Management Consulting/Approaches to Solve Inventory Problems in Engineering Industries
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objectives of inventory management?
is a best control method which allows you to organize and manage your financial aspects. Inventory Management helps providing a good understanding ground and the capacity to control your financial costs. Good inventory management system helps you a great deal.
1) To Ensure Adequate Stock: An endeavor is made by inventory control to see that any department will get the raw materials or other necessary item as and when required. Hence an effective system of purchasing, storage and maintenance is effectively arranged so that enough stock is available on hand.
(2) To Minimize Inventories on Hand: The next objective of inventory control is to minimize inventories on hand. It has to be ensured that excessive stock is not kept and unnecessary capital is not locked up. But it must be consistent with adequate stock, so that production is not disrupted.
(3) To Maintain Continuity in Production: The supplies of materials spare parts, consumable stores etc. must be stocked to the optimum level, so that continuity of operations is maintained. The inventory control system should ensure that production is completed as per schedule.
(4) Minimize the Cost of Purchasing and Storage: It is essential that there is economy in cost of purchasing, cost of receiving and inspection, storage and issue of materials etc. The expenses to be reduced to minimum are interest oh capital locked, insurance, maintenance, and inspection and transportation costs.
(5) To Minimize the Wastage and Loss: In every manufacturing organisation, there is a risk of wastage and theft of stores, wastage and losses are likely to occur during movements and during the production processes. Inventory control ensures that the risk of theft, wastage and losses are minimized.
(6) To Reduce the Risk of Deterioration: If a considerable time elapses in the storage of goods, there arise two types of risks (i) the deterioration of goods stored and (ii) the goods becoming obsolete and out dated. Hence, inventory control ensures that such risk is minimized.
(7) Effective Use of Available Capital: Various levels like maximum level, minimum level, reordering level etc. are fixed in a system of inventory control, which ensures that unnecessary capital is not locked up in inventory. Order is placed at right time and in right quantity, taking into account the re-ordering level. This will make efficient purchasing possible.
(8) To be Helpful in Efficient Purchasing: Maintenance of optimum stock is closely connected with a system of inventory control. One of the major objectives of inventory control is to assist in efficient purchasing.
(9) To Give Maximum Satisfaction to Customers: The customer satisfaction is a sign of a progressive enterprise. Inventory control assists in supplying goods at proper price and at right time. Inventory control leads to economical purchase, makes possible continuity of production and maintaining enough stock. All these leads to consumer satisfaction.
(10) To Minimize Loss Due to Price Decline: When considerable investment is made in inventory, the price decrease on a large scale may involve the firm in considerable loss. This is reduced to a great extent by proper inventory control.
(11) Maximum Use of Storage Capacity: One of the objectives of inventory control is to make maximum use of storage capacity available. This will reduce storage costs.
(12) Proper Storage of Materials: Inventory control function includes supervision and control of storage of materials, tools etc. Where thousands of items are stored, it is necessary that material of a particular type required is immediately available. Efficient storage is made possible due to inventory control.
OPERATION Inventory Management objectives
• To Find and track down all the processing data's in an inventory system repository .
• Define a procedure by which assets are identified and maintained in the Inventory System.
• Provideall necessary personnel (data entry, update and deletion).
• Restrict access of certain members ,Complete range of reports that will satisfy informational requirements.
• To file the Inventory Management System within the Standards and Procedures Manual.
• To provide coaching to personnel responsible for supporting the Inventory Management System.
Inventory Management BENEFITS are
• Reduces cost and provides detailed reports for reference or checking purposes
• Increase Account Saturation and Maintenance
• Provides a flexibility to suit individual needs of CUSTOMERTS
• Strengthen the relationship with the customer by becoming an on-going partner in the customer’s profitability improvement and demonstrating that product price is only part of the cost of doing
BUSINESS with a supplier.
different types of inventories
function does inventory perform.?
