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WHAT IS INVENTORY?

Inventory is a quantity or store of goods that is held for some purpose or use (the term may also be used as a verb, meaning to take inventory or to count all goods held in inventory). Inventory may be kept "in-house," meaning on the premises or nearby for immediate use; or it may be held in a distant warehouse or distribution center for future use. With the exception of firms utilizing just-in-time methods, more often than not, the term "inventory" implies a stored quantity of goods that exceeds what is needed for the firm to function at the current time (e.g., within the next few hour 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 running out of materials or goods. 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. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment. Inventory management involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check.

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Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status. Handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle counting support etc. Management of the inventories, with the primary objective of

determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs. See inventory proportionality.

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HISTORY
Venetian Arsenal - ahead of their time

It is hard to decide on the most amazing plant in the history of manufacturing, but one contender is certainly the Venetian Arsenal, the shipbuilding, munitions-making industrial

powerhouse that allowed the tiny city-state of Venice to be a world power for 600 years.

Although the site had been used to maintain ships since perhaps the 8th century, it was in 1320 that the Arsenal became Venice's premier shipbuilding facility. This was a time when most of Europe had no manufacturing more efficient than the guild system, the slow and tradition-bound way craftsmen had of passing on skills to their sons or apprentices while monopolizing production and sale of craft pieces in a given region. Even the craft system was not the rule for Europe - the bulk of goods in those times were still made, not by paid specialists, but by the people who would be using them. The Arsenal was something different, a harbinger of future times.

It often happens that we find what seems to us in hindsight like
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Despite its geographical diminutiveness. Shipbuilding was slower and less efficient even in the seas-oriented states of England and Spain than in Venice. The Arsenal employed 16 000 people. storage containers. cloth. in the buildings around the shipyard. The most famous example is the failure of China to apply gunpowder technology to weapons. It was capable of producing one fully equipped merchant or military vessel per day. Major innovations in manufacturing and were made at the Venetian Arsenal. The records of Christendom's wars against the Turks are full of references to the power and influence of Venice. oars. The Ancient Greek discovery of the steam engine principle. Venice's naval power INVENTORY MANAGEMENT Page 4 .revolutionary innovation in organization or technology largely ignored by its contemporaries. By the 16th century the Arsenal was the most powerful and efficient ships and munitions manufacturer in the world. a state that at this time covered about a fiftieth the land area of France or Spain and a tiny fraction of the land area of the Ottoman Empire. whereas production of similar sized and featured ships elsewhere in Europe took months. and its use to power a toy. but the spread of these innovations throughout Europe would wait until the start of the "Industrial Revolution". weapons and other goods they required often lived close by. rather than instantly copied like we in the modern world have come to expect. comes in second. The employees directly engaged in producing ships and the rope.

and that the success of its navy and army depended on logistics. Anticipating the Elizabethan principle whereby trade was an accessory of diplomacy and diplomacy an accessory of trade (the principle which was later named "mercantilism" by Adam Smith). The naval power of Venice in this period was a result of factors additional to its effective shipbuilding. Venice devoted 10% of its public budget to the mighty Arsenal. Nevertheless. At the Arsenal. and debtors could pay off their obligations by serving as rowers. following which the ship would be INVENTORY MANAGEMENT Page 5 . shipbuilding parts were standardized.enabled it to control the strategic islands of Crete and Cyprus in Ottoman coastal waters. To this end. It maintained a powerful reserve of about 100 warships in the Arsenal docks at all times. Its ships were manned by paid freemen of Venice. The necessary parts were then assembled by another team. To ensure access to necessary raw materials Venice had seized and kept control over passes through the Alps to German lands in the North. and each major component of this early bill of materials was produced by a specialized team of workers. it was Venice's logistical and manufacturing muscle that floated and maintained its powerful navy. not slaves or mercenaries. The Venetian government had all its merchant ships carry arms on board. the Venetian bureaucracy well understood that the city's success depended on its navy and army.

