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Purpose - The purpose of this literature review is to provide a review of inventory management system. Reviewed topics are; how database design can impact on traditional inventory management and organization's effectiveness, how data mining & data warehousing techniques and decision can be utilized in online inventory system, integrating internal and external models with inventory management, how safety & security measures will be taken in online stock handling, finally the impact of Just-in-time theory on inventory managing, planning and control.
Design/methodology/approach - These above given articles are segmented based on major themes extracted from the global research (Nexis, journals, reports, books) as well as key assumptions made by the particular inventory management model.
Findings - Four major themes are found from research focused on inventory management. First theme focuses on improving traditional approach for inventory system, which considerably provides attention on improving database design to improve organization's effectiveness and performance of online inventory management system. Second theme gives effective approach to integrate traditional logistic decisions, such as transportation and warehousing. Third theme provides important information regarding safety features whilst handling stock, such as security, backup & recovery. Fourth and final theme involves around JIT (Just-in-Time) theory, how it improves online inventory management system.
Keywords - Inventory management, stock control.
Context - The goal of this review is to begin the process of reviewing inventory management system. It has made a unique and significant contribution to inventory management theory, and a detailed examination of such work stands to produce increased awareness and appreciation of the contribution. Furthermore, it stands to facilitate the advancement of inventory management by highlighting themes. In addition to being of critical importance to efficient and effective inventory management, these issues have likely received such attention because they are central components to deliver efficient inventory system. These issues have been discussed globally and best actions have been implemented to utilize these themes and it has been proved that these issues may enhance the performance and effectiveness of inventory management systems.
Overview - These issues or themes, extend the inventory management literature in several respects. First, one of the most important theme or issue is to improve traditional approach to design inventory system to enhance performance and organisational effectiveness, explained in section 1. Second, important issue is to use modern data mining and data warehousing techniques, described in section 2. Third, is to achieve safety & security of stock, explained in section 3. Fourth, by utilizing the Just-in-time theory with inventory system, results in effectiveness.
Section 1: Improving traditional approach in designing Inventory Management System by improving database design
Research in the importance of modern inventory management approach goes beyond a simple assumption about the inventory control . The basic traditional inventory control model introduced by Harris (1913), which allows a firm to place orders whenever its inventory position reaches a re-order point. Author has considered additional factors, such as transportation factors, buyer/seller relationships, quality consideration, short lead times and emergency conditions. Whereas among others like Beamon (2006) & Mattson (2007) have evaluated the approach under particular demand and lead-time distributions. However, Nielson (2006) suggested that to improve traditional approach in designing inventory system is to design powerful database. He also reports that the database design significantly impacts the quality and usability of the inventory system. Nielson (2006) suggests that a database design that is not properly normalized will introduce data update anomalies and data error, which impacts the organization's effectiveness and efficiency of inventory system. These types of problems can show up as inconveniences such as incorrect or multiple conflicting addresses for a client. Williams (2008) thinks that most likely result of this failure is regular data errors and increased manual data correction and monitoring costs by staff.
Conclusion: A poorly designed database may place the entire organization at risk due to the incomplete or incorrect information. Traditional approach of designing inventory system, where different researchers think that buyer/seller relationship is important to run successful inventory system or quality considerations, could be improved by using advance modern techniques like designing powerful database.
Section 2: Integrating Inventory Management using Data Mining & Data warehousing technique
In fact, Williams (2008) argued that in an addition to establishing traditional designing for inventory control models, data mining & warehousing technique also develops and extends methods to reduce the amount of inventory that a firm must hold through warehousing decisions. William (2008) also suggested that a popular topic in the stream of warehousing and inventory considerations is the portfolio effect. This term refers to the reduction of aggregate safety stock that can be achieved through centralization of stocking locations. In more recent publication and research, such as Evers (1999) and Waller et al (2006), researchers continue to focus on the integration of warehousing and inventory control by examining issues such as transhipment and cross-docking, respectively. Mason et al (2003) further this research by integrating and exploring the advantages of jointly optimizing transportation and warehousing considerations. Additionally, Thomas & Tyworth (2006), review the research that examines risk pooling from a different perspective: splitting replenishment orders as a means to pool lead-time risk.
Conclusion: So far, the research indicates that researchers have focused on integrating inventory control with other traditional activities, namely data mining & warehousing. This focus has produced a contribution to the practice of inventory management.
Section 3: Integrating internal & external collaboration Models with inventory management increases effectiveness
Williams (2008) believe that some researchers in the field of inventory management tend to place focus on customer service (i.e. getting the right product to the right place at the right time). Stank et al (2001) suggest that collaboration, both internal and external, is key to improving a firm's customer service because it allows "coordination of operations across business entities". Daugherty et al (1999) notes that the purpose of these collaborative programs is to make inventory commitment more efficient and that the basis for each of the programs is information sharing. Williams (2008) argues as researchers proceed with advancing the collaborative inventory management, the importance of two inventory modelling assumptions increase relative to single entity models. First, the model's demand uncertainty assumption and the level of demand uncertainty assumed is key to understanding the benefit of inventory programs that are founded on information sharing and second, the model's assumption of how consumers' respond to a stock out is also of greater importance.
