Tuesday, February 7, 2012

Overview of Inventory Management

Need for Inventory Management:
In order to be in business want to have stocks meeting the demands exactly. Not too extra and not less. Manufacturers need to stock their raw materials in order to manufacture the products. Running out of one item may hinder the process of the manufacturing the goods. If a supplier is not able to supply the required goods on demands, the firms needs to keep an inventory of the goods in demand considering the lead time. For example, A just-in-time manufacturing firm, like Nissan in Smyma, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times a day. Whereas, steel mills may have lead time of up to 2-3 months. Thus, the company dependent on the steel supply needs to place orders at least three months in advance and also have stocks of three months steel requirements in the inventory. Inventory can be used as hedge against the price rise or inflation. Salesman call the purchasing agents just before the price increase is effective. This gives the buyer a chance to buy the products in excess than the need, but at a rate lower than it could have been if he waited. Often firms are offered with high discounts on large orders purchased. If the discount is sufficient to offset the extra holding cost incurred as a result of excess inventory, then the decision to buy large quantities is justified. Sustenance of large inventories helps the firms in reducing the set up cost associated with the production run. Consider an hypothetical example, if the set up cost is $300 and run produces 300 units the cost per unit reduces to $0.10.
There are different types of Inventory:
1. Transit Inventory/Pipeline Inventory:
The transit inventory arises due to the need to transport raw materials and goods from one location to the other. Sometimes, large automobile manufacturers use cargo's for shipping. For, example, for BP the transports are done from refinery to customer through different modes i.e Pipelines, Roadways(tankers), shipping. The time taken for the goods to reach the customer are known as transit times.
2. Buffer Inventory:
Inventory is sometimes used to protect against the uncertainties of supply and demand. Also, poor delivery reliability or poor quality of a suppliers products. These inventory cushions are referred t as safety stocks. The higher the level of buffer inventory the firms serve the customers better as there will be less stock-outs.
3. Anticipation Inventory:
Sometimes, firms purchase and hold the inventory which is in excess of their current needs in anticipation of the future events. These future events may include price increase, a seasonal increase in demand, or even an impending labor strike. Such tactics are commonly used by retailers, who routinely build up the inventory months in advance of the demand for their products will be unusually high (i.e., at Halloween, Christmas, etc). This enables the retailers to balance their stock resources under such events.

All this seems to be little complex. To make it easy, RFID and EPC technologies are being developed. RFID reduces the need of labor intensive inventory counts and EPC provides unique identification number corresponding to specific items. Click here for the detail explanation about these technologies development.

Inventory management is a costly affair and it has various costs associated with it, like the acquisation cost, maintenance cost, etc.

Cost Effective Inventory Management:
Following are the few ways by which we can have cost effective Inventory Management:
1. Control order transaction costs
2. Lower inventory holding costs
3. Use Routine Demand Forecasting.
4. Forecast Events.
5. Reduce lead time for product acquisitions.
6.Purchase minimum
7. Get demand plans from downstream.
8. Send demand plans upstream.
9. Keep in stock, but not everywhere.
10. Take advantages of price/quantity breaks.
11. Consider liquidation

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