Inventory Management e6h3v
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Mohammad Ali Jinnah University
INVENTORY MANAGEMENT
GROUP ABDUL NAVEED
MB083009
EHSAN AFZAL
MB083086
FAWAD IFTHIKAR
MB083010
SUBMITTED TO: FAIZ-UL-RHEMAN
DATE: 04/07/2011
ACKNOWLEGMENT
Deepest thanks and gratitude to Almighty ALLAH, the most merciful, the most beneficent and source of all knowledge and wisdom that enable and strengthen us to complete this projectreport. We extend our deepest gratitude and profound regards to Mr. FAIZ-UL-RHEMAN who remain a source of inspiration for us through her guidance and teaching. Esteemed appreciation and recognition to our friends, colleagues and family for their and encouragement throughout this endeavor
Dedication We dedicated this report to our beloved parents who always pray for our success. And also to our project instructor MR.FAIZ-UL-RHEMAN who gave us opportunity to do this project and also help us in doing that project.
1. Introduction………………………………………………………………… 1.1 Objective of the Study 1.2 Meaning of inventory 1.3 Nature of inventory 1.4 Functions of Inventory 1.5 Inventory management 1.6Concept of inventory management 1.7 Inventory Management Process
8. Literature review…………………………………………………................. 2. Inventory Counting Systems……………………………………………. 2.1 Types of inventory system 2.2 Inventory Cost
3. Objective of inventory management…………………………………… 4. Importance of inventory management…………….................................. 4.1
Advantages and disadvantages of inventory management
5. Essentials of inventory control system…………….................................. 6. Role of Manager in inventory management…………………………… 7. Data analysis……………………………………………………………….. 7.1Classification System 7.2 Method
9. Conclusion…………………………………………………………………...
INVENTORY MANAGEMENT 1. INTRODUCTION
1.1 Objective of the Study
Inventories constitute the principal item in the working capital of the majority of trading and industrial companies. In inventory, we include raw materials, finished goods, work in progress, supplies and other accessories. To maintain the continuity in the operations of business enterprise, a minimum stock of inventory required.
However, the physical control of inventory is the operating responsibility of stores superintendent and financial personnel have nothing to do about it but the financial control of these inventories in all lines of activity in which they comprise a substantial part of the current assets is a frequent problem in the management of working capital. Management of inventory is designed to regulate the volume of investment in goods on hand, the types of goods carried in stock to meet the needs of production and sales while at the same time, the investment in them is to kept at a reasonable level.
1.2 Meaning of inventory Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In ing language it may mean stock of finished goods only. In a manufacturing concern, it may include raw materials, work-in-progress and stores etc. In the form of materials or supplies to be consumed in the production process or in the rendering of services. In brief, Inventory is unconsumed or unsold goods purchased or manufactured.
1.3 Nature of inventories Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventory exist in a manufacturing company are raw materials, work in progress and finished goods. •
Raw materials Raw materials are those inputs that are converted into finished product though the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions.
•
Work in progress These inventories are semi manufactured products. They represent products that need more work before they become finished products for sales.
•
Finished goods Finished goods inventories are those completely manufactured products which are ready for sale. Stock of raw materials and work in progress facilitate production. While stock of finished goods is required for smooth marketing operation. Thus, inventories serve as a link between the production and consumption of goods.
The level of three kinds of inventories for a firm depends on the nature of its business. A manufacturing firm will have substantially high levels of all three kinds of inventories, while a retail or wholesale firm will have a very high and no raw material and work in progress inventories. Within manufacturing firms, there will be differences. Large heavy engineering companies produce long production cycle products, therefore they carry large inventories. On the other hand, inventories of a consumer product company will not be large, because of short production cycle and fast turn over. Firms also maintain a fourth kind of inventory, supplies or stores and spares.
1.4 Functions of Inventory
1. To meet anticipated customer demand. These inventories are referred to as anticipation
stocks because they are held to satisfy planned or expected demand. 2. To smooth production requirements. Firms that experience seasonal patterns in demand
often build up inventories during off-season to meet overly high requirements during certain seasonal periods. Companies that process fresh fruits and vegetable deal with seasonal inventories 3. To decouple operations. The buffers permit other operations to continue temporarily
while the problem is resolved. Firms have used buffers of raw materials to insulate production from disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations from manufacturing disruptions. 4. To protect against stock-outs. Delayed deliveries and unexpected increases in demand
increase the risk of shortages. The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of anticipated demand. 5. To take advantage of order cycles. Inventory storage enables a firm to buy and produce
in economic lot sizes without having to try to match purchases or production with demand requirements in short run. 6. To hedge against price increase. The ability to store extra goods also allows a firm to
take advantage of price discounts for large orders. 7. To permit operations. Production operations take a certain amount of time means that
there will generally be some work-in-process inventory.
1.5 Inventory management Inventory management refers to the process of managing the stocks of finished products, semi-finished products and raw materials by a firm. Inventory management, if done properly, can bring down costs and increase the revenue of a firm. In simple words inventory management can be described as an activity of planning a inventory control policy, implement that policy and controlling it that help the organization in a achieving its goals in a sufficient manner. Inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory.
There are several schools of thought that view inventory and its function differently. These will be addressed later, but first we present a foundation to facilitate the reader's understanding of inventory and its function
1.6 Concept of inventory management The term inventory management is used in two ways- unit control and value control. Production and purchase officials use this word in term unit control whereas in ing this word is used in term of value control. As investment in inventory represents in many cases, one of the largest asset items of business enterprises particularly those engaged in manufacturing, wholesale trade and retail trade. Sometimes the cost of material used in production sures the wages and production overheads. Hence, the proper management and control of capital invested in the inventory should be the prime responsibility of ing department because resources invested in inventory are not earning a return for the company. Rather, on the other hand, they are costing the firm money both in of capital costs being incurred and loss of opportunity income that is being foregone.
The reasons for keeping stock All these stock reasons can apply to any owner or product stage. Buffer stock is held in individual workstations against the possibility that the upstream
workstation may be a little delayed in providing the next item for processing. Whilst some processes carry very large buffer stocks, Toyota moved to one (or a few items) and has now moved to eliminate this stock type. Safety stock is held against process or machine failure in the hope/belief that the failure
can be repaired before the stock runs out. This type of stock can be eliminated by programmers like Total Productive Maintenance Overproduction is held because the forecast and the actual sales did not match. Making to
order and JIT eliminates this stock type.
Lot delay stock is held because a part of the process is designed to work on a batch basis
whilst only processing items individually. Therefore each item of the lot must wait for the whole lot to be processed before moving to the next workstation. This can be eliminated by single piece working or a lot size of one.
Demand fluctuation stock is held where production capacity is unable to flex with demand.
Therefore a stock is built in times of lower utilization to be supplied to customers when demand exceeds production capacity. This can be eliminated by increasing the flexibility and capacity of a production line or reduced by moving to item level load balancing.
Line balance stock is held because different sub-processes in a line work at different rates.
Therefore stock will accumulate after a fast sub-process or before a large lot size subprocess. Line balancing will eliminate this stock type.
Changeover stock is held after a sub-process that has a long setup or change-over time.
This stock is then used while that change-over is happening. This stock can be eliminated by tools like SMED.
Where these stocks contain the same or similar items it is often the work practice to hold
all these stocks mixed together before or after the sub-process to which they relate. This 'reduces' costs. Because they are mixed-up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes which makes the situation even more acute.
1.7 Inventory Management Process: This process allows s to manage all the Materials/items purchased, manufactured, sold, or kept in stock. For each Material item, s enter the data relevant for a particular area in the system. This data is used automatically by the system for purchasing, sales, production, inventory management, ing and etc... It provides optimum for business. Helps create orders, delivery notes, and outgoing invoices, automatically calculating prices, sales units, and gross profit. Enables complete control over stock quantities at all times and lets s analyze the financial aspects of stockholding at the same time. Allows s to control production on the basis of the items that are used for production and on the basis of the finished product and any by-products created.
Requirements for Effective Inventory Management To be effective, management must have the following: A system to keep track of the inventory on the hand on order. A reliable forecast of demand that includes an indication of possible forecast error. Knowledge of lead times and lead time variability. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs.
A classification system for inventory items.