The Words we Use . government-protected access to plentiful raw materials. and assembly-line vertical production. division of labor. At the Arsenal.moved to another part of the workbuildings for furnishing. Eventually even technological research. The managers of the Arsenal closely coordinated their policies and projects with officers of the Venice government. parts. and weapon and ship design were being carried out at the Arsenal. both deriving from the Latin factor. maker. experimentation.the words factory and manufacturing are related. meaning hands. The buildings housing the Arsenal were continually expanded to ensure sufficient space for the ever-growing workforce.to ensure that there is continuity between functions : INVENTORY MANAGEMENT Page 6 . Purpose Management of Inventory INVENTORY MANAGEMENT must tie together the following objectives . Manufacture means to make with the hands from factor and another Latin word. the modern concepts specialized anticipated. meaning doer. were integration That is why it is sometimes called the first factory in the world. and close coordination with the government bureaucracy were the keys to the power of the Arsenal. of standardized work groups. Concentration of every necessary asset at one spot. manus.

ideally it should be zero. Inventory Control . Optimization means INVENTORY MANAGEMENT Page 7 .‡ ‡ ‡ ‡ Company¶s Sales Sales Production & & Materials Strategic Goals Forecasting Operations Requirement Planning Planning. coordinate internal activities and communicate with customers . Inventory Management system provides information to efficiently manage the flow of materials . Inventory Management does not make decisions or manage operations. Traditional Supply Chain solutions such as Materials Requirement Planning . As this is the blocked Working Capital of organization. In some cases it is maintained to take care of increasing price tendency of commodities or rebate in bulk buying. The many changes in the market demand . INVENTORY is defined as the blocked Working Capital of an organization in the form of materials . global sourcing of materials and new manufacturing technology means many companies need to change their Inventory Management approach and change the process for Inventory Control . typically focuses on implementing more rapid and efficient systems to reduce the cost of communicating information between and across the Inventory links in the SCM.COM focuses in optimizing the total investment of materials cost and workload for every Inventory item throughout the chain from procurement of raw materials to finished goods Inventory . effectively utilize people and equipment . This Inventory is maintained to take care of fluctuations in demand and lead time. Inventory Management must be designed to meet the dictates of market place and support the company¶s Strategic Plan . But we are maintaining Inventory . they provide the information to managers who make more accurate and timely decisions to manage their operations. new opportunities due to worldwide marketing .

Inventory level and workload to meet customers service goal for each items in the link of Inventory Chain . Annual Rate Contracts with manufacturers or their authorized dealers .g. but the underlying principles for accomplishing good Inventory Management and Inventory activities have INVENTORY MANAGEMENT Page 8 not changed. the determination of the optimal levels of order quantities and reorder points and setting safety stock levels . Some features of VMI ‡ ‡ Shortening include of Centralized Supply : Chain Forecasting ‡ Frequent communication of inventory. Some of the new approaches and techniques are wrapped in new terminology. the basic principles of Inventory Management and Inventory Control remain the same.providing a balance of supply to meet the demand at a minimum total cost . . These include deployment strategies ( Push versus Pull ) . who maintain Inventory on our behalf and supply the items as and when required . These levels are critical . It is strategic in the sense that top management sets goals . VMI reduces stock-outs and optimize inventory in supply chain . the latest concept of Vendor Managed Inventory is used to optimize the Inventory . since they are primary determinants of customer service levels. items that are expected to stock out have top priority then items that are furthest below targeted stock levels then advance shipments of promotional items Despite the many changes that companies go through. We are entering into Vendor Managed Inventory . Keeping in view all concerns . stock-outs and planned promotions ‡ Trucks are filled in a prioritized order . control policies . e.

backorders and customer lost sales are common. Inventory is usually a distributor¶s largest asset. The material a distributor has committed to stock isn¶t available when customers request it. The company¶s profits. Inventory Management and the activities of Inventory Control do not make decisions or manage operations. Inventory balance information in the distributor¶s expensive computer system does not accurately reflect what is available for sale in the warehouse. they provide the information to Managers who make more accurate and timely decisions to manage their operations. and communicate with customers. considering its substantial investment in inventory. effectively utilize people and equipment. Each of the areas above will need to be addressed in some form or another to have a successful program of Inventory Management and Inventory Control. and what requirements are placed on it due to market demands. ‡ The return on investment is not satisfactory.The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials. is far less than what could be earned if the money were invested elsewhere INVENTORY MANAGEMENT Page 9 . But many distributors aren¶t satisfied with the contribution inventory makes towards the overall success of their business: ‡ The wrong quantities of the wrong items are often found on warehouse shelves. Even though there maybe a lot of surplus inventory and dead stock in their warehouse(s). coordinate internal activities. The emphases on each area will vary depending on the company and how it operates. ‡ Computer inventory records are not accurate.