TYPES OF INVENTORY
Raw materials: The purchased items or extracted materials that are transformed into components or products.
Components: Parts or subassemblies used in building the final product.
Work-in-process (WIP): Any item that is in some stage of completion in the manufacturing process.
Finished goods: Completed products that will be delivered to customers.
Distribution inventory: Finished goods and spare parts that are at various points in the distribution system.
Maintenance, repair, and operational (MRO) inventory (often called supplies): Items that are used in manufacturing but do not become part of the finished product.
INDEPENDENT VS. DEPENDENT DEMAND INVENTORY
Some inventory items can be classified as independent demand items, and some can be classified as dependent demand items. While we need to make the timing and sizing decisions for all inventory items, we must be careful in the manner in which we make those decisions for these two types of items.
Independent demand inventory item: Inventory item whose demand is not related to (or dependent upon) some higher level item. Demand for such items is usually thought of as forecasted demand. Independent demand inventory items are usually thought of as finished products.
Dependent demand inventory item: Inventory item whose demand is related to (or dependent upon) some higher level item. Demand for such items is usually thought of as derived demand. Dependent demand inventory items are usually thought of as the materials, parts, components, and assemblies that make up the finished product.
USES OF INVENTORY
(REASONS FOR MAINTAINING INVENTORY)
Anticipation Inventory or Seasonal Inventory: Inventory are often built in anticipation of future demand, planned promotional programs, seasonal demand fluctuations, plant shutdowns, vacations, etc.
Fluctuation Inventory or Safety Stock: Inventory is sometimes carried to protect against unpredictable or unexpected variations in demand.
Lot-Size Inventory or Cycle Stock: Inventory is frequently bought or produced in excess of what is immediately needed in order to take advantage of lower unit costs or quantity discounts.
Transportation or Pipeline Inventory: Inventory is used to fill the pipeline as products are in transit in the distribution network.
Speculative or Hedge Inventory: Inventory can be carried to protect against some future event, such as a scarcity in supply, price increase, disruption in supply, strike, etc.
Maintenance, Repair, and Operating (MRO) Inventory: Inventories of some items (such as maintenance supplies, spare parts, lubricants, cleaning compounds, and office supplies) are used to support general operations and maintenance.
OBJECTIVES OF INVENTORY MANAGEMENT
There are three main objectives of inventory management, as follows:
Provide the desired level of customer service. Customer service refers to a company’s ability to satisfy the needs of its customers. There are several ways to measure the level of customer service, such as: (1) percentage of orders that are shipped on schedule, (2) the percentage of line items that are shipped on schedule, (3) the percentage of dollar volume that is shipped on schedule, and (4) idle time due to material and component shortage. The first three measures focus on service to external customers, while the fourth applies to internal customer service.
Achieve cost-efficient operations. Inventories can facility cost-efficient operations in several ways. Inventories can provide a buffer between operations so that each phase of the transformation process can continue to operate even when output rates differ. Inventories also allow a company to maintain a level workforce throughout the year even when there is seasonal demand for the company’s output. By building large production lots of items, companies are able to spread some fixed costs over a larger number of units, thereby decreasing the unit cost of each item. Finally, large purchases of inventory might qualify for quantity discounts, which will also reduce the unit cost of each item.
Minimize inventory investment. As a company achieves lower amounts of money tied up in inventory, that company’s overall cost structure will improve, as will its profitability. A common measure used to determine how well a company is managing its inventory investment (i.e., how quickly it is getting its inventories out of the system and into the hands of the customers) is inventory turnover ratio, which is a ratio of the annual cost of goods sold to the average inventory level in dollars.
BASIC INVENTORY DECISIONS
There are two basic decisions that must be made for every item that is maintained in inventory. These decisions have to do with the timing of orders for the item and the size of orders for the item.
Basic Inventory Decisions
How much? When?
Lot sizing decision
Determination of the quantity to be ordered. Lot timing decision
Determination of the timing for the orders.