2. Literature review
(1) A decision-making engine for optimal inventory management of the manufacturing assembly companies Dmitry Brusilovsky Kvant Soft Inc., Thornhill, Canada
In this presentation (article), the problem of optimal inventory management for the small or medium-size manufacturing assembly companies is described. The system for optimal inventory management of the manufacturing assembly companies and the mathematical model, which the inventory management decision-making engine is based on, are presented. Development of demand planning decision making engine for the demand-driven manufacturing assembly companies based on a high precision demand forecasting is described. A complex unstructured problem of demand forecasting is defined. A separate problem of how to forecast demand for the new articles that do not have the demand history is discussed. Quantitative approaches to demand forecasting, concentrating mainly on new approaches that were developed in the last decade, are reviewed. Typical forecasting demand situations, based on availability and accuracy of the demand data/information, are singled out. These situations correspond to different demand measurement scales: dichotomy (binary demand forecasting implemented using binary dependent variable regression models), ordinal, count (based on Poisson regression), and interval.
(2) The ups and downs of inventory management. Materials Management in Health Care, 13(2), 22-26. Neil, R. (2004, February). This article discusses the advantages and disadvantages of using stockless and just-in-time (JIT) purchasing programs in hospitals. The author states that the JIT and stockless have slightly different meanings to hospitals and vendors, but they can be used in conjunction. JIT is defined as a program that establishes regular, frequent deliveries from a hospital’s distributor, and which reduces a hospital’s inventory from a 30-day or 60-day to a 10-day supply. A hospital with a stockless program can carry an even lower amount of inventory and receives items in low units of measure from a distributor.
Since less inventory is kept, a hospital can reduce space and warehouse space used to store products. This also reduces the chance of losing money on obsolete, stolen, spoiled, or damaged products. However, according to Bob Majors, materials management director for Bloomington (Ind.) Hospital, the JIT model that originated from the manufacturing industry does not fit well into health care supply chain logistics because hospital volume is not predictable and thus the demand of inventory is uncertain. He claims that the JIT or stockless programs peaked in popularity in the mid-1990s and have now become less popular than when they were first introduced. The article ends by stating that the new distribution trend may go back to the traditional approach of operating a big warehouse and taking more control over products. An example of this move is HCA, Nashville, which is the industry’s largest hospital system. It has higher holding costs due to carrying more inventories, but it has a lower distributor fees than it would have with a stockless or JIT program.
(3) Efficient approach to health care industry material resource management: An empirical research. Hospital Material Management Quarterly, 13(3), 10-25. Kim, G. C., & Rifai, A. K. (1992). This article presents a research study examining the feasibility of implementing a just-intime (JIT) system in health care industry. The study compared health care institutions that have adopted a JIT system and those that have not. The results show that the introduction of JIT philosophy in the health care industry’s material management system improved the system and reduced implementation problems. Moreover, the introduction of JIT philosophy had a positive impact on the institutions' inventory management, service quality, and competitiveness.
The article starts by discussing the impact of JIT philosophy. The authors define JIT as a continuous flow of products adapted to demand changes that produces only necessary quantities of products at predetermined points in time. To achieve this flow-like system, JIT needs to be ed by JIT purchasing, total quality control, multiple-process layout deg, job standardizing, and production smoothing. In the manufacturing industry, the major benefit of JIT purchasing is that the levels of parts inventories in the assembly plant and the carrying costs for those parts are significantly reduced. The success of JIT systems in the manufacturing industry has driven many service sector industries to adopt JIT as their material management system.
(3) Adapting just-in-time inventory control to the hospital setting. Hospital Materials Management, 11(10), 8-12. Chapman, S. (1986) This article discusses the applicability of just-in-time (JIT) inventory control to hospitals. The author believes that the difficulty in implementing a JIT inventory control is the uncertainty in supply or demand, which is directly related to lead time. The two major uncertainties are the actual lead time demand and the actual replenishment lead time. First, the uncertainty of the actual
lead time demand may create stockouts and poor customer service, which can be prevented with safety stock (buffer inventory). Second, the uncertainty of the actual replenishment lead time may create a need for additional safety stock. These problems can be solved by using a JIT approach because lead time will be reduced as the average inventory level is lower with a JIT system. Thus, the “danger zone” when a stockout could occur is much smaller. As a result, the safety stock needed to maintain the same level of customer service is reduced. Due to the reduction in cycle stock with a JIT system, the lot size is reduced, which in turn lowers the inventory holding cost. However, this benefit of a JIT system may increase the risk of stock out unless the uncertainties mentioned above are reduced. For a properly working JIT system, cost reduction and uncertainty reduction have to be accomplished together.
(4) Risk Aversion in Inventory Management Prof. David Simchi-Levi &Massachusetts Institute of Technology Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. These structural results are extended to models in which the decision maker has access to a (partially) complete financial market and can hedge its operational risk through trading financial securities. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution.
(5) Just-In-Time Inventory Management Strategy & Lean Manufacturing Written by David Broyles, Jennifer Beims, James Franko, & Michelle Bergman Kansas State University April, 2005 Just-in-time is a movement and idea that has gained wide acceptance in the business community over the past decade. As companies became more and more competitive and the pressures from Japans continuous improvement culture, other firms were forced to find innovative ways to cut costs and compete. The idea behind JIT, or lean manufacturing, is to have the supplies a firm needs at the exact moment that they are needed. In order to accomplish this goal a firm must constantly be seeking ways to reduce waste and enhance value. A recent survey of senior manufacturing executives showed that 71% used some form of JIT in their processes (Pragman). This simple statistic illustrates that JIT is here to stay and also that firms must constantly be searching for ways to cut costs and achieve an advantage. JIT is one way to achieve that end result. In order to understand how JIT works a common vocabulary needs to be established from which to further discuss the topic and gain insight into why so many firms have adopted it. As previously stated, one of the key components of JIT is to reduce waste and add value. There are several activities that a company must monitor as targets for reducing waste. Among these are, excessive waste times, inflated inventories, unneeded people or material movement, unnecessary processing steps, numerous variabilities throughout a firm's activities and any other non-value adding activity. A key example of this is a new plant that Caterpillar is bringing on-line in the near future. By reducing the number of times a bucket had to be repositioned while it was being welded, Caterpillar was able to reduce the amount of time the bucket spent in the welding line, reduce labor costs by limiting idle time at the welding station and increase the efficiency of the entire manufacturing process
(7) Applying just-in-time systems in health care. IIE Solutions, 29(8), 32-37.
Whitson, D. (1997) Since the government switched from cost-plus reimbursement to flat fees regardless of complications or a provider’s actual expense for medical services in 1983, hospitals continue to search for innovative ways to reduce costs while maintain quality. This article discusses how hospitals can reduce the acquisition price of supplies when using a just-in-time (JIT) system. It covers the benefits of JIT, the opportunities for JIT application in health-care, and the ing implications of using a JIT system. The benefits of JIT briefly described in this article are cost savings as a result of inventory reduction and associated holding costs, space for other revenue generating activities, and the transfer of labor costs to the distributor. The article heavily focuses on the possibilities of using JIT in the healthcare industry. The areas where JIT can be applied in health care include central supply, materials management and pharmacy, nursing, swing beds, relationships between nursing units and supplying departments, and physician practices. First, under JIT the central supply function is minimized because the need to store goods between supplier delivery and internal delivery to units or department is decreased by adopting a JIT method where an individual unit directly receives items from the supplier.
(8) INVENTORY MANAGEMENT IN SMALL BUSINESS: A DECISION MATRIX APPROACH S. Altan Erdem, University of Minnesota, Duluth Tom K. Massey, Jr., University of North Texas This article provides a decision tool to assist small business managers in their search for an appropriate inventory management system. In the article, a functional taxonomy that would match various small business sectors with certain operational consideration points is proposed. This taxonomy is basically a two-dimensional decision matrix that can equip these managers with various perspectives which are broad enough to reveal potential gains of different systems. The management processes associated with maintaining optimal inventory levels presents numerous and continual challenges to the goods-oriented small business. In each of these firms the design and implementation of a particular inventory planning system should originate with the
underlying strategic planning policies within the business. These decisions are conditioned by numerous financial and structural concerns. It is important to note that research has shown that inventory planning discrepancies have created difficulties for small business, each of these areas must be carefully considered.
3. Inventory Counting Systems
3.1 Types of inventory management 1) Periodic System This is a physical count of items in inventory is made at periodic intervals (e.g. weekly, monthly) in order to decide how much to order of each item. Major s: Supermarkets, discounts stores, and department stores. Advantage Orders for many items occur at the same time, which can result in economies in processing and shipping orders Disadvantages a)
Lack of control between reviews.
b)
The need to protect against shortages between review periods by carrying extra stock.
c)
The need to make a decision on order quantities at each review
2) Perpetual Inventory System (also known as a continual system) This keeps track of removals from inventory on a continuous basis, so the system can provide information on the current level of inventory for each item. Advantages 1. The control provided by the continuous monitoring of inventory withdrawals. 2. The fixed-order quantity; management can identify an economic order size. Disadvantage 1. The added cost of record keeping. Two-bin-system method
Is two containers of inventory; reorder when the first is empty. The advantage of this system is that there is no need to record each withdrawal from inventory; the disadvantage is that the reorder card may not be turned in for a variety of reasons.