if not all.Role of inventory accounting By helping the organization to make better decisions. That means making the connections and understanding the relationships between given inputs ± the resources brought to bear ± and the outputs and outcomes that they achieve. So often they are the litmus test by which public confidence in the institution is either won or lost. the accountants can help the public sector to change in a very positive way that delivers increased value for the taxpayer¶s investment. Finance is connected to most. analysis and advice to enable the organizations¶ service managers to operate effectively. It is critical that these foundations are firmly laid. of the key business processes within the organization. Finance should also be providing the information. It should be steering the stewardship and accountability systems that ensure that the organization is conducting its business in an appropriate. by ensuring that success is appropriately recognized in both the formal and informal reward systems of the organization. Inventory Management Techniques Inventory management techniques are used by enterprises to strike an effective balance between inputs and outputs of a given process of INVENTORY MANAGEMENT Page 10 . To say that they have a key role to play is an understatement. how much do we have left to spend? It is about helping the organization to better understand its own performance. It can also help to incentivise progress and to ensure that reforms are sustainable and effective in the long term. ethical manner. It is also about understanding and actively managing risks within the organization and its activities. This goes beyond the traditional preoccupation with budgets ± how much have we spent so far.

The following article covers some effective steps and techniques that can be used by people to properly manage their inventories. Inventory is often the largest priced asset of the business after the fixed assets. Often inventory control methods are mistaken with inventory management methods. Modern inventory management techniques are basically formulas and models that are established by firms on the basis of the need of the raw INVENTORY MANAGEMENT Page 11 . market value the book value of all the stocks. Inventory control also involves the measurement of time element that is required to consume a given volume of raw materials. What are inventory management techniques is a question that is quite commonly asked by businessmen. The two terms are however different and inventory control methods are practical models that help the organization to curb over consumption of a particular item of the inventory. due to the almost synonymous meaning of the terms. Keeping the inventory also means keeping a tab on the realizable value. The inventory management formulas are basically used for the following purposes: y y y Allotment of resources at the right time Minimization of re-order time and cost Maintaining a constant inflow of raw materials The end result is that the combination of inventory management models and inventory control techniques is a smooth inflow of raw materials at a relatively cheap cost and at a perfect timing.production or trade. The inventory of a business is often defined to be a list of all items that are present in the stock of raw materials.

is say 250. It basically means that if your inventory has 1000 unites.C. goes as follows. and your EOQ.O. there are several constraints and problems due to which this model has to modified. Annual Cost Cost Carrying Carrying per per cost % cost of Per requirement order unit CU (AR) (CO) (CU) (CC) unit The answer of the formula is precise level of fall in the stock that indicates a reorder. × C. you should be placing an order for a new stock. ¥ 2. then the moment this stock reaches 250.material and availability of the raw material.U. % Where. Though the economic order and reorder quantity formula is just the basic formula. × C. The given formula is quite complex and there are a considerable number of modifications that can be included. / ¥ C.R. The following are some insights« Types of Inventory Management Techniques The basic equation that is used for the ordering and re-ordering of goods by all firms is economic order quantity.A. The formula of EOQ. Such an order will ensure that the stock arrives on time and the stock is also cheap. The following are some inventory management techniques that are based upon the EOQ. but have some or the other modification as per necessity: INVENTORY MANAGEMENT Page 12 .

Fixed Order Interval Model: The fixed order interval models are used when the supply has to be uniform at uniform intervals. the carrying costs. uniform and has to be set according to the supply denominations. etc.y Fixed Order Quantity Model: The fixed order quantity model is used when the supplier of a raw material is done only in specified denominations such as 10 meters of cloth. The annual requirement is. Here all the costs and annual requirements are uniform. with an occasional rise or fall in ordering costs. In such a situation. 10 kg of stainless steel. such as 10 meters cloth per week. Many companies have also programmed different inventory software that simplify the process even further. Here all time elements of the EOQ are uniform and unchangeable. however. you may read on: y y y y Cost Control Methods Cost Control Management Cost Control Techniques Cost Control Strategies There are countless inventory management models that are formulated by companies for their own requirements. Single Period Models: Single period models are used in cases where the inventory items are of perishable nature. Starts with MIT CTL Partner with the best! INVENTORY MANAGEMENT Page 13 . frequency and amount of ordered material. The key to formulate really good inventory management techniques is to have really good order cost. y y To know more about inventory management techniques and cost control methods. cost per order or even carrying cost per unit are constant.

