Friday, November 28, 2014

Inventory Management Techniques and Their Importance



Inventory Management Techniques and Their Importance

An inventory is a warehouse or storage location where a business maintains stocks of its products so that it can ensure swift delivery of those products on the order. With the ever increasing demand in products, more and more management practices have evolved to ease the process of product procurement by the customer. Highly efficient delivery systems and supply chains are developed to ensure efficient delivery of the products to their consumers. In the current scenario when customer satisfaction and service have become a prime reason for a business to stand apart from its competition, the need for effective inventory management is largely seen more as a necessity than a mere trend. Project management is a field of management that deals with the effective management of various types of projects. To understand the various inventory management techniques it is crucial to know why it is important.
  • First, a mismanaged inventory can lead to an unnecessary increase in the working capital. The excess funds could have been fruitfully directed to fuel the company’s growth initiatives or research and development efforts.
  • Second, effective inventory management would lead to low storage costs, which will in turn lead to an increase in the company’s profits. Storage space is expensive; if you are able to manage your inventory well and able to reduce the amount of goods that you need to store, then you will require less space, which will in turn lead to low warehouse rental costs.
  • Third, it can help you satisfy your customers by providing them with the products they need in the swiftest manner. Poor inventory management leads to lower availability of goods and higher delivery time. Hence, if you want to gain those service satisfaction stars, you need to manage your inventory well.
  • Fourth, goods stored in inventory over a long period may spoil. This leads to unnecessary overheads in operating a business. Hence, proper inventory management can help you reduce those costs greatly.
  • Fifth, if you have inventories scattered in various locations, you need a proper system to manage those inventories on the basis of demand and supply. Inventory management techniques can help you go a long way in managing multiple inventories.
Various businesses have employed the basic inventory management techniques or inventory control methods to keep their inventory costs in check. Inventory management has become an intrinsic part of supply chain management. There are various methods that an organization may use to manage its inventory:

Just in Time (JIT)

 As the name suggests, the JIT inventory management technique says that the item will be ordered only if it is needed for shipping or manufacturing. The item may be ordered a few days back depending on the delivery time promised by the supplier. A mandatory requirement of this approach is the proper identification of each item before the manufacturer or reseller requires it. Since, there can be many goods required by supplier or manufacturer at any time, each and every future requirement should be properly identified and timely ordered.

Another crucial requirement for this technique is the timely delivery of the order by the supplier. Since the item is ordered just before it is needed, any delay in the arrival of the item may delay the whole production process; this may be treated as a drawback in the approach. The JIT inventory management technique helps reduce the size of the inventory and leads to low storage costs. Although, early identification and order of all items required in the future should always be there to make this approach effective. Early identification of risks is also a prime concern in managing a business properly;
 There are several components to JIT that deserve mention in the text:
  • Production in Small Lots: The philosophy encourages production in smaller lots rather than bulk production. Bulk production takes much time, whereas smaller lots need less storage space and less manufacturing time than large lots.
  • Short Business Setup Time: If a business agrees to produce in small lots, it will require less time for setup. Since, the production is less, little inventory space is needed which leads to lower costs.
  • High Quality in Delivery: Since, the goods are produced in smaller lots and as-and-when they are needed. Businesses can ensure high quality standards by inspecting each and every one of their products. Quality control is very difficult in case of bulk productions, which may make it very difficult to inspect each and every product after arrival in the warehouse or manufacturing. That is why JIT inventory management systems are very efficient in maintaining high quality standards in their inventory.
  • Excellent Preventative Maintenance: JIT approach makes it possible for the application of an excellent preventative maintenance strategy. Since, business downtimes can lead to irreparable losses, JIT is essential to maintain a good inventory management system.
  • Commitment of Supplier on Timely Delivery: Since JIT is highly dependent on the close cooperation and close coordination between suppliers and the procurers, each and every supplier should be committed to making deliveries on time. Since untimely delivery of orders can lead to delayed production or low customer satisfaction, a level of commitment is necessary for the suppliers to make timely deliveries.
  • Employees with a Flexible Attitude: The employees of the business should be able to respond proactively to the changing business scenarios. Flexible attitude of employees is essential to make the JIT approach beneficial for business.