Tracking System Universal Product Code (UPC) bar code printed on a label that has information about the item to which it is attached. Bar coding represents an important development for other sectors of business besides retailing. In manufacturing, bar codes attached to parts, subassemblies, and finished goods greatly facilitate counting and monitoring activities.
Demand Forecast and Lead time Information Managers need to know the extent to which demand and lead time might vary; the greater the potential variability, the greater the need for additional stock to reduce the risk of a shortage between deliveries.
Lead time is time interval between ordering and receiving the order.
3.2 Inventory Cost (Three Basic Costs) 1. Holding or Carrying Cost is the costs to carry an item in inventory for a length of time
usually a year. Cost includes interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, etc.
2. Ordering Cost is cost of ordering and receiving inventory. These include determining how
much is needed, preparing invoices, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage.
3. Storage Cost is cost resulting when demand exceeds the supply of inventory on hand.
These costs can include the opportunity cost of not making a sale, loss of customer goodwill, late charges, and similar costs
4. Objectives of inventory management
The basic managerial objectives of inventory control are two-fold; first, the avoidance over-investment or under-investment in inventories; and second, to provide the right quantity of standard raw material to the production department at the right time. In brief, the objectives of inventory control may be summarized as follows:
A. Operating Objectives:
1. Ensuring Availability of Materials: There should be a continuous availability of all types of raw materials in the factory so that the production may not be help up wants of any material. A minimum quantity of each material should be held in store to permit production to move on schedule.
2. Avoidance of Abnormal Wastage: There should be minimum possible wastage of materials while these are being stored in the go downs or used in the factory by the workers. Wastage should be allowed up to a certain level known as normal wastage. To avoid any abnormal wastage, strict control over the inventory should be exercised. Leakage, theft, embezzlements of raw material and spoilage of material due to rust, bust should be avoided.
3. Promotion of Manufacturing Efficiency: If the right type of raw material is available to the manufacturing departments at the right time, their manufacturing efficiency is also increased. Their motivation level rises and morale is improved.
4. Avoidance of Out of Stock Danger: Information about
availability of materials should
be made continuously available to the management so that they can do planning for procurement of raw material. It maintains the inventories at the optimum level keeping in view the operational requirements. It also avoids the out of stock danger.
5. Better Service to Customers: Sufficient stock of finished goods must be maintained to match reasonable demand of the customers for prompt execution of their orders.
6. Deg poorer organization for inventory management: Clear cut ability should be fixed at various levels of organization.
B. Financial Objectives:
1. Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets.
2.
Reasonable Price: While purchasing materials, it is to be seen that right quality of material is purchased at reasonably low price. Quality is not to be sacrificed at the cost of lower price. The material purchased should be of the quality alone which is needed.
3. Optimum Investing and Efficient Use of capital: The basic aim of inventory control from the financial point of view is the optimum level of investment in inventories. There should be no excessive investment in stock, etc
C. Others objective Inventory management help to reduce martial handling costs-accumulating parts between operations It also helps to utile people and equipment reasonably .secondly it facilitate product displays and services to customer To minimize in total cost associated with stocks. These costs can be categorized into three groups To ensure smooth flow of stock
Minimizing risk and uncertainty To provide required quality of material
5. Importance of Inventory Management Systems ?Inventory management is an important part of a business because inventories are usually the largest expense incurred from business operations. Most companies will use an inventory management system that will track and maintain the inventory required to meet customer demand. Most systems used by companies are linked to the management or ing information system, increasing the effectiveness of their operations.
Provides the following information Price preferences of customers Right quarters to buy Amount of given item sold Seasonal time a given item sells Time to engage in promotional activities
5.1 Advantages and disadvantages of inventory management Advantages
Disadvantages
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Business
•
Carrying costs
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Guarantees prompt service delivery
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Associated risks
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Reinforces profitability – no stock out cost
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Enhances customer satisfaction
6. Essentials of inventory control system For an efficient and successful inventory control there are certain important conditions that are a follows: (1) Classification and Identification of inventories: The usual inventory of manufacturing firm
includes raw-material, stores, work-in-progress and component etc. To facilitate prompt recording the dealing, each item of the inventory must be assigned a particular code number and it must be classified in suitable group or sub-divisions. ABC analysis of material is very helpful in this context. (2) Standardization and simplification of inventories: In order to facilitate inventory control,
the inventory line should be simplified. It refers to the elimination of excess types and sizes of items. Simplification leads to reduction in classification of inventories and its carrying costs. Standardization, on the other hand, refers to the fixation of standards of raw material to be purchased and specification of the components and tools to be used. (3) Setting the Maximum and Minimum limits for each part of inventory: The third step in
this process is to set the maximum and minimum limits of each item of the inventory. It avoids the chances of over-investment as well as running a short of any item during the cost of producing. Reordering point should also be fixed beforehand.
(4) Economic Order Quantity: It is also a basic inventory problem to determine the quantity as
how much to order at a time. In determining the EOQ, the problem is one to set a balance between two opposite costs, namely, ordering costs and carrying costs. This quantity should be fixed beforehand.
(5) Adequate storage Facilities: To make the system of inventory control successful and
efficient one, it is also essential to provide the adequate storage facilities. Sufficient storage area and proper handling facilities should be organized. (6) Adequate Reports and Records: Inventory control requires the maintenance of adequate
inventory record and reports. Various inventory records must contain information to meet the needs of purchasing, production, sales and financial staff. The typical information required about any class of inventory may be relating to quantity on hand, location, quantities in transit, unit cost, code for each item of inventory, reorder point, safety level etc. Statements forms and inventory records should be so designed that the clerical cost of maintaining these records must be kept a minimum. (7) Intelligent and Experienced Personnel: An important requirement of successful inventory
control system is the appointment of qualified and experienced staff in purchase and stores department. Mere establishment of procedures and the maintenance of records would not give the desired results as there is no substitute for sincere and devoted as well as experienced hands. Hence, the whole inventory control structure should be manned with trained, qualified, experienced and devoted employees. (8) Coordination: There must be proper coordination of all departments involved in the process
of inventory control, such as purchase, finance, receiving, approving, storage and ing departments. These all departments have different outlook and objects in inventory management but financial manager has to coordinate them all. (9) Budgeting: An efficient budgeting system is also required. Preparation of budgets concerning
materials, supplies and equipment to ensure economy in purchasing and use of material is also necessary. (10) Internal Check: Operating of a system of internal check is also vital in inventory
management so that all transactions involving material supplies and equipment purchase are properly approved and automatically checked.
7. Financial manager’s role in inventory management Inventory represents a large investment by manufacturing concern: therefore, great emphasis must be placed on its efficient management. Though, the operative responsibility for Inventory management lies with the inventory manager, the financial manager must also be concerned with all types of inventories- raw materials, work-in-progress and finished goods. He must monitor Inventory levels and see that only an optimum amount is invested in Inventory. He should be familiar with the Inventory control techniques and ensure that Inventory is managed well. He should try to resolve the conflicting view points of all the departments in order to have efficient inventory management. He has to act as a careful inspector levels. He should introduce the policies which reduce the lead time, regulate usage and thus, minimize safety stock. All these techniques of Inventory management lead to the goal of wealth maximization.
Keep operations running? A manufacturer must have certain purchased items (raw materials, components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. Inventory between successive dependent operations also serves to decouple the dependency of
the operations. A machine or work center is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a work center, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each work center, then each machine can maintain its operations for a limited time, hopefully until operations resume the original center.
Lead time Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered. If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain
extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months’ steel requirement would be necessary.
Hedge Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs.
Quantity discount Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.
Smoothing requirements Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. Consider the demand forecast and production schedule outlined in Table 1. Notice how the use of inventory has allowed the firm to maintain a steady rate of output (thus avoiding the cost of hiring and training new personnel), while building up inventory in anticipation of an increase in demand. In fact, this is often called anticipation inventory. In essence, the use of inventory has allowed the firm to move demand requirements to earlier periods, thus smoothing the demand.
Controlling inventory Firms that carry hundreds or even thousands of different part numbers can be faced with the impossible task of monitoring the inventory levels of each part number. In order to facilitate this, many firm's use an ABC approach. ABC analysis is based on Pareto Analysis, also known as the "80/20" rule. The 80/20 comes from Pareto's finding that 20 percent of the populace possessed 80 percent of the wealth. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. Therefore, a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be the correct 20 percent. The top 20 percent of the firm's most costly items are termed "An" items (this should
approximately represent 80 percent of total inventory costs). Items that are extremely inexpensive or have low demand are termed "C" items, with "B" items falling in between A and C items. The percentages may vary with each firm, but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs.