such as food and flowers. or monthly. The fixed-order-interval model is used when orders have to be placed at fixed time intervals such as weekly.OTHER LOT-SIZING TECHNIQUES There are a number of other lot-sizing techniques available in addition to EOQ. chances are you would walk out with 100 paper clips. and part-period balancing. they come 100 to a box and you cannot purchase a partial box. Unsold or unused goods are not typically carried over from one period to another and INVENTORY MANAGEMENT Page 14 . EOQ is an example of the fixed-order-quantity model since the same quantity is ordered every time an order is placed. This system requires periodic checks of inventory levels and is used by many retail firms such as drug stores and small grocery stores. FIXED-ORDER-INTERVAL MODEL. You were captive to the packaging requirements of paper clips. The lot size is dependent upon how much inventory is needed from the time of order until the next order must be placed (order cycle). It works the same way for other purchasing situations. The single-period model is used in ordering perishables. A firm might also use a fixed-order quantity when it is captive to packaging situations. i. FIXED-ORDER-QUANTITY MODEL.e. If you were to walk into an office supply store and ask to buy 22 paper clips. These include the fixed-order quantity. the single-period model.. fixed-order-interval model. A supplier may package their goods in certain quantities so that their customers must buy that quantity or a multiple of that quantity. such as newspapers. and items with a limited life. biweekly. SINGLE-PERIOD MODEL.

In other words. a two-month lead time and a desired safety stock of two weeks would have reorder point of 250. an order would be placed whenever the inventory level Reorder for that good point reached 250 units. = 100/month × 2 months + 2 weeks' safety stock = 250 Principle of inventory proportionality Purpose INVENTORY MANAGEMENT Page 15 . This model tries to balance the cost of lost customer goodwill and opportunity cost that is incurred from not having enough inventory. utilizing one of the above techniques. can be determined by the rate of demand and the lead time. with the cost of having excess inventory left at the end of a period. PART-PERIOD BALANCING. Part-period balancing attempts to select the number of periods covered by the inventory order that will make total carrying costs as close as possible to the set-up/order cost. or point at which an order should be placed. If safety stock is necessary it would be added to the reorder point quantity. an inventory item with a demand of 100 per month. When a proper lot size has been determined. Reorder point = Expected demand during lead time + Safety stock Thus.there may even be some disposal costs involved. the reorder point.

to the product that just ran out. a much more accurate and optimal outcome. By integrating accurate demand forecasting with inventory management. As opposed to "keep full" systems where a retail consumer would like to see full shelves of the product they are buying so as not to think they are buying something old. The secondary goal of inventory proportionality is inventory minimization. i. and thereby closer to achieving the primary goal. replenishment inventories can be scheduled to arrive just in time to replenish the product destined to run out first.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. while at the same time balancing out the inventory supply of all products to make their inventories more proportional. Applications The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer. The primary optimal outcome is to have the same number of days' (or hours'. there is no "excess inventory.e. unwanted or stale. Excess inventory is sub-optimal because the money spent to obtain it could have been utilized better elsewhere. Accurate demand forecasting also allows the desired inventory proportions to be dynamic by determining expected sales out into the future.Inventory proportionality is the goal of demand-driven inventory management. and differentiated from the "trigger point" systems where product is reordered when it hits a certain level. INVENTORY MANAGEMENT Page 16 . inventory that would be left over of another product when the first product runs out. Integrating demand forecasting into inventory management in this way also allows for the prediction of the "can fit" point when inventory storage is limited on a perproduct basis. etc. In such a case. this allows for inventory to be in proportion to expected short-term sales or consumption rather than to past averages." that is.