 Accurate Response

The inventory management approach of accurate response is an excellent mechanism that helps businesses manages their inventory, which may get overloaded due to improper forecasts. Businesses greatly manage their inventory on the basis of future demand predictions. It has become increasingly important for these forecasts to be accurate for a business to keep itself alive in the cut-throat competition. Since more and more companies have come up with sophisticated inventory management systems that give accurate forecasts on product demands, the need for accurate response is highly needed.
Bad forecasts lead to businesses storing huge amount of inventory due to expected future demands. This leads to many storage costs and bad management of inventory. With the accurate response inventory management practice, one can reduce the unpredictability in the markets by making more accurate predictions. The underlying principle in making an accurate response strategy is identifying the products for which demand can be forecast. Then the product whose demand can’t be predicted is kept away from the predictable products.
The accurate response method helps businesses better manage and predict their inventory. First, all the items that were not available and lead to a drop of sales are incorporated in the total costs so that these products are available for maintaining customers. Second, products are classified as predictable and unpredictable so that proper inventory stock can be maintained for the predictable products.  The various benefits of the accurate response inventory management techniques are:
  • Delivery Success: By maintaining an inventory of the predictable products, businesses can ensure successful delivery of products that would otherwise have resulted in a loss of sales. An inventory of predictable products can be maintained for the future to ensure swift delivery and unpredictable products can be kept on a deliver-on-order basis. This helps in reducing inventory storage, delivering products proactively, and reducing costs.
  • Lower Costs: Inaccurate forecasts can lead to an increase in the price of goods stored because retailers, wholesalers and distributors incorporate the overheads incurred due to storage of these products into product costs. Accurate response can prevent this and help the sellers lower the cost of such products and gain a competitive advantage.

Dropshipping

The method involves a seller making a dropshipping contract with another company. The best part of the technique is that there is no need to bear the cost of inventory; the seller can directly transfer the order to a dropshipping company, which will then take the responsibility of delivering the item to the customer. The seller receives a certain percentage of the sales that he can make. The downside to this method is that the seller does not have any control over the shipping of the item and cannot cross check the quality of the shipment.

Procuring Bulk Shipments

This is an age-old method of managing inventories; the method relies on the principle that if you purchase goods in bulk, you are able to procure them in much lower costs. The method can only be employed if a business is sure that he will be able to sell that product. If a product is in high demand then you should consider using this inventory management technique which is sure to save you much money.
Apart from these practices there are many techniques that will help you manage your inventory. As businesses are becoming more competitive, more and more inventory management practices have come into the light. However, there are a certain pointers that should always be kept in mind if you really want to successfully manage your inventory:
  • Do not maintain too much inventory in your warehouse. If a certain quantity of product is needed after a year, do not go forth and unnecessarily bear its storage costs for one whole year. Make use of the different accurate forecasting methods to help you efficiently procure the goods in a timely manner before demand escalates.
  • Make sure that you track your inventory items properly. Using bar codes and inventory tracking software you need to make sure that there are no counting errors that were incurred while accessing an inventory. Inaccurate tracking can lead to a false promise to customers, who will give you a difficult time if you are not able to fulfill your promise of delivering the order on time.
  • Order products on the basis of priorities. The products that are in most demand should be ordered first and so forth. If you keep on randomly storing products in your inventory, then you will unnecessarily incur huge storage costs.
  • You should always use proper inventory management software to manage your inventory. Even if you own a small business, you will need to have the proper software with data backup modules to help you manage inventory efficiently.
  • You should always have a backup plan in case of system failures. Also, you should backup your inventory data into remote systems so that there is no accidental loss of inventory data. A good backup plan can go a long way in making your inventory management more efficient process.
In a nutshell, inventory management will lead to low storage costs, ample usage of funds and timely delivery to customers. The various approaches to inventory management may depend on the requirements of the business.