By classifying each inventory item as an A, B or C the firm can determine the resources (time, effort and money) to dedicate to each item. Usually this means that the firm monitors A items very closely but can check on B and C items on a periodic basis (for example, monthly for B items and quarterly for C items). Another control method related to the ABC concept is cycle counting. Cycle counting is used instead of the traditional "once-a-year" inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records. When cycle counting is used the firm is continually taking a physical count but not of total inventory. A firm may physically count a certain section of the plant or warehouse, moving on to other sections upon completion, until the entire facility is counted. Then the process starts all over again. The firm may also choose to count all the A items, then the B items, and finally the C
items. Certainly, the counting frequency will vary with the classification of each item. In other words, an item may be counted monthly, B items quarterly and C items yearly. In addition the required accuracy of inventory records may vary according to classification, with items requiring the most accurate record keeping.
8. Data analysis and methods
8.1 Classification System An important aspect of inventory management is that items held in inventory are not of equal importance in of dollars invested, profit potential, sales or usage volume, or stock-out penalties. Example: A producer of electrical equipment might have electric generators, coils of wire, and miscellaneous nuts and bolts among the items carried in inventory. It would be unrealistic to devote equal attention to each of these items. Analysis the inventory handling using the following techniques ABC analysis (control mechanism). EOQ Control levels.
Control Mechanism: Usually the firm has to maintain several types of inventories. It is not desirable to keep same degree of control on all items the firm should play maximum attention to these whose is the highest value. The firm should receive the most effort in controlling. The firm should beselective in it approach to control inventory handling in various types of inventories This analytical approach is called the ABC analysis, and tends to measure the significance of each item ate inventories in of its value
1. A-B-C Approach A-B-C Approach classifies inventory items according to some measure of importance, usually annual dollar usage, and then allocates control efforts accordingly.
Three Classes of Items Used: A (very important) B (moderately important) C (least important)
The key questions concerning cycle counting for management are: 1. How much accuracy is needed? 2. When should cycle counting be performed? 3. Who should do it? Rules of implementing ABC techniques: Classify the item of inventories. Determine the price per unit of each item. Find the total cost of each item Rank the items in accordance with total costs, allotting first rank to the item with highest total cost and so on (i.e. arrange in descending order). Find out the total number of items and calculate the percentage of each item. Calculate the percentage of Total cost of each item to total cost of all items.
ADVANDAGES: Preference for keeping inventory can be placed properly after Preference for keeping inventory can be placed properly after ABC analysis Store personnel are placed better with this analysis Store personnel are placed better with this analysisi.ei.their time can be utilized better
Storing, handling and delivery of materials to production department become better.
ECONOMIC ORDER QUANTITY MODELS Economic Order Quantity (EOQ) is the order size that minimizes total cost. EOQ models identify the optimal order quantity in of minimizing the sum of certain annual costs that vary with order size. Three (3) Order Size 1. The economic order quantity model. 2. The economic order quantity model with non instantaneous delivery. 3. The quantity discount model.
Inventory carrying cost: It is the cost of holding the materials in the store and includes: Cost of storage space which could have been utilized for some other purpose. Cost of bins and racks that have to be provided for the storage of materials. Cost of maintaining the materials to avoid deterioration. Amount of interest payable on the money locked up in the materials. Cost of spoilage in stores and handling. Transportation costs in relation to stock. Cost of obsolescence on of some of the materials becomingobsolete after some time of storage either due to change in the process or product. Insurance cost. Clerical cost etc. Ordering cost: It is the cost of placing orders for the purchase of materials and includes:
1) Cost of staff posted in the purchasing department, inspection section and payment department. 2) Cost of stationery, postage and telephone charges
3. Stock levels Reorder level: Re-order level is the level of inventory at which the firm should place an order to replenish the inventory. In case, the order is placed at this level, the new goods will arrive before the runs out of goods to sell. In order to determine reorder level, information is required about two things. (a) The lead time and (b) The usage rate. The term lead time refers to the time normally taken in receiving the delivery of inventory after the order has been placed in case there is no uncertainty about the usage rate and the lead time, the order level cans be determined by simply applying the formula. Re-order level = Average usage X lead time + safety stock. Safety stock level: The actual usage as well as the lead time may be different from the normal usage or the normal lead time. In order to guard against such a contingency the firm maintains a safety stock the minimum buffer stock as a cushion against possible increase in usage or delay in delivery time. The level of safety stock can be calculated by applying the following formula. Safety stock = Average usage X period of safety stock. Maximum inventory: It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds maximum level limit then it will be over-stocking. A firm should avoid over-stocking because it will result in high material costs. Over-stocking will mean blocking of more
working capital, more space for storing the materials, more wastage of materials, and more chances of losses from obsolescence. This can be calculated by using the following formula. Maximum inventory = Economic Order Quantity + safety stock
9. Conclusion
To sum up, we can say Inventory management is an essential part of any organization. Every essential is a part of any organization. Every organization has manly two objective one disorganizations have manly two objectives one is Profit maximization &another is wealth Profit maximization &another is wealth maximization. Inventory management helps the maximization. Inventory management helps the organization to achieve its objectives. Inventory management can use techniques like TQM, JIT& ABC etc. to have an effective control on its& ABC etc. to have an effective control on its inventory.
10. Practical examples of Pakistani companies Inventory management survey We targeted and conduct survey from two different type of organization which uses inventory management system efficiently. The names of those organizations are as followed. Matro cash & carry
Unimark pharmaceutical
1. Matro cash and carry METRO Cash & Carry announced its operations in Pakistan in January 2006 & since then it has established itself as a potential market leader in self service wholesale. Under the supervision of Giovanni Soranzo, Managing Director, METRO Cash & Carry Pakistan has opened its first wholesale centre in Lahore in October 2007. METRO Cash & Carry Pakistan is now successfully operating 5 wholesale centers, 2 in Lahore, 1 in Karachi, 1 in Faisalabad & 1 in Islamabad. The company’s country head office is based in Lahore at Thokar Niaz Baig near motorway. The current Head count of employees is approx 1176 including Head Office & 5 wholesale centres.METRO Cash & Carry plans to invest in Pakistan on a sustained and reliable basis in the years to come.
SKU Inventories (Scanned or Key Entered)
Metro Inventory Service can scan your readable bar-code, or key enter the information to provide you with a file detailing all of the information you need in reconciling your inventory.The file will
be in ASCII format defined to your specifications.
Financial Retail Inventories Metro Inventory Service can inventory your entire retail store providing you with both a retail by location physical inventory and a retail by department inventory. We complete a set up prior to your first inventory in which we break down your retail store into small easily identifiable locations. Departments are isolated within all locations. Upon completion of the inventory, Metro Inventory Service can provide management with a complete detailed printout of the physical inventory
Financial Cost Inventories Metro Inventory Service can provide management with a complete financial cost inventory where product is cost-coded or has a readable bar code.
Fixed Asset Inventories
Metro Inventory Service can provide management with a detailed fixed asset inventory showing a complete description of the asset and its current location. We can help you set up your system to
establish control over your fixed assets. Included in this service (where requested), we can identify your assets with labels.
2. Unimark pharmaceutical inventory system It started in 1983 and it vision is “To be a global Life sciences company through
innovation, cost leadership, optimizing economic value creation for share holders”
Point of Sales POS an inventory system in which the item is deducted from inventory as it is sold or dispensed
Reorder Points Minimum and maximum stock levels which determine when a reorder is placed and for how much
Computers and Inventory •
Automatically adjust inventory
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Continuous picture of the inventory
•
Generate orders Automatic Manual
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Only as accurate as the information entered
Receiving the Order •
Checking in the Order Compare the invoice with products
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Right drug, strength, size, quantity, in date?
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Pharmacist will check in controlled drugs
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Report any discrepancies
INVENTORY MANAGEMENT
GROUP ABDUL NAVEED
MB083009
EHSAN AFZAL
MB083086
FAWAD IFTHIKAR
MB083010
SUBMITTED TO: FAIZ-UL-RHEMAN
DATE: 04/07/2011
ACKNOWLEGMENT
Deepest thanks and gratitude to Almighty ALLAH, the most merciful, the most beneficent and source of all knowledge and wisdom that enable and strengthen us to complete this projectreport. We extend our deepest gratitude and profound regards to Mr. FAIZ-UL-RHEMAN who remain a source of inspiration for us through her guidance and teaching. Esteemed appreciation and recognition to our friends, colleagues and family for their and encouragement throughout this endeavor
Dedication We dedicated this report to our beloved parents who always pray for our success. And also to our project instructor MR.FAIZ-UL-RHEMAN who gave us opportunity to do this project and also help us in doing that project.
