of 32% year-over-year (YoY) in unit shipments of handsets and 7% quarter-over-quarter (QoQ) to 33.9 million units, recording 117.9 million units being sold in 2009 over 100.7 million units in 2008 because of effective growth in North America, Europe and emerging markets. They have earned low profitability compared to the 3rd quarter of their business due to price erosion, increase of marketing expenses for year-end inventory clearance and emerging market channel expansion.
A general benchmark with U.S.-based Hewlett-Packard has clearly indicated that LG can increase their productivity by pruning inventory levels and lead times, and by checking the current status of the products on the time. Business analysts say LG is going on right path for a supply system. But they motivate the company to introduce more detailed strategies as supply chain management of LG is in its first stage.