RELEVANT INVENTORY COSTS
Relevant Inventory Costs
Item Costs Holding Costs Ordering Costs Shortage Costs
Direct cost for getting an item. Purchase cost for outside orders, manufacturing cost for internal orders. Costs associated with carrying items in inventory. Storage and other related costs. Fixed costs associated with placing an order (either a purchase cost for outside orders, or a setup cost for internal orders). Costs associated with not having enough inventory to meet demand.
BEHAVIOR OF COSTS FOR DIFFERENT INVENTORY DECISIONS
When assessing the cost effectiveness of an inventory policy, it is helpful to measure the total inventory costs that will be incurred during some reference period of time. Most frequently, that time interval used for comparing costs is one year. Over that span of time, there will be a certain need, or demand, or requirement for each inventory item. In that context, the following describes how the annual costs in each of the four categories will vary with changes in the inventory lot sizing decision.
Item costs: How the per unit item cost is measured depends upon whether the item is one that is obtained from an external source of supply, or is one that is manufactured internally. For items that are ordered from external sources, the per unit item cost is predominantly the purchase price paid for the item. On some occasions this cost may also include some additional charges, like inbound transportation cost, duties, or insurance. For items that are obtained from internal sources, the per unit item cost is composed of the labor and material costs that went into its production, and any factory overhead that might be allocated to the item. In many instances the item cost is a constant, and is not affected by the lot sizing decision. In those cases, the total annual item cost will be unaffected by the order size. Regardless of the order size (which impacts how many times we choose to order that item over the course of the year), our total annual acquisitions will equal the total annual need. Acquiring that total number of units at the constant cost per unit will yield the same total annual cost. (This situation would be somewhat different if we introduced the possibility of quantity discounts. We will consider that later.)
Holding costs (also called carrying costs): Any items that are held in inventory will incur a cost for their storage. This cost will be comprised of a variety of components. One obvious cost would be the cost of the storage facility (warehouse space charges and utility charges, cost of material handlers and material handling equipment in the warehouse). In addition to that, there are some other, more subtle expenses that add to the holding cost. These include such things as insurance on the held inventory; taxes on the held inventory; damage to, theft of, deterioration of, or obsolescence of the held items. The order size decision impacts the average level of inventory that must be carried. If smaller quantities are ordered, on average there will be fewer units being held in inventory, resulting in lower annual inventory holding costs. If larger quantities are ordered, on average there will be more units being held in inventory, resulting in higher annual inventory holding costs.
Ordering costs: Any time inventory items are ordered, there is a fixed cost associated with placing that order. When items are ordered from an outside source of supply, that cost reflects the cost of the clerical work to prepare, release, monitor, and receive the order. This cost is considered to be constant regardless of the size of the order. When items are to be manufactured internally, the order cost reflects the setup costs necessary to prepare the equipment for the manufacture of that order. Once again, this cost is constant regardless of how many items are eventually manufactured in the batch. If one increases the size of the orders for a particular inventory item, fewer of those orders will have to be placed during the course of the year, hence the total annual cost of placing orders will decline.
Shortage costs: Companies incur shortage costs whenever demand for an item exceeds the available inventory. These shortage costs can manifest themselves in the form of lost sales, loss of good will, customer irritation, backorder and expediting charges, etc. Companies are less likely to experience shortages if they have high levels of inventory, and are more likely to experience shortages if they have low levels of inventory. The order size decision directly impacts the average level of inventory. Larger orders mean more inventory is being acquired than is immediately needed, so the excess will go into inventory. Hence, smaller order quantities lead to lower levels of inventory, and correspondingly a higher likelihood of shortages and their associated shortage costs. Larger order quantities lead to higher levels of inventory, and correspondingly a lower likelihood of shortages and their associated costs. The bottom line is this: larger order sizes will lead to lower annual shortage costs.