1. Introduction………………………………………………………………… 1.1 Objective of the Study 1.2 Meaning of inventory 1.3 Nature of inventory 1.4 Functions of Inventory 1.5 Inventory management 1.6Concept of inventory management 1.7 Inventory Management Process
8. Literature review…………………………………………………................. 2. Inventory Counting Systems……………………………………………. 2.1 Types of inventory system 2.2 Inventory Cost
3. Objective of inventory management…………………………………… 4. Importance of inventory management…………….................................. 4.1
Advantages and disadvantages of inventory management
5. Essentials of inventory control system…………….................................. 6. Role of Manager in inventory management…………………………… 7. Data analysis……………………………………………………………….. 7.1Classification System 7.2 Method
9. Conclusion…………………………………………………………………...
INVENTORY MANAGEMENT 1. INTRODUCTION
1.1 Objective of the Study
Inventories constitute the principal item in the working capital of the majority of trading and industrial companies. In inventory, we include raw materials, finished goods, work in progress, supplies and other accessories. To maintain the continuity in the operations of business enterprise, a minimum stock of inventory required.
However, the physical control of inventory is the operating responsibility of stores superintendent and financial personnel have nothing to do about it but the financial control of these inventories in all lines of activity in which they comprise a substantial part of the current assets is a frequent problem in the management of working capital. Management of inventory is designed to regulate the volume of investment in goods on hand, the types of goods carried in stock to meet the needs of production and sales while at the same time, the investment in them is to kept at a reasonable level.
1.2 Meaning of inventory Inventory is the physical stoke of goods maintained in an organization for its smooth sunning. In ing language it may mean stock of finished goods only. In a manufacturing concern, it may include raw materials, work-in-progress and stores etc. In the form of materials or supplies to be consumed in the production process or in the rendering of services. In brief, Inventory is unconsumed or unsold goods purchased or manufactured.
1.3 Nature of inventories Inventories are stock of the product a company is manufacturing for sale and components that make up the product. The various forms in which inventory exist in a manufacturing company are raw materials, work in progress and finished goods. •
Raw materials Raw materials are those inputs that are converted into finished product though the manufacturing process. Raw materials inventories are those units which have been purchased and stored for future productions.
•
Work in progress These inventories are semi manufactured products. They represent products that need more work before they become finished products for sales.
•
Finished goods Finished goods inventories are those completely manufactured products which are ready for sale. Stock of raw materials and work in progress facilitate production. While stock of finished goods is required for smooth marketing operation. Thus, inventories serve as a link between the production and consumption of goods.
The level of three kinds of inventories for a firm depends on the nature of its business. A manufacturing firm will have substantially high levels of all three kinds of inventories, while a retail or wholesale firm will have a very high and no raw material and work in progress inventories. Within manufacturing firms, there will be differences. Large heavy engineering companies produce long production cycle products, therefore they carry large inventories. On the other hand, inventories of a consumer product company will not be large, because of short production cycle and fast turn over. Firms also maintain a fourth kind of inventory, supplies or stores and spares.
1.4 Functions of Inventory
1. To meet anticipated customer demand. These inventories are referred to as anticipation
stocks because they are held to satisfy planned or expected demand. 2. To smooth production requirements. Firms that experience seasonal patterns in demand
often build up inventories during off-season to meet overly high requirements during certain seasonal periods. Companies that process fresh fruits and vegetable deal with seasonal inventories 3. To decouple operations. The buffers permit other operations to continue temporarily
while the problem is resolved. Firms have used buffers of raw materials to insulate production from disruptions in deliveries from suppliers, and finished goods inventory to buffer sales operations from manufacturing disruptions. 4. To protect against stock-outs. Delayed deliveries and unexpected increases in demand
increase the risk of shortages. The risk of shortages can be reduced by holding safety stocks, which are stocks in excess of anticipated demand. 5. To take advantage of order cycles. Inventory storage enables a firm to buy and produce
in economic lot sizes without having to try to match purchases or production with demand requirements in short run. 6. To hedge against price increase. The ability to store extra goods also allows a firm to
take advantage of price discounts for large orders. 7. To permit operations. Production operations take a certain amount of time means that
there will generally be some work-in-process inventory.
1.5 Inventory management Inventory management refers to the process of managing the stocks of finished products, semi-finished products and raw materials by a firm. Inventory management, if done properly, can bring down costs and increase the revenue of a firm. In simple words inventory management can be described as an activity of planning a inventory control policy, implement that policy and controlling it that help the organization in a achieving its goals in a sufficient manner. Inventory management, or inventory control, is an attempt to balance inventory needs and requirements with the need to minimize costs resulting from obtaining and holding inventory.
There are several schools of thought that view inventory and its function differently. These will be addressed later, but first we present a foundation to facilitate the reader's understanding of inventory and its function
1.6 Concept of inventory management The term inventory management is used in two ways- unit control and value control. Production and purchase officials use this word in term unit control whereas in ing this word is used in term of value control. As investment in inventory represents in many cases, one of the largest asset items of business enterprises particularly those engaged in manufacturing, wholesale trade and retail trade. Sometimes the cost of material used in production sures the wages and production overheads. Hence, the proper management and control of capital invested in the inventory should be the prime responsibility of ing department because resources invested in inventory are not earning a return for the company. Rather, on the other hand, they are costing the firm money both in of capital costs being incurred and loss of opportunity income that is being foregone.
The reasons for keeping stock All these stock reasons can apply to any owner or product stage. Buffer stock is held in individual workstations against the possibility that the upstream
workstation may be a little delayed in providing the next item for processing. Whilst some processes carry very large buffer stocks, Toyota moved to one (or a few items) and has now moved to eliminate this stock type. Safety stock is held against process or machine failure in the hope/belief that the failure
can be repaired before the stock runs out. This type of stock can be eliminated by programmers like Total Productive Maintenance Overproduction is held because the forecast and the actual sales did not match. Making to
order and JIT eliminates this stock type.
Lot delay stock is held because a part of the process is designed to work on a batch basis
whilst only processing items individually. Therefore each item of the lot must wait for the whole lot to be processed before moving to the next workstation. This can be eliminated by single piece working or a lot size of one.
Demand fluctuation stock is held where production capacity is unable to flex with demand.
Therefore a stock is built in times of lower utilization to be supplied to customers when demand exceeds production capacity. This can be eliminated by increasing the flexibility and capacity of a production line or reduced by moving to item level load balancing.
Line balance stock is held because different sub-processes in a line work at different rates.
Therefore stock will accumulate after a fast sub-process or before a large lot size subprocess. Line balancing will eliminate this stock type.
Changeover stock is held after a sub-process that has a long setup or change-over time.
This stock is then used while that change-over is happening. This stock can be eliminated by tools like SMED.
Where these stocks contain the same or similar items it is often the work practice to hold
all these stocks mixed together before or after the sub-process to which they relate. This 'reduces' costs. Because they are mixed-up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes which makes the situation even more acute.
1.7 Inventory Management Process: This process allows s to manage all the Materials/items purchased, manufactured, sold, or kept in stock. For each Material item, s enter the data relevant for a particular area in the system. This data is used automatically by the system for purchasing, sales, production, inventory management, ing and etc... It provides optimum for business. Helps create orders, delivery notes, and outgoing invoices, automatically calculating prices, sales units, and gross profit. Enables complete control over stock quantities at all times and lets s analyze the financial aspects of stockholding at the same time. Allows s to control production on the basis of the items that are used for production and on the basis of the finished product and any by-products created.
Requirements for Effective Inventory Management To be effective, management must have the following: A system to keep track of the inventory on the hand on order. A reliable forecast of demand that includes an indication of possible forecast error. Knowledge of lead times and lead time variability. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs.
A classification system for inventory items.
2. Literature review
(1) A decision-making engine for optimal inventory management of the manufacturing assembly companies Dmitry Brusilovsky Kvant Soft Inc., Thornhill, Canada
In this presentation (article), the problem of optimal inventory management for the small or medium-size manufacturing assembly companies is described. The system for optimal inventory management of the manufacturing assembly companies and the mathematical model, which the inventory management decision-making engine is based on, are presented. Development of demand planning decision making engine for the demand-driven manufacturing assembly companies based on a high precision demand forecasting is described. A complex unstructured problem of demand forecasting is defined. A separate problem of how to forecast demand for the new articles that do not have the demand history is discussed. Quantitative approaches to demand forecasting, concentrating mainly on new approaches that were developed in the last decade, are reviewed. Typical forecasting demand situations, based on availability and accuracy of the demand data/information, are singled out. These situations correspond to different demand measurement scales: dichotomy (binary demand forecasting implemented using binary dependent variable regression models), ordinal, count (based on Poisson regression), and interval.