Know more....
 
Top Ten Ways to Manage Inventory 

Inventory management is a system used to oversee the flow of products and services in and out of an organization. A company may decide to incorporate one key inventory management technique or combine a variety of techniques to meet organizational needs. Businesses utilize inventory management strategies to create invoices and purchase orders, generate receipts and control inventory-related accounting.

Supplier Assistance

An effective way to manage inventory is to solicit the help of suppliers. Supplier-managed inventory gives the vendor access to the distributor's inventory data. The supplier generates purchase orders based on the distributor's needs. Distribution-intensive companies utilize vendor managed inventory controls to eliminate data-entry errors and to effectively manage the timing of purchase orders.

Inventory Control Personnel

An efficient method for managing inventory is to hire a dedicated inventory control specialist. Inventory specialists manage all merchandise items that are on hand and in transit. They also perform adjustments, manage returns, validate received merchandise and implement inventory reporting strategies

Lead Time

Lead time is the amount of time it takes to reorder inventory. Suppliers deliver products at varying times after an order is placed. A useful way to manage inventory is to establish lead time reports to understand how long it takes to replenish your inventory.

Monitor Inventory Levels

Having high levels of inventory adds to expenses and increases overhead costs. An effective way to manage inventory is to determine the inventory demands of the business. Limit seasonal inventory and cut back on inventory that does not sell.

Customer Delivery

An effective way to manage inventory is to measure inventory turnover and delivery turnaround time. This involves measuring how often your inventory sells and how long it takes to get into the hands of your customers.

Inventory Consultant

Many organizations hire inventory consultants outside the company to develop and manage internal inventory systems. Inventory consultants are responsible for maintaining accuracy, cycle counting, shipping and receiving, and managing order-picking operations.

Purchase Software

Many businesses manage inventory by designing an inventory management database or purchasing inventory management software. Inventory management software enables distributors to customize the database to fit their individual needs.

Product Turnaround

All businesses have products that sell and products that sit on the shelves. A helpful way to manage inventory is to establish a system that pinpoints which products move quickly and which products take more time to sell.

Tracking System

Many businesses develop a tracking system to manage inventory and monitor turnaround times. Inventory tracking system formats range from spreadsheets to computer programs. They provide complete inventory control allowing business owners to organize item levels and take cycle counts in distribution centers or stock rooms.

Work in Progress

Businesses successfully manage inventory by tracking units as they move through different operational stages. Many businesses utilize some inventory to create other products. Establishing a system to track "work-in-progress" materials allows businesses to adjust order amounts before the inventory gets too low and slows production

Thursday, November 27, 2014

Material Requirements planning system - MRP


Material Requirements Planning (MRP) is a computer-based production planning and inventory control system. MRP is concerned with both production scheduling and inventory control. It is a material control system that attempts to keep adequate inventory levels to assure that required materials are available when needed. MRP is applicable in situations of multiple items with complex bills of materials. MRP is not useful for job shops or for continuous processes that are tightly linked.

The major objectives of an MRP system are to simultaneously:

1.    Ensure the availability of materials, components, and products for planned production and for customer delivery
2.    Maintain the lowest possible level of inventory,
3.    Plan manufacturing activities, delivery schedules, and purchasing activities.

MRP is especially suited to manufacturing settings where the demand of many of the components and subassemblies depend on the demands of items that face external demands. Demand for end items is independent. In contrast, demand for components used to manufacture end items depend on the demands for the end items. The distinctions between independent and dependent demands are important in classifying inventory items and in developing systems to manage items within each demand classification. MRP systems were developed to cope better with dependent demand items.

The three major inputs of an MRP system are the
a.    master production schedule,
b.    the product structure records, and
c.    the inventory status records

Without these basic inputs the MRP system cannot function. The demand for end items is scheduled over a number of time periods and recorded on a master production schedule (MPS). The master production schedule expresses how much of each item is wanted and when it is wanted. The MPS is developed from forecasts and firm customer orders for end items, safety stock requirements, and internal orders. MRP takes the master schedule for end items and translates it into individual time-phased component requirements.