Excess inventory is not seen or valued by the consumer. Finally. the product is expensive. Roots The use of inventory proportionality in the United States is thought to have been inspired by Japanese just-in-time (business) parts inventory management made famous by Toyota Motors in the 1980s. manufacturing. Most major oil companies use such systems today. INVENTORY MANAGEMENT Page 17 . so it is simply cash sunk (literally) into the ground. Supply Chain and Inventory Management Total Visibility and Control of Your Supply Chain NetSuite inventory management software offers a complete set of inventory management. Motor fuel (e. and purchasing capabilities that will provide you with integrated supply chain management and control across your entire organization. Inventory proportionality is used to balance the inventories of the different grades of motor fuel. gasoline) is generally stored in underground storage tanks. these storage tanks have a maximum capacity and cannot be overfilled. each stored in dedicated tanks. One early example of inventory proportionality used in a retail application in the United States is for motor fuel. This application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. in proportion to the sales of each grade. The motorists do not know whether they are buying gasoline off the top or bottom of the tank. Additionally. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks. nor need they care.g.inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view.

With NetSuite. With NetSuite. INVENTORY MANAGEMENT Page 18 . supply. real-time view into key supplier. you'll be able to better manage inventory levels and costs²and better meet fulfillment expectations. helping drive and maintain superior customer service levels y Meet your industry's specific inventory management and purchasing needs with easily integrated add-on solutions available from SuiteApp. inventory and procurement indicators. Self-service capabilities for partners. improving customer service. you gain an in-depth. vendors and partners by providing self service and real-time visibility y Effectively and efficiently meet customer demand.NetSuite delivers an end-to-end procure-to-pay process that truly creates competitive advantage. vendors and customers allow you to share supply and demand information²improving collaboration throughout the entire supply chain. turn rates and inventory profitability y Eliminate manual inventory management processes and improve vendor satisfaction with a seamless procure-to-pay process y Significantly improve your relationships with suppliers. costs and fulfillment measures and trends y Manage margins with a clear view into inventory costs. Benefits y Get complete real-time visibility into demand.com.

multi-location inventory. detailed visibility into key inventory control and supply chain management measures.Key Features y Warehouse and Inventory Control o Enjoy real-time. stock on order. including inventory trends. demandbased replenishment. channels and currencies o Gain control over inventory replenishment and ensure that you have enough on hand to fill anticipated orders. and supplier on-time performance o Slash inventory costs by tightening control of stock levels while increasing operational efficiencies o Increase product margins by effectively managing pricing based on different types of customers. landed cost. and more. while keeping excess stock to a minimum o Extensive inventory management software features also include bin and lot management. customer and volume pricing. y Purchasing and Vendor Management o Eliminate inefficiencies throughout your organization with convenient online purchase order creation that allows you to replace paper-based forms and timeconsuming manual processes o Streamline requisition processes and improve collaboration with vendors by giving them self-serve INVENTORY MANAGEMENT Page 19 .

building multi-level assemblies. and seamlessly integrating with back-office operations o Extend the reach system of your NetSuite inventory management with industry manufacturing solutions available at SuiteApp. Asset and Inventory Management ServiceDesk Plus has an integrated Asset Management solution along with the basic help desk functions. automatically scans updates asset/nodes with an IP address within your network.com. y Optimized Manufacturing Processes o Streamline the assembly process by efficiently managing production work orders. including inventory reordering points and transaction histories o Track costs and eliminate errors by creating a complete business process flow through purchasing. creating special purchase orders for components. ServiceDesk Plus offers IT asset management & network inventory tracking functionality across both Windows and Linux workstations. Asset Management INVENTORY MANAGEMENT Page 20 . With the integrated Asset Management. receiving and account payables. software and assets in your every organization.access to key data and information. ServiceDesk provides you with an accurate inventory of all It the hardware.

switches. components and consumables Helps to import any type of asset from CSV files Create baseline groups for all your assets based on different criteria y y y y y y Scanning Inventory y y Windows Domain Scan to scan all Windows machines Scans Linux. Non-IT assets. routers and Access points Agentless scanning Scanning of standalone workstations Distributed Asset Scan to scan across different sites and availability of complete data in the central server Scheduled Scan for scanning machines periodically Identifies and scans all new machines added in the network Maintains history of all the software and hardware changes that happens in the network Notifies technicians on any hardware or software change in the network Get Reports on machines that have not been scanned over a period y y y y y y y y INVENTORY MANAGEMENT Page 21 .y y Asset States to track the complete life cycle of the assets Cost Factors to determine the various costs associated to each asset during its life cycle and maintain their TCO Get the complete ownership of all assets and history for all assets Remote Control to access any workstation in your organization Tracks lease information of all assets and notify technicians on lease expiry Get one view of all your IT assets. Mac machines and other network devices like Printers.