(2) The ups and downs of inventory management. Materials Management in Health Care, 13(2), 22-26. Neil, R. (2004, February). This article discusses the advantages and disadvantages of using stockless and just-in-time (JIT) purchasing programs in hospitals. The author states that the JIT and stockless have slightly different meanings to hospitals and vendors, but they can be used in conjunction. JIT is defined as a program that establishes regular, frequent deliveries from a hospital’s distributor, and which reduces a hospital’s inventory from a 30-day or 60-day to a 10-day supply. A hospital with a stockless program can carry an even lower amount of inventory and receives items in low units of measure from a distributor.
Since less inventory is kept, a hospital can reduce space and warehouse space used to store products. This also reduces the chance of losing money on obsolete, stolen, spoiled, or damaged products. However, according to Bob Majors, materials management director for Bloomington (Ind.) Hospital, the JIT model that originated from the manufacturing industry does not fit well into health care supply chain logistics because hospital volume is not predictable and thus the demand of inventory is uncertain. He claims that the JIT or stockless programs peaked in popularity in the mid-1990s and have now become less popular than when they were first introduced. The article ends by stating that the new distribution trend may go back to the traditional approach of operating a big warehouse and taking more control over products. An example of this move is HCA, Nashville, which is the industry’s largest hospital system. It has higher holding costs due to carrying more inventories, but it has a lower distributor fees than it would have with a stockless or JIT program.
(3) Efficient approach to health care industry material resource management: An empirical research. Hospital Material Management Quarterly, 13(3), 10-25. Kim, G. C., & Rifai, A. K. (1992). This article presents a research study examining the feasibility of implementing a just-intime (JIT) system in health care industry. The study compared health care institutions that have adopted a JIT system and those that have not. The results show that the introduction of JIT philosophy in the health care industry’s material management system improved the system and reduced implementation problems. Moreover, the introduction of JIT philosophy had a positive impact on the institutions' inventory management, service quality, and competitiveness.
The article starts by discussing the impact of JIT philosophy. The authors define JIT as a continuous flow of products adapted to demand changes that produces only necessary quantities of products at predetermined points in time. To achieve this flow-like system, JIT needs to be ed by JIT purchasing, total quality control, multiple-process layout deg, job standardizing, and production smoothing. In the manufacturing industry, the major benefit of JIT purchasing is that the levels of parts inventories in the assembly plant and the carrying costs for those parts are significantly reduced. The success of JIT systems in the manufacturing industry has driven many service sector industries to adopt JIT as their material management system.
(3) Adapting just-in-time inventory control to the hospital setting. Hospital Materials Management, 11(10), 8-12. Chapman, S. (1986) This article discusses the applicability of just-in-time (JIT) inventory control to hospitals. The author believes that the difficulty in implementing a JIT inventory control is the uncertainty in supply or demand, which is directly related to lead time. The two major uncertainties are the actual lead time demand and the actual replenishment lead time. First, the uncertainty of the actual
lead time demand may create stockouts and poor customer service, which can be prevented with safety stock (buffer inventory). Second, the uncertainty of the actual replenishment lead time may create a need for additional safety stock. These problems can be solved by using a JIT approach because lead time will be reduced as the average inventory level is lower with a JIT system. Thus, the “danger zone” when a stockout could occur is much smaller. As a result, the safety stock needed to maintain the same level of customer service is reduced. Due to the reduction in cycle stock with a JIT system, the lot size is reduced, which in turn lowers the inventory holding cost. However, this benefit of a JIT system may increase the risk of stock out unless the uncertainties mentioned above are reduced. For a properly working JIT system, cost reduction and uncertainty reduction have to be accomplished together.
(4) Risk Aversion in Inventory Management Prof. David Simchi-Levi &Massachusetts Institute of Technology Traditional inventory models focus on risk-neutral decision makers, i.e., characterizing replenishment strategies that maximize expected total profit, or equivalently, minimize expected total cost over a planning horizon. In this paper, we propose a framework for incorporating risk aversion in multi-period inventory models as well as multi-period models that coordinate inventory and pricing strategies. In each case, we characterize the optimal policy for various measures of risk that have been commonly used in the finance literature. In particular, we show that the structure of the optimal policy for a decision maker with exponential utility functions is almost identical to the structure of the optimal risk-neutral inventory (and pricing) policies. These structural results are extended to models in which the decision maker has access to a (partially) complete financial market and can hedge its operational risk through trading financial securities. Computational results demonstrate the importance of this approach not only to risk-averse decision makers, but also to risk-neutral decision makers with limited information on the demand distribution.
(5) Just-In-Time Inventory Management Strategy & Lean Manufacturing Written by David Broyles, Jennifer Beims, James Franko, & Michelle Bergman Kansas State University April, 2005 Just-in-time is a movement and idea that has gained wide acceptance in the business community over the past decade. As companies became more and more competitive and the pressures from Japans continuous improvement culture, other firms were forced to find innovative ways to cut costs and compete. The idea behind JIT, or lean manufacturing, is to have the supplies a firm needs at the exact moment that they are needed. In order to accomplish this goal a firm must constantly be seeking ways to reduce waste and enhance value. A recent survey of senior manufacturing executives showed that 71% used some form of JIT in their processes (Pragman). This simple statistic illustrates that JIT is here to stay and also that firms must constantly be searching for ways to cut costs and achieve an advantage. JIT is one way to achieve that end result. In order to understand how JIT works a common vocabulary needs to be established from which to further discuss the topic and gain insight into why so many firms have adopted it. As previously stated, one of the key components of JIT is to reduce waste and add value. There are several activities that a company must monitor as targets for reducing waste. Among these are, excessive waste times, inflated inventories, unneeded people or material movement, unnecessary processing steps, numerous variabilities throughout a firm's activities and any other non-value adding activity. A key example of this is a new plant that Caterpillar is bringing on-line in the near future. By reducing the number of times a bucket had to be repositioned while it was being welded, Caterpillar was able to reduce the amount of time the bucket spent in the welding line, reduce labor costs by limiting idle time at the welding station and increase the efficiency of the entire manufacturing process
(7) Applying just-in-time systems in health care. IIE Solutions, 29(8), 32-37.
Whitson, D. (1997) Since the government switched from cost-plus reimbursement to flat fees regardless of complications or a provider’s actual expense for medical services in 1983, hospitals continue to search for innovative ways to reduce costs while maintain quality. This article discusses how hospitals can reduce the acquisition price of supplies when using a just-in-time (JIT) system. It covers the benefits of JIT, the opportunities for JIT application in health-care, and the ing implications of using a JIT system. The benefits of JIT briefly described in this article are cost savings as a result of inventory reduction and associated holding costs, space for other revenue generating activities, and the transfer of labor costs to the distributor. The article heavily focuses on the possibilities of using JIT in the healthcare industry. The areas where JIT can be applied in health care include central supply, materials management and pharmacy, nursing, swing beds, relationships between nursing units and supplying departments, and physician practices. First, under JIT the central supply function is minimized because the need to store goods between supplier delivery and internal delivery to units or department is decreased by adopting a JIT method where an individual unit directly receives items from the supplier.
(8) INVENTORY MANAGEMENT IN SMALL BUSINESS: A DECISION MATRIX APPROACH S. Altan Erdem, University of Minnesota, Duluth Tom K. Massey, Jr., University of North Texas This article provides a decision tool to assist small business managers in their search for an appropriate inventory management system. In the article, a functional taxonomy that would match various small business sectors with certain operational consideration points is proposed. This taxonomy is basically a two-dimensional decision matrix that can equip these managers with various perspectives which are broad enough to reveal potential gains of different systems. The management processes associated with maintaining optimal inventory levels presents numerous and continual challenges to the goods-oriented small business. In each of these firms the design and implementation of a particular inventory planning system should originate with the
underlying strategic planning policies within the business. These decisions are conditioned by numerous financial and structural concerns. It is important to note that research has shown that inventory planning discrepancies have created difficulties for small business, each of these areas must be carefully considered.