INVENTORY MONITORING APPROACHES
Continuous review systen: This approach maintains a constant order size, but allows the time between the placement of orders to vary. This method of monitoring inventory is sometimes referred to as a perpetual review method, a fixed quantity system, and a two-bin system. When the inventory is depleted to the reorder point, a replenishment order is placed. The size of that order is the economic order quantity for that item. This type of system provides closer control over inventory items since the inventory levels are under perpetual scrutiny.
Periodic review system: This approach maintains a constant time between the placement of orders, but allows the order size to vary. This method of monitoring inventory is sometimes referred to as a fixed interval system or fixed period system. It only requires that inventory levels be checked at fixed periods of time. The amount that is ordered at a particular time point is the difference between the current inventory level and a predetermined target inventory level (also called an order up to level). If demand has been low during the prior time interval, inventory levels will be relatively high, and the amount to be ordered will be relatively low. If demand has been high during the prior time interval, inventory levels will have been depleted to low levels, and the amount to be ordered will be higher.
Min-max system: This approach allows both the order size and the time between the placement of orders to vary. This method of monitoring inventory is sometimes referred to as an optional replenishment system. It is a hybrid system that combines elements of both the continuous review system and the periodic review system. It is similar to the periodic review system in that it only checks inventory levels at fixed intervals of time, and it has a target inventory level. However, when one of those review periods arises the system does not automatically place an order. An order is only placed if the size of the order would be sufficient to warrant placing the order. This determination is made by incorporating the reorder point concept from the continuous review system. At the review period the inventory level on hand is compared to a reorder point for the item. If inventory has not fallen below the reorder point, no order is placed. However, if the inventory level has dropped below the reorder point, an order is placed. The size of the order is the difference between the inventory on hand and the target inventory level.
17 ways to improve management of forecasting and inventory
to: improve the management of the inventory assets; enhance planning, forecasting and analysis; modify organizational structure to be more efficient; and to implement more effective forecasting
Have you developed the necessary metrics for initial customer order fill rates, final fill, inventory turnover, gross margin, lost margin from liquidation, age of inventory, etc.? In turn have these become performance objectives for the Inventory Control Buyers?
2. Streamline process
Assess the processes of seasonal planning, weekly forecasting, end-of-season analysis for your multichannel business. Streamline how the Inventory Control buyers perform their work and manage inventory. Process improvement should improve planning and forecasting accuracy, and lead to improvement in customer initial order fill rate and turnover.
3. Know your vendors
What are their pain points (space, cash, capacity)? What are their strengths? Understand these thoroughly to gain maximum leverage. Should you reduce the number of vendors you purchase from to get more leverage?
4. Establish a vendor scorecard
Involve Merchandising, Inventory Control, Fulfillment and Accounting and set up a vendor scorecard to evaluate vendors. This should include sales, margin, on-time delivery, significant problems, etc. Review it several times a year with the vendors. You may even want to take it a step further and set up a vendor recognition program for the top vendors.
5. Visit your top 20 vendors now
Strengthens relationships. Include at least the Merchant and Inventory Control Buyer. Involve vendor’s senior management as well as yours. Have an agenda about your company’s direction, needs and expectations.
6. Manage your vendors
Insist on costs, terms, and conditions with vendors that make sense for your company. It is your responsibility to look out for your interests, theirs to look out for theirs! Develop vendor compliance and charge back policies to enforce compliance.
7. Negotiate terms
Arrange and pay 2%10Net60 with all domestic vendors.
8. Provide limitless access to information systems
Inventory Control Buyers must have laptops and VPN access to all tools. Pays for itself quickly and frequently.
9. Invest in systems
Provide Inventory Control Buyers easy, efficient, accurate, and timely access to data. Ongoing training, report requests, modification requests should be a management priority. This group spends more money than any other. Support them!
10. Invest in inventory control staff
The Inventory Control Department manages the largest balance sheet asset in the company. Hire and retain strong people, provide them tools, have high expectations of them, then reward their solid performance well. Should you have a different organizational structure?