The product structure records, also known as bill of material records (BOM), contain information on every item or assembly required to produce end items. Information on each item, such as part number, description, quantity per assembly, next higher assembly, lead times, and quantity per end item, must be available.

The inventory status records contain the status of all items in inventory, including on hand inventory and scheduled receipts. These records must be kept up to date, with each receipt, dis-bursement, or withdrawal documented to maintain record integrity.
MRP will determine from the master production schedule and the product structure records the gross component requirements; the gross component requirements will be reduced by the available inventory as indicated in the inventory status records





Material requirements planning (MRP) is a computer-based inventory management system designed to assist production managers in scheduling and placing orders for items of dependent demand. Dependent demand items are components of finished goods—such as raw materials, component parts, and subassemblies—for which the amount of inventory needed depends on the level of production of the final product. For example, in a plant that manufactured bicycles, dependent demand inventory items might include aluminum, tires, seats, and bike chains.
The first MRP systems of inventory management evolved in the 1940s and 1950s. They used mainframe computers to explode information from a bill of materials for a certain finished product into a production and purchasing plan for components. Before long, MRP was expanded to include information feedback loops so that production personnel could change and update the inputs into the system as needed. The next generation of MRP, known as manufacturing resources planning or MRP II, also incorporated marketing, finance, accounting, engineering, and human resources aspects into the planning process. A related concept that expands on MRP is enterprise resources planning (ERP), which uses computer technology to link the various functional areas across an entire business enterprise.
MRP works backward from a production plan for finished goods to develop requirements for components and raw materials. MRP begins with a schedule for finished goods that is converted into a schedule of requirements for the subassemblies, the component parts, and the raw materials needed to produce the final product within the established schedule. MRP is designed to answer three questions: what is needed? how much is needed? and when is it needed?"
MRP breaks down inventory requirements into planning periods so that production can be completed in a timely manner while inventory levels—and related carrying costs—are kept to a minimum. Implemented and used properly, it can help production managers plan for capacity needs and allocate production time. But MRP systems can be time consuming and costly to implement, which may put them out of range for some small businesses. In addition, the information that comes out of an MRP system is only as good as the information that goes into it. Companies must maintain current and accurate bills of materials, part numbers, and inventory records if they are to realize the potential benefits of MRP.

MRP INPUTS

The information input into MRP systems comes from three main sources: a bill of materials, a master schedule, and an inventory records file. The bill of materials is a listing of all the raw materials, component parts, subassemblies, and assemblies required to produce one unit of a specific finished product. Each different product made by a given manufacturer will have its own separate bill of materials. The bill of materials is arranged in a hierarchy, so that managers can see what materials are needed to complete each level of production. MRP uses the bill of materials to determine the quantity of each component that is needed to produce a certain number of finished products. From this quantity, the system subtracts the quantity of that item already in inventory to determine order requirements.
The master schedule outlines the anticipated production activities of the plant. Developed using both internal forecasts and external orders, it states the quantity of each product that will be manufactured and the time frame in which they will be needed. The master schedule separates the planning horizon into time "buckets," which are usually calendar weeks. The schedule must cover a time frame long enough to produce the final product. This total production time is equal to the sum of the lead times of all the related fabrication and assembly operations. It is important to note that master schedules are often generated according to demand and without regard to capacity. An MRP system cannot tell in advance if a schedule is not feasible, so managers may have to run several possibilities through the system before they find one that works.
The inventory records file provides an accounting of how much inventory is already on hand or on order, and thus should be subtracted from the material requirements. The inventory records file is used to track information on the status of each item by time period. This includes gross requirements, scheduled receipts, and the expected amount on hand. It includes other details for each item as well, like the supplier, the lead-time, and the lot size.