3. Inventory Counting Systems
3.1 Types of inventory management 1) Periodic System This is a physical count of items in inventory is made at periodic intervals (e.g. weekly, monthly) in order to decide how much to order of each item. Major s: Supermarkets, discounts stores, and department stores. Advantage Orders for many items occur at the same time, which can result in economies in processing and shipping orders Disadvantages a)
Lack of control between reviews.
b)
The need to protect against shortages between review periods by carrying extra stock.
c)
The need to make a decision on order quantities at each review
2) Perpetual Inventory System (also known as a continual system) This keeps track of removals from inventory on a continuous basis, so the system can provide information on the current level of inventory for each item. Advantages 1. The control provided by the continuous monitoring of inventory withdrawals. 2. The fixed-order quantity; management can identify an economic order size. Disadvantage 1. The added cost of record keeping. Two-bin-system method
Is two containers of inventory; reorder when the first is empty. The advantage of this system is that there is no need to record each withdrawal from inventory; the disadvantage is that the reorder card may not be turned in for a variety of reasons.
Tracking System Universal Product Code (UPC) bar code printed on a label that has information about the item to which it is attached. Bar coding represents an important development for other sectors of business besides retailing. In manufacturing, bar codes attached to parts, subassemblies, and finished goods greatly facilitate counting and monitoring activities.
Demand Forecast and Lead time Information Managers need to know the extent to which demand and lead time might vary; the greater the potential variability, the greater the need for additional stock to reduce the risk of a shortage between deliveries.
Lead time is time interval between ordering and receiving the order.
3.2 Inventory Cost (Three Basic Costs) 1. Holding or Carrying Cost is the costs to carry an item in inventory for a length of time
usually a year. Cost includes interest, insurance, taxes, depreciation, obsolescence, deterioration, spoilage, pilferage, breakage, etc.
2. Ordering Cost is cost of ordering and receiving inventory. These include determining how
much is needed, preparing invoices, inspecting goods upon arrival for quality and quantity, and moving the goods to temporary storage.
3. Storage Cost is cost resulting when demand exceeds the supply of inventory on hand.
These costs can include the opportunity cost of not making a sale, loss of customer goodwill, late charges, and similar costs
4. Objectives of inventory management
The basic managerial objectives of inventory control are two-fold; first, the avoidance over-investment or under-investment in inventories; and second, to provide the right quantity of standard raw material to the production department at the right time. In brief, the objectives of inventory control may be summarized as follows:
A. Operating Objectives:
1. Ensuring Availability of Materials: There should be a continuous availability of all types of raw materials in the factory so that the production may not be help up wants of any material. A minimum quantity of each material should be held in store to permit production to move on schedule.
2. Avoidance of Abnormal Wastage: There should be minimum possible wastage of materials while these are being stored in the go downs or used in the factory by the workers. Wastage should be allowed up to a certain level known as normal wastage. To avoid any abnormal wastage, strict control over the inventory should be exercised. Leakage, theft, embezzlements of raw material and spoilage of material due to rust, bust should be avoided.
3. Promotion of Manufacturing Efficiency: If the right type of raw material is available to the manufacturing departments at the right time, their manufacturing efficiency is also increased. Their motivation level rises and morale is improved.
4. Avoidance of Out of Stock Danger: Information about
availability of materials should
be made continuously available to the management so that they can do planning for procurement of raw material. It maintains the inventories at the optimum level keeping in view the operational requirements. It also avoids the out of stock danger.
5. Better Service to Customers: Sufficient stock of finished goods must be maintained to match reasonable demand of the customers for prompt execution of their orders.
6. Deg poorer organization for inventory management: Clear cut ability should be fixed at various levels of organization.
B. Financial Objectives:
1. Economy in purchasing: A proper inventory control brings certain advantages and economies in purchasing also. Every attempt has to make to effect economy in purchasing through quantity and taking advantage to favorable markets.
2.
Reasonable Price: While purchasing materials, it is to be seen that right quality of material is purchased at reasonably low price. Quality is not to be sacrificed at the cost of lower price. The material purchased should be of the quality alone which is needed.
3. Optimum Investing and Efficient Use of capital: The basic aim of inventory control from the financial point of view is the optimum level of investment in inventories. There should be no excessive investment in stock, etc
C. Others objective Inventory management help to reduce martial handling costs-accumulating parts between operations It also helps to utile people and equipment reasonably .secondly it facilitate product displays and services to customer To minimize in total cost associated with stocks. These costs can be categorized into three groups To ensure smooth flow of stock
Minimizing risk and uncertainty To provide required quality of material
5. Importance of Inventory Management Systems ?Inventory management is an important part of a business because inventories are usually the largest expense incurred from business operations. Most companies will use an inventory management system that will track and maintain the inventory required to meet customer demand. Most systems used by companies are linked to the management or ing information system, increasing the effectiveness of their operations.
Provides the following information Price preferences of customers Right quarters to buy Amount of given item sold Seasonal time a given item sells Time to engage in promotional activities
5.1 Advantages and disadvantages of inventory management Advantages
Disadvantages
•
Business
•
Carrying costs
•
Guarantees prompt service delivery
•
Associated risks
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Reinforces profitability – no stock out cost
•
Enhances customer satisfaction
6. Essentials of inventory control system For an efficient and successful inventory control there are certain important conditions that are a follows: (1) Classification and Identification of inventories: The usual inventory of manufacturing firm
includes raw-material, stores, work-in-progress and component etc. To facilitate prompt recording the dealing, each item of the inventory must be assigned a particular code number and it must be classified in suitable group or sub-divisions. ABC analysis of material is very helpful in this context. (2) Standardization and simplification of inventories: In order to facilitate inventory control,
the inventory line should be simplified. It refers to the elimination of excess types and sizes of items. Simplification leads to reduction in classification of inventories and its carrying costs. Standardization, on the other hand, refers to the fixation of standards of raw material to be purchased and specification of the components and tools to be used. (3) Setting the Maximum and Minimum limits for each part of inventory: The third step in
this process is to set the maximum and minimum limits of each item of the inventory. It avoids the chances of over-investment as well as running a short of any item during the cost of producing. Reordering point should also be fixed beforehand.
(4) Economic Order Quantity: It is also a basic inventory problem to determine the quantity as
how much to order at a time. In determining the EOQ, the problem is one to set a balance between two opposite costs, namely, ordering costs and carrying costs. This quantity should be fixed beforehand.
(5) Adequate storage Facilities: To make the system of inventory control successful and
efficient one, it is also essential to provide the adequate storage facilities. Sufficient storage area and proper handling facilities should be organized. (6) Adequate Reports and Records: Inventory control requires the maintenance of adequate
inventory record and reports. Various inventory records must contain information to meet the needs of purchasing, production, sales and financial staff. The typical information required about any class of inventory may be relating to quantity on hand, location, quantities in transit, unit cost, code for each item of inventory, reorder point, safety level etc. Statements forms and inventory records should be so designed that the clerical cost of maintaining these records must be kept a minimum. (7) Intelligent and Experienced Personnel: An important requirement of successful inventory
control system is the appointment of qualified and experienced staff in purchase and stores department. Mere establishment of procedures and the maintenance of records would not give the desired results as there is no substitute for sincere and devoted as well as experienced hands. Hence, the whole inventory control structure should be manned with trained, qualified, experienced and devoted employees. (8) Coordination: There must be proper coordination of all departments involved in the process
of inventory control, such as purchase, finance, receiving, approving, storage and ing departments. These all departments have different outlook and objects in inventory management but financial manager has to coordinate them all. (9) Budgeting: An efficient budgeting system is also required. Preparation of budgets concerning
materials, supplies and equipment to ensure economy in purchasing and use of material is also necessary. (10) Internal Check: Operating of a system of internal check is also vital in inventory
management so that all transactions involving material supplies and equipment purchase are properly approved and automatically checked.
7. Financial manager’s role in inventory management Inventory represents a large investment by manufacturing concern: therefore, great emphasis must be placed on its efficient management. Though, the operative responsibility for Inventory management lies with the inventory manager, the financial manager must also be concerned with all types of inventories- raw materials, work-in-progress and finished goods. He must monitor Inventory levels and see that only an optimum amount is invested in Inventory. He should be familiar with the Inventory control techniques and ensure that Inventory is managed well. He should try to resolve the conflicting view points of all the departments in order to have efficient inventory management. He has to act as a careful inspector levels. He should introduce the policies which reduce the lead time, regulate usage and thus, minimize safety stock. All these techniques of Inventory management lead to the goal of wealth maximization.
Keep operations running? A manufacturer must have certain purchased items (raw materials, components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. Inventory between successive dependent operations also serves to decouple the dependency of
the operations. A machine or work center is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a work center, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each work center, then each machine can maintain its operations for a limited time, hopefully until operations resume the original center.
Lead time Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered. If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory. A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain
extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months’ steel requirement would be necessary.
Hedge Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs.
Quantity discount Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.
Smoothing requirements Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. Consider the demand forecast and production schedule outlined in Table 1. Notice how the use of inventory has allowed the firm to maintain a steady rate of output (thus avoiding the cost of hiring and training new personnel), while building up inventory in anticipation of an increase in demand. In fact, this is often called anticipation inventory. In essence, the use of inventory has allowed the firm to move demand requirements to earlier periods, thus smoothing the demand.
