Wednesday, September 17, 2014

Inventory System--Managing Risks


From the Bayone Packaging case we can see the importance of having an appropriate inventory management system. The truth is, a manufacturing enterprise’s sustainability requires an efficient inventory management system. Meanwhile, it requires the sufficient risk management to maintain an efficient inventory management system. 














http://www.business-around-the-globe.com/buy_business_cartoons/protected_max2_inventory_risk_control_management_to_maximize_profit_cartoon.html 

To systematically reduce the possibility or prevent these potential problems from happening, we could take the following steps after setting up the inventory management system. (This risk evaluation process could be fulfilled by hiring relating experts or corporate with professional companies.)

  • Identify the risks
Initially, we can look for the hazards, potential risks via checking each procedure in the inventory managing process:
    Purchasing
    Receiving
    Warehousing and storage
    Shipment and delivery
    Invoicing
    Cost accounting
    Perpetual inventory record keeping (1)
In each section, we may start by asking those questions:
    Are operating margins consistent and in an expected range?
    Are there high amounts of obsolete, damaged or spoiled inventory?
    Are inventory quantities shrinking or growing unexpectedly?
    Do perpetual inventory reports agree to the general ledger?
    Are there chronic shortages of inventory items?
    Are amounts received and shipped the same as the amounts ordered?
    Are there unexpected variances between perpetual records and results of physical     inventories?
    …(2)

  • Category the risks
After identifying the potential risks, we may realize that most of these risks actually are nonsystematic risks, which are controllable at some degree. Thus, we are able to seeking for solutions for controlling each risk. To do it in a systematic way, it is feasible to match each risk into different categories, such as long-term/short-term, internal/external, different department/sections, coefficient of difficulties, etc..


                                                                                     https://www.enisa.europa.eu/activities/risk-management/files/images/definitions.jpg


  • Evaluate the risks
Evaluating process could be the most complicated section, which includes numeral/statistical modeling analyses, mainly about the scale of exposure, degree of vulnerability, potential loss estimation, and the probability of occurrence. The purpose is to give out datas to make risks more intuitively clear, addressing the significance of controlling inventory risks.

  • Report the risks and make decisions
A well-made risk evaluation report is needed in getting the acceptances and supports from the senior managers and the enterprise board. The report can be structured in 5 chapters: (3)
    Chapter 1: Briefly write an introduction explaining the objectives and purses, as well as the expected outcomes.
    Chapter 2: Listing the activities deals with the work plan, detailed records and description on identification and inventory process, like workshops, interviews, and so on. 
    Chapter 3: Showing the detailed evaluation about risks, feasible methodologies and tools, data availability and quality, professional expertise and skills, and institutional capacity.
    Chapter 4: Overall Review and current status, issues and challenges, strengths and weaknesses, external support needs and requirements.
    Chapter 5: Recommendations and suggestions as well as its implementation strategy and action plan. 

  • Keep track of the status
It is necessary to examine the appliance and effectiveness of each solution periodically, and see whether we should make some adjustments to manage the risks in adapting to the changing circumstances. 

In managing the risks existing in the inventory system, there are some questions about the implementation too.
  1. Each part of the risk's solution is clear, but how can we create a path/system to run the controlling work smoothly?
  2. What if the first-hand datas are incorrect? Is it necessary set a second examination for the accuracy of datas?
Reference:

(3)http://www.gripweb.org/gripweb/sites/default/files/methodologies_tools/siera_black.pdf

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