You are on page 1of 5

INVENTORY MANAGEMENT

INTRODUCTION
DEFINATION AND MEANING
Inventory is a list of goods and materials, or those goods and materials
themselves, held available in stock by a business. Inventory are held in order to
manage and hide from the customer the fact that manufacture/supply delay is
longer than delivery delay, and also to ease the effect of imperfections In the
manufacturing process that lower production efficiencies if production capacity
stands idle for lack of materials.
Inventory management is primarily about specifying the size and placement of
stocked goods. Inventory management is required at different locations within a
facility or within multiple locations of a supply network to protect the regular and
planned course of production against the random disturbance of the scope of
inventory management also concerns the fine lines between replenishment lead
time, carrying costs of inventory, asset management, inventory forecasting,
inventory valuation, inventory visibility, future inventory price forecasting,
physical inventory, available physical space for inventory, quality management,
replenishment, returns and defective goods and demand forecasting and also by
replenishment Or can be defined as the left out stock of any item used in an
organization. running out of materials or goods.
Any organization which is into production, trading, sale and service of a product
will necessarily hold stock of various physical resources to aid in future
consumption and sale. While inventory is a necessary evil of any such business,
it may be noted that the organizations hold inventories for various reasons,
which include speculative purposes, functional purposes, physical necessities
etc.
From the above definition the following points stand out with reference to
inventory:

All organizations engaged in production or sale of products hold inventory


in one form or other.

Inventory can be in complete state or incomplete state.

Inventory is held to facilitate future consumption, sale or further


processing/value addition.

All inventoried resources have economic value and can be considered as


assets of the organization.

A component of supply chain management, inventory management supervises


the flow of goods from manufacturers to warehouses and from these facilities to
point of sale. A key function of inventory management is to keep a detailed
record of each new or returned product as it enters or leaves a warehouse or
point of sale.

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 programmes 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 utilisation 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 sub-process. 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
within evitable consequences.

The basis of Inventory accounting


Inventory needs to be accounted where it is held across accounting period
boundaries since generally expenses should be matched against the results of
that expense within the same period. When processes were simple and short
then inventories were small but with more complex processes then inventories
became larger and significant valued items on the balance sheet. This need to
value unsold and incomplete goods has driven much new behaviour into
management practise. Perhaps most significant of these are the complexities of
fixed
cost recovery, transfer pricing, and the separation of direct from indirect costs.
This, supposedly, precluded "anticipating income" or "declaring dividends out of
capital". It is one of the intangible benefits of Lean and the TPS that process
times shorten and stock levels decline to the point where the importance of this
activity is hugely reduced and therefore effort, especially managerial, to achieve
it can be minimised.

LIFO V/S FIFO


When a dealer sells goods from inventory, the value of the inventory reduces by
the cost of goods sold (Cog sold). This is simple where the Cog has not varied
across those held in stock but where it has then an agreed method must be
derived. For commodity items that one cannot track individually, accountants
must choose a method that fits the nature of the sale. Two popular methods exist
: FIFO and LIFO accounting (first in - first out, last in - first out). FIFO regards the
first unit that arrived in inventory the first one sold. LIFO considers the last unit
arriving in inventory as the first one sold. Which method an accountant selects
can have a significant effect on net income and book value and, in turn, on
taxation. Using LIFO accounting for inventory, a company generally report slower
net income and lower book value due to the effects of inflation. This generally
results in lower taxation. Due to LIFO's potential to skew inventory value, UK
GAAP and IAS have effectively banned LIFO inventory accounting.