MRP PROCESSING

Using information culled from the bill of materials, master schedule, and inventory records file, an MRP system determines the net requirements for raw materials, component parts, and subassemblies for each period on the planning horizon. MRP processing first determines gross material requirements, then subtracts out the inventory on hand and adds back in the safety stock in order to compute the net requirements.
The main outputs from MRP include three primary reports and three secondary reports. The primary reports consist of: planned order schedules, which outline the quantity and timing of future material orders; order releases, which authorize orders to be made; and changes to planned orders, which might include cancellations or revisions of the quantity or time frame. The secondary reports generated by MRP include: performance control reports, which are used to track problems like missed delivery dates and stock outs in order to evaluate system performance; planning reports, which can be used in forecasting future inventory requirements; and exception reports, which call managers' attention to major problems like late orders or excessive scrap rates.
Although working backward from the production plan for a finished product to determine the requirements for components may seem like a simple process, it can actually be extremely complicated, especially when some raw materials or parts are used in a number of different products. Frequent changes in product design, order quantities, or production schedule also complicate matters. The importance of computer power is evident when one considers the number of materials schedules that must be tracked.

BENEFITS AND DRAWBACKS OF MRP

MRP systems offer a number of potential benefits to manufacturing firms. Some of the main benefits include helping production managers to minimize inventory levels and the associated carrying costs, track material requirements, determine the most economical lot sizes for orders, compute quantities needed as safety stock, allocate production time among various products, and plan for future capacity needs. The information generated by MRP systems is useful in other areas as well. There is a large range of people in a manufacturing company that may find the use of information provided by an MRP system very helpful. Production planners are obvious users of MRP, as are production managers, who must balance workloads across departments and make decisions about scheduling work. Plant foremen, responsible for issuing work orders and maintaining production schedules, also rely heavily on MRP output. Other users include customer service representatives, who need to be able to provide projected delivery dates, purchasing managers, and inventory managers.
MRP systems also have several potential drawbacks. First, MRP relies upon accurate input information. If a small business has not maintained good inventory records or has not updated its bills of materials with all relevant changes, it may encounter serious problems with the outputs of its MRP system. The problems could range from missing parts and excessive order quantities to schedule delays and missed delivery dates. At a minimum, an MRP system must have an accurate master production schedule, good lead-time estimates, and current inventory records in order to function effectively and produce useful information.
Another potential drawback associated with MRP is that the systems can be difficult, time consuming, and costly to implement. Many businesses encounter resistance from employees when they try to implement MRP. For example, employees who once got by with sloppy record keeping may resent the discipline MRP requires. Or departments that became accustomed to hoarding parts in case of inventory shortages might find it difficult to trust the system and let go of that habit.
The key to making MRP implementation work is to provide training and education for all affected employees. It is important early on to identify the key personnel whose power base will be affected by a new MRP system. These people must be among the first to be convinced of the merits of the new system so that they may buy into the plan. Key personnel must be convinced that they personally will be better served by the new system than by any alternate system. One way to improve employee acceptance of MRP systems is to adjust reward systems to reflect production and inventory management goals.

MRP II

In the 1980s, MRP technology was expanded to create a new approach called manufacturing resources planning, or MRP II. "The techniques developed in MRP to provide valid production schedules proved so successful that organizations became aware that with valid schedules other resources could be better planned and controlled," Gordon Minty noted in his book Production Planning and Controlling. "The areas of marketing, finance, and personnel were affected by the improvement in customer delivery commitments, cash flow projections, and personnel management projections."
Minty went on to explain that MRP II "has not replaced MRP, nor is it an improved version of it. Rather, it represents an effort to expand the scope of production resource planning and to involve other functional areas of the firm in the planning process," such as marketing, finance, engineering, purchasing, and human resources. MRP II differs from MRP in that all of these functional areas have input into the master production schedule. From that point, MRP is used to generate material requirements and help production managers plan capacity. MRP II systems often include simulation capabilities so managers can evaluate various options





Wednesday, November 26, 2014

ABC Classification / Analysis of Inventory




The ABC classification process is an analysis of a range of objects, such as finished products ,items lying in inventory or customers into three categories. It's a system of categorization, with similarities to Pareto analysis, and the method usually categorizes inventory into three classes with each class having a different management control associated : 

A - outstandingly important; B - of average importance; C - relatively unimportant as a basis for a control scheme. Each category can and sometimes should be handled in a different way, with more attention being devoted to category A, less to B, and still less to C.