11. Consistent forecasting philosophy
Be sure all categories and SKUs are forecast using consistent methodology that fits your organization. Challenge it often.
12. Review, recite, retain key data
IC Buyers MUST know their category and vendor inventory levels, turns, SKU count, and GM $ and %. More importantly, understand the impact of their actions to these metrics and to the business.
13. Clear a day’s-work-in-a-day
Ensure timely and accurate data across the organization by demanding all receipts, put away, invoices, PO acknowledgments, orders, (all business transactions) are posted daily.
14. Renegotiate (always)
New PO’s for in-season replenishment of items selling over forecast are due better costs. Ask early and assertively for RTV and/or mark down money for poor performers.
Is your company aggressive enough in identifying potential overstocks and putting them into one of 15 different methods used in multichannel companies? Reduce slow selling stock as close to in-season as possible to gain a higher cost recovery.
16. Inbound freight
Have a qualified consultant perform a freight audit to see what additional savings can be gained. Join a freight consortium to maximize savings.
Imported products now represent 50% to 70% of all products in many companies and they give a considerably higher initial mark up and maintained margin. Is your staff managing this inventory effectively? They require longer lead times and higher vendor minimums, which can lead to higher inventories and slower turnover.
1. Project planning
Proper project planning and the appropriate staffing to support large complex implementation is one of the most critical aspects to reducing unnecessary risks, delivering the application on time and within the budget. A qualified consultant can either project manage or assist your staff in this critical activity.
2. Post implementation audit
At conversion, companies typically use 25% to 35% of a new system’s function effectively. Audit the implementation 30 to 60 days after conversion to evaluate what the software vendor still has not delivered; audit your staff’s responsibilities; itemize how additional training can improve system use; what additional functionality should be scheduled for implementation, what data conversion problems still exist, etc.
3. Return on investment
Understanding how applications will achieve an acceptable ROI will assist with the justification of new applications. Measure the expected or planned ROI against the actual ROI for both savings and intangible (soft) benefits.
4. Enhanced management reporting
By developing more targeted reports of key metrics and benchmarks, management will be able to stay in touch with what’s happening across the enterprise. Develop key performance indicators (KPIs), corporate dashboards and effective reporting for each function or department.
5. Enhanced systems integration
By developing more detailed integrations, manual processes and lack of data between systems can be eliminated, thus reducing errors and bottlenecks and decreasing expenses. Enhanced systems integration will also decrease the need for redundant data between applications.
6. Get more from your computer application
There is always personnel turnover, or companies lose key users of applications. Identify departments and individuals that can benefit from additional training. This will allow you to set up educational programs to address their needs and the company gets improved productivity and analysis.
7. Single source of data
This goes hand in hand with enhanced systems integrations. By reducing the number of times data has to be replicated in various systems, companies can reduce overhead and the potential for errors in redundant data.
8. Contract programmers
Where applicable, this can help reduce the costs of critical enhancements to applications. It can be difficult to find qualified people to hire, in which case, contracting with IT/programming professionals can be more cost effective then attempting to hire programmers.
9. Software As A Service (SAAS)
SAAS models can allow companies to reduce the initial investment necessary to implement and maintain applications. By not having to invest in hardware or staffing to maintain an application, companies can reduce their IT expenses. Typical SAAS models place the responsibility of hardware and software maintenance and upgrades with the vendor, reducing staff and expenses. A company only owns usage rights while contracted and does not own licensing rights to the product.
Multichannel businesses have the option to outsource the hardware with various companies in order to reduce staffing and maintenance related expenses. Companies can choose to outsource their existing hardware or shift their applications to new hardware at the outsourcing facility.
11. Use of consultants for development
Using outside consultants and programmers for application development can reduce long term expenses. In addition, outsourcing programming and application development can reduce the need for recruitment and retention of qualified programmers.