The primary purpose of inventory is to serve as a buffer between supply and demand processes. Therefore, understanding the demand process is critical to both building an appropriate supply process and managing inventory. In general, the demand process is assumed to be either deterministic or stochastic. An assumption of deterministic demand indicates that the demand rate is considered to be known and constant, while an assumption of stochastic demand indicates that the demand rate is neither constant nor known (i.e. demand is changing over time).
Williams (2008) also believe that in addition to the increased importance of the assumption of demand uncertainty, the review also examines the importance of the assumption regarding stock out response. The occurrence of a stock out generally may be modelled in one of two ways: backorder (backlog) or lost sale. When an entity within the supply chain is unable to fulfil customer demand from on-hand inventory, the demand is either backordered, meaning that the demand will be fulfilled in the future when on-hand inventory becomes available, or the demand is lost, meaning that the demand will not be fulfilled. For a given inventory control model, the stock out assumption is of importance in terms of the model's application and relevance to various supply chain echelons.
Section 4: Safety stock and security measures in inventory system
Schreibfeder (2000) suggests that to run a truly stock control operation, one must have the proper on-hand inventory levels especially when new stock arrives. To measure the performance of inventory planners or buyers, it has to start measuring the day's supply of a product on-hand when a replenishment shipment is received. The term for this "left on shelf" inventory is residual stock. A buyer/customer must answer two kinds of questions when replenishing the stock of a product: when to place a replenishment order, and how much of a product should be reordered. Economics lots, price-break analysis and the economic order quantity formula provide the answer to how much to order that minimizes the company's cost of inventory.
Schreibfeder (2000) explains that safety stock is insurance against running out of an item because of unexpected demand during the anticipated lead time or vendor shipment delays. These three components are used to calculate the order point:
Order point = (Demand per day x anticipated lead time) + safety stock
If the residual stock is greater than "x" day's supply at the time of the last three stock receipts, one or more of the following conditions probably exists: Demand forecast predictions consistently exceed the actual usage and must be evaluated for accuracy. To decrease the residual stock to its target of "x" days' supply, it can reduce inventory levels by correcting demand or the anticipated lead time, or by maintaining less safety stock. If the residual stock is less than "y" day's supply at the time of the last three stock receipts, one or more of the following conditions probably exists:
Demand forecast predictions are consistently less than actual usage and must be evaluated for accuracy.
The anticipated lead time is less than the actual experienced lead times.
The maintained safety stock quantity is not adequate to protect customer service-that is, great variations exist in lead times and/or usage from month to month.
Janiga (2005) believes that another factor impacting the efficiency of one's inventory management strategy is the role of the inventory. Inventory is composed of two separate stocks - working stock and safety stock. Working stock supports day-to-day operations and will continuously cycle up and down as the material is consumed and replenished. Safety stock is basically an insurance policy against uncertainty. Material shortages caused by unexpected events such as delayed replenishment or an unusually high consumption rate can be covered with the safety stock. Under ideal operating conditions, safety stock is not used.
Conclusion: Schreibfeder (2000) way of handling safety stock is better than Janiga's (2005), which can enhance the effectiveness and performance of inventory management.
Section 5: integrating just-in-time theory along with inventory management system
Robert (2002) believes that today's environment demands continuous improvement at increasingly accelerated levels. As organizations search for new sources of competitive advantage, innovative or improved ways to manage inventory investment grow even more attractive. In fact, effective inventory management should be a primary objective when searching for ways to manage costs, improve profitability, and enhance shareholder value.
According to Atkinson (2005), Just-in-Time (JIT) inventory is the big thing right now in operations. First of all, JIT is a form of providing supplies for customers, as the name suggests, just in time. A large benefit of JIT is that it reduces the total cost of ordering and holding inventory. High holding costs and low ordering costs are the factors that drive JIT.Â Generally, it's the ability to lower ordering costs that make it a feasible solution.Â the ability to lower safety stock, is when JIT is effective. Depending on the product and the industry, one or both of these qualities may exist in operations.Â If they do, JIT may be right solution.Â Without the ability to make ordering costs low as a percentage of holding costs then there is no need for JIT.Â In fact, the increased frequency in ordering will result in cost increases.
In fact, Atkinson (2005) believes that the other aspect of JIT is the drastic reduction in safety stock. It is because of this variability that safety stock exists in the first place.Â What JIT does is tries to reduce the lead times and variation in lead times in order to help reduce safety stock.Â
Conclusion: Conclusively, there are two major parts to JIT inventory operations: lowering the ratio between ordering costs and holding costs and shortening lead times.Â What results is a firm with such high holding costs that ordering very small batches very frequently is the most profitable solution.Â This eliminates average inventory above the safety stock level.Â Then, if lead times and lead time variability can be decreased, safety stock can be decreased.Â The result is inventory coming in as it needs to come in.Â In other words, it comes in just-in-time.