Popularly known as the "80/20" rule ABC concept is applied to inventory management as a rule-of-thumb. It says that about 80% of the Rupee value, consumption wise, of an inventory remains in about 20% of the items.

This rule , in general , applies well and is frequently used by inventory managers to put their efforts where greatest benefits , in terms of cost reduction as well as maintaining a 
smooth availability of stock, are attained.

The ABC concept is derived from the Pareto's 80/20 rule curve. It is also known as the 80-20 concept. Here, Rupee / Dollar value of each individual inventory item is calculated on annual consumption basis.

Thus, applied in the context of inventory, it's a determination of the relative ratios between the number of items and the currency value of the items purchased / consumed on a repetitive basis :
  • 10-20% of the items ('A' class) account for 70-80% of the consumption
  • the next 15-25% ('B' class) account for 10-20% of the consumption and
  • the balance 65-75% ('C' class) account for 5-10% of the consumption

'A' class items are closely monitored because of the value involved (70-80% !).


High value (A), Low value (C) , intermediary value (B)
 
  • 20% of the items account for 80% of total inventory consumption value (Qty consumed X unit rate)
  • Specific items on which efforts can be concentrated profitably
  • Provides a sound basis on which to allocate funds and time
  • A,B & C , all have a purchasing / storage policy - "A", most critically reviewed , "B" little less while "C" still less with greater results.
ABC Analysis is the basis for material management processes and helps define how stock is managed. It can form the basis of various activity including leading plans on alternative stocking arrangements (consignment stock), reorder calculations and can help determine at what intervals inventory checks are carried out (for example A class items may be required to be checked more frequently than c class stores

Inventory Control Application:
The ABC classification system is to grouping items according to annual issue value, (in terms of money), in an attempt to identify the small number of items that will account for most of the issue value and that are the most important ones to control for effective inventory management. The emphasis is on putting effort where it will have the most effect.

All the items of inventories are put in three categories, as below :

A Items : These Items are seen to be of high Rupee consumption volume. "A" items usually include 10-20% of all inventory items, and account for 50-60% of the total Rupee consumption volume.

B Items : "B" items are those that are 30-40% of all inventory items, and account for 30-40% of the total Rupee consumption volume of the inventory. These are important, but not critical, and don't  pose sourcing difficulties.

C Items : "C" items account for 40-50% of all inventory items, but only 5-10% of the total  

Rupee consumption volume. Characteristically, these are standard, low-cost and readily available items. ABC classifications allow the inventory manager to assign priorities for inventory control. Strict control needs to be kept on A and B items, with preferably low safety stock level. Taking a lenient view, the C class items can be maintained with looser control and  with high safety stock level. The ABC concept puts emphasis on the fact  that every item of inventory is critical and has the potential of affecting ,adversely, production, or sales to a customer or operations. The categorization helps in better  control on A and B items.

In addition to other management procedures, ABC classifications can be used to design cycle counting schemes. For example, A items may be counted 3 times per year, B items 1 to 2 times, and C items only once, or not at all

Suggested policy guidelines for A , B & C classes of items
A items (High cons. Val)        B items (Moderate cons.Val)          C item (Low cons. Val)

Very strict cons. control    
Moderate control
Loose control
No or very low safety stock
Low safety stock
High safety stock
Phased delivery (Weekly)
Once in three months
Once in 6 months
Weekly control report
Monthly control report
Quarterly report
Maximum follow up
Periodic follow up
Exceptional
As many sources as possible
Two or more reliable
Two reliable
Accurate forecasts
Estimates on past data
Rough estimate
Central purchasing /storage
Combination purchasing
Decentralised
Max.efforts to control LT
Moderate
Min.clerical efforts
To be handled by Sr.officers
Middle level 
Can be delegated



 
 



 
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