SUPPLY CHAIN MANAGEMENT


A supply chain is a network of facilities and distribution options that performs the
functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished
products to customers. Supply chains exist in both service and manufacturing
organizations, although the complexity of the chain may vary greatly from
industry to industry and firm to firm. Supply chain management is typically
viewed to lie between fully vertically integrated firms, where the entire material

flow is owned by a single firm and those where each channel member operates
independently. Therefore coordination between the various players in the chain is
key in its effective management. Cooper and Ell ram [1993] compare supply
chain management to a well-balanced and well-practiced relay team. Such a
team is more competitive when each player knows how to be positioned for the
hand-off. The relationships are the strongest between players who directly pass
the baton (stick), but the entire team needs to make a coordinated effort to win
the race. Below is an example of a very simple supply chain for a single product,
where raw material is procured from vendors, transformed into finished goods in
a single step, and then transported to distribution centres, and ultimately,
customers .Realistic supply chains have multiple end products with shared
components, facilities and capacities. The flow of materials is not always along
an arborescent network, various modes of transportation may be considered,
and the bill of materials for the end items may be both deep and large.
To simplify the concept, supply chain management can be defined as a loop: it
starts with the customer and ends with the customer. All materials, finished
products, information, and even all transactions flow through the loop. However,
supply chain management can be a very difficult task because in the reality, the
supply chain is a complex and dynamic network of facilities and organizations
with different, conflicting objectives.
Supply chains exist in both service and manufacturing organizations, although
the complexity of the chain may vary greatly from industry to industry and firm
to firm.

Unlike commercial manufacturing supplies, services such as clinical supplies


planning are very dynamic and can often have last minute changes. Availability
of patient kit when patient arrives at investigator site is very important for
clinical trial success. This results in overproduction of drug products to take care
of last minute change in demand. R&D manufacturing is very expensive and
overproduction of patient kits adds significant cost to the total cost of clinical
trials. An integrated supply chain can reduce the overproduction of drug products
by efficient demand management, planning, and inventory management.
Traditionally, marketing, distribution, planning, manufacturing, and the
purchasing organizations along the supply chain operated independently. These
organizations have their own objectives and these are often conflicting.
Marketing's objective of high customer service and maximum sales dollars
conflict with manufacturing and distribution goals. Many manufacturing
operations are designed to maximize throughput and lower costs with little
consideration for the impact on inventory levels and distribution capabilities.
Purchasing contracts are often negotiated with very little information beyond
historical buying patterns. The result of these factors is that there is not a single,
integrated plan for the organization---there were as many plans as businesses.
Clearly, there is a need for a mechanism through which these different functions

can be integrated together. Supply chain management is a strategy through


which such integration can be achieved. Supply Chain Management (SCM) is the
process of planning, implementing, and controlling the operations of the supply
chain with the purpose to satisfy customer requirements as efficiently as
possible. Supply chain managements pans all movement and storage of raw
materials, work-in-process inventory, and finished goods from point-of-origin to
point-of-consumption.

According to the Council of Supply Chain Management


Professionals(CSCMP),
A professional association that developed a definition in 2004, Supply Chain
Management encompasses the planning and management of all activities
involved in sourcing and procurement, conversion, and all logistics management
activities. Importantly, it also includes coordination and collaboration with
channel partners, which can be suppliers ,intermediaries, third-party service
providers, and customers. In essence, Supply Chain Management integrates
supply and demand management within and across companies.

According to Cohen & Lee (1988)


Supply Chain Management is The network of organizations that are having
linkages, both upstream and downstream, indifferent processes and activities
that produces and delivers the value in form of products and services in the
hands of ultimate consumer. Thus a shirt manufacturer is a part of supply chain
that extends up stream through the weaves of fabrics to the spinners and the
manufacturers of fibres, and down stream through distributions and retailers to
the final consumer. Though each of these organizations are dependent on each
other yet traditionally do not closely cooperate with each other. An integrated
supply chain management streamlines processes and increases profitability by
delivering the right product to the right place, at the right time, and at the lowest
possible cost.

According to Ganeshan & Harrison

(2001)
Supply Chain Management is a systems approach to managing the entire flow
of information, materials, and services from raw materials suppliers through
factories and warehouses to the end customer. Supply chain event
management(abbreviated as SCEM) is a consideration of all possible occurring
events and factors that can cause a disruption in a supply chain. With SCEM
possible scenarios can be created and solutions can be planned