Controlling inventory Firms that carry hundreds or even thousands of different part numbers can be faced with the impossible task of monitoring the inventory levels of each part number. In order to facilitate this, many firm's use an ABC approach. ABC analysis is based on Pareto Analysis, also known as the "80/20" rule. The 80/20 comes from Pareto's finding that 20 percent of the populace possessed 80 percent of the wealth. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. Therefore, a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be the correct 20 percent. The top 20 percent of the firm's most costly items are termed "An" items (this should
approximately represent 80 percent of total inventory costs). Items that are extremely inexpensive or have low demand are termed "C" items, with "B" items falling in between A and C items. The percentages may vary with each firm, but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs.
By classifying each inventory item as an A, B or C the firm can determine the resources (time, effort and money) to dedicate to each item. Usually this means that the firm monitors A items very closely but can check on B and C items on a periodic basis (for example, monthly for B items and quarterly for C items). Another control method related to the ABC concept is cycle counting. Cycle counting is used instead of the traditional "once-a-year" inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records. When cycle counting is used the firm is continually taking a physical count but not of total inventory. A firm may physically count a certain section of the plant or warehouse, moving on to other sections upon completion, until the entire facility is counted. Then the process starts all over again. The firm may also choose to count all the A items, then the B items, and finally the C
items. Certainly, the counting frequency will vary with the classification of each item. In other words, an item may be counted monthly, B items quarterly and C items yearly. In addition the required accuracy of inventory records may vary according to classification, with items requiring the most accurate record keeping.
8. Data analysis and methods
8.1 Classification System An important aspect of inventory management is that items held in inventory are not of equal importance in of dollars invested, profit potential, sales or usage volume, or stock-out penalties. Example: A producer of electrical equipment might have electric generators, coils of wire, and miscellaneous nuts and bolts among the items carried in inventory. It would be unrealistic to devote equal attention to each of these items. Analysis the inventory handling using the following techniques ABC analysis (control mechanism). EOQ Control levels.
Control Mechanism: Usually the firm has to maintain several types of inventories. It is not desirable to keep same degree of control on all items the firm should play maximum attention to these whose is the highest value. The firm should receive the most effort in controlling. The firm should beselective in it approach to control inventory handling in various types of inventories This analytical approach is called the ABC analysis, and tends to measure the significance of each item ate inventories in of its value
1. A-B-C Approach A-B-C Approach classifies inventory items according to some measure of importance, usually annual dollar usage, and then allocates control efforts accordingly.
Three Classes of Items Used: A (very important) B (moderately important) C (least important)
The key questions concerning cycle counting for management are: 1. How much accuracy is needed? 2. When should cycle counting be performed? 3. Who should do it? Rules of implementing ABC techniques: Classify the item of inventories. Determine the price per unit of each item. Find the total cost of each item Rank the items in accordance with total costs, allotting first rank to the item with highest total cost and so on (i.e. arrange in descending order). Find out the total number of items and calculate the percentage of each item. Calculate the percentage of Total cost of each item to total cost of all items.
ADVANDAGES: Preference for keeping inventory can be placed properly after Preference for keeping inventory can be placed properly after ABC analysis Store personnel are placed better with this analysis Store personnel are placed better with this analysisi.ei.their time can be utilized better
Storing, handling and delivery of materials to production department become better.
ECONOMIC ORDER QUANTITY MODELS Economic Order Quantity (EOQ) is the order size that minimizes total cost. EOQ models identify the optimal order quantity in of minimizing the sum of certain annual costs that vary with order size. Three (3) Order Size 1. The economic order quantity model. 2. The economic order quantity model with non instantaneous delivery. 3. The quantity discount model.
Inventory carrying cost: It is the cost of holding the materials in the store and includes: Cost of storage space which could have been utilized for some other purpose. Cost of bins and racks that have to be provided for the storage of materials. Cost of maintaining the materials to avoid deterioration. Amount of interest payable on the money locked up in the materials. Cost of spoilage in stores and handling. Transportation costs in relation to stock. Cost of obsolescence on of some of the materials becomingobsolete after some time of storage either due to change in the process or product. Insurance cost. Clerical cost etc. Ordering cost: It is the cost of placing orders for the purchase of materials and includes:
1) Cost of staff posted in the purchasing department, inspection section and payment department. 2) Cost of stationery, postage and telephone charges
3. Stock levels Reorder level: Re-order level is the level of inventory at which the firm should place an order to replenish the inventory. In case, the order is placed at this level, the new goods will arrive before the runs out of goods to sell. In order to determine reorder level, information is required about two things. (a) The lead time and (b) The usage rate. The term lead time refers to the time normally taken in receiving the delivery of inventory after the order has been placed in case there is no uncertainty about the usage rate and the lead time, the order level cans be determined by simply applying the formula. Re-order level = Average usage X lead time + safety stock. Safety stock level: The actual usage as well as the lead time may be different from the normal usage or the normal lead time. In order to guard against such a contingency the firm maintains a safety stock the minimum buffer stock as a cushion against possible increase in usage or delay in delivery time. The level of safety stock can be calculated by applying the following formula. Safety stock = Average usage X period of safety stock. Maximum inventory: It is the quantity of materials beyond which a firm should not exceed its stocks. If the quantity exceeds maximum level limit then it will be over-stocking. A firm should avoid over-stocking because it will result in high material costs. Over-stocking will mean blocking of more
working capital, more space for storing the materials, more wastage of materials, and more chances of losses from obsolescence. This can be calculated by using the following formula. Maximum inventory = Economic Order Quantity + safety stock
9. Conclusion
To sum up, we can say Inventory management is an essential part of any organization. Every essential is a part of any organization. Every organization has manly two objective one disorganizations have manly two objectives one is Profit maximization &another is wealth Profit maximization &another is wealth maximization. Inventory management helps the maximization. Inventory management helps the organization to achieve its objectives. Inventory management can use techniques like TQM, JIT& ABC etc. to have an effective control on its& ABC etc. to have an effective control on its inventory.
10. Practical examples of Pakistani companies Inventory management survey We targeted and conduct survey from two different type of organization which uses inventory management system efficiently. The names of those organizations are as followed. Matro cash & carry
Unimark pharmaceutical
1. Matro cash and carry METRO Cash & Carry announced its operations in Pakistan in January 2006 & since then it has established itself as a potential market leader in self service wholesale. Under the supervision of Giovanni Soranzo, Managing Director, METRO Cash & Carry Pakistan has opened its first wholesale centre in Lahore in October 2007. METRO Cash & Carry Pakistan is now successfully operating 5 wholesale centers, 2 in Lahore, 1 in Karachi, 1 in Faisalabad & 1 in Islamabad. The company’s country head office is based in Lahore at Thokar Niaz Baig near motorway. The current Head count of employees is approx 1176 including Head Office & 5 wholesale centres.METRO Cash & Carry plans to invest in Pakistan on a sustained and reliable basis in the years to come.
SKU Inventories (Scanned or Key Entered)
Metro Inventory Service can scan your readable bar-code, or key enter the information to provide you with a file detailing all of the information you need in reconciling your inventory.The file will
be in ASCII format defined to your specifications.
Financial Retail Inventories Metro Inventory Service can inventory your entire retail store providing you with both a retail by location physical inventory and a retail by department inventory. We complete a set up prior to your first inventory in which we break down your retail store into small easily identifiable locations. Departments are isolated within all locations. Upon completion of the inventory, Metro Inventory Service can provide management with a complete detailed printout of the physical inventory
Financial Cost Inventories Metro Inventory Service can provide management with a complete financial cost inventory where product is cost-coded or has a readable bar code.
Fixed Asset Inventories
Metro Inventory Service can provide management with a detailed fixed asset inventory showing a complete description of the asset and its current location. We can help you set up your system to
establish control over your fixed assets. Included in this service (where requested), we can identify your assets with labels.
2. Unimark pharmaceutical inventory system It started in 1983 and it vision is “To be a global Life sciences company through
innovation, cost leadership, optimizing economic value creation for share holders”
Point of Sales POS an inventory system in which the item is deducted from inventory as it is sold or dispensed
Reorder Points Minimum and maximum stock levels which determine when a reorder is placed and for how much
Computers and Inventory •
Automatically adjust inventory
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Continuous picture of the inventory
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Generate orders Automatic Manual
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Only as accurate as the information entered
Receiving the Order •
Checking in the Order Compare the invoice with products
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Right drug, strength, size, quantity, in date?
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Pharmacist will check in controlled drugs
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Report any discrepancies
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