prohibited. Tracks different types of licenses individual. enterprise. freeware etc. volume and CAL Maintain software compliance for all managed software based on installations and purchased licenses Groups major-minor software versions for downgrading licenses Site-based tracking of Software licenses Notifies technicians on any compliance violation or installation of prohibited software during scan Send email to users using any prohibited software y y y y y y Software Metering Identifies the software usage in each machine Get reports on software installations where the software is being used rarely CMDB y y y Ability to track different relationships between the assets (Connection.of time Software Asset Management y Software Types to track different types of software like managed. shareware. usage and container relationship) Purchase Order INVENTORY MANAGEMENT Page 22 .

y y Audit Reports Pre-built reports on all assets Get customized reports in tabular and matrix form Get the complete asset summary and audit reports Ability to fetch any type of report using query reports Ability to export reports in pdf.y Tracks requests Orders all using purchase Purchase y Purchase Order Approvals by Approval Managers Maintains y Cost Center information and GL code for the Purchase Orders y Notification on any Purchase Order due Receives items from y Purchase Orders and move them to assets. csv. y Customize the Purchase Order form with additional fields Contract Management Track contracts for different types of assets and software licenses. Notifies technicians on any contract expiry. xls and HTML format Page 23 y y y y y INVENTORY MANAGEMENT .

C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs.y Site-based reports INVENTORY CONTROLLING Firms that carry hundreds or even thousands of different part numbers can be faced with the impossible task of monitoring the inventory levels of each part number. The percentages may vary with each firm. But. B or C the firm can determine the resources (time. Items that are extremely inexpensive or have low demand are termed "C" items. The top 20 percent of the firm's most costly items are termed "A" items (this should approximately represent 80 percent of total inventory costs). but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. Usually this means that the firm monitors A items very closely but can check on B and C items on a periodic basis (for example. By classifying each inventory item as an A. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. The 80/20 comes from Pareto's finding that 20 percent of the populace possessed 80 percent of the wealth. Therefore. effort and money) to dedicate to each item. In order to facilitate this. monthly for B items and quarterly for C items). many firm's use an ABC approach. a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. also known as the "80/20" rule. with "B" items falling in between A and C items. it has to be the correct 20 percent. INVENTORY MANAGEMENT Page 24 . ABC analysis is based on Pareto Analysis.

location. In other words. the counting frequency will vary with the classification of each item. inventory control number. moving on to other sections upon completion. and finally the C items. When cycle counting is used the firm is continually taking a physical count but not of total inventory. Certainly. then the B items. date purchased.. Cycle counting is used instead of the traditional "once-a-year" inventory count where firms shut down for a short period of time and physically count all inventory assets in an attempt to reconcile any possible discrepancies in their inventory records. and C items yearly. A firm may physically count a certain section of the plant or warehouse. Inventory Control keeps track of all furniture. and real property. description.e. B items quarterly. Capital items are assigned an inventory number and are entered into the system with all pertinent information (i. A item may be counted monthly. WHY KEEP INVENTORY? Why would a firm hold more inventory than is currently necessary to ensure the firm's operation? The following is a list of reasons for INVENTORY MANAGEMENT Page 25 . The firm may also choose to count all the A items.) Inventory Control also reconciles local records with the State Property Accounting System (SPAS) to insure all assets are properly recorded. In addition the required accuracy of inventory records may vary according to classification. with A items requiring the most accurate record keeping. until the entire facility is counted. etc. cost. Then the process starts all over again. equipment.Another control method related to the ABC concept is cycle counting.

If not. KEEP OPERATIONS RUNNING. A manufacturer must have certain purchased items (raw materials. a sale is lost forever. it must have the products that the customer wants on hand when the customer wants them. INVENTORY MANAGEMENT Page 26 . Running out of only one item can prevent a manufacturer from completing the production of its finished goods.maintaining what would appear to be "excess" inventory. Inventory between successive dependent operations also serves to decouple the dependency of the operations. the retailer will have to back-order the product. or subassemblies) in order to manufacture its product. if a good is not in inventory. in many instances. components. Hence. If the customer can get the good from some other source. A machine or workcenter is often dependent upon the previous operation to provide it with parts to work on. Table 1 January February March April May June Demand Produce 50 100 50 100 100 0 100 200 100 200 200 100 100 100 200 100 0 Month-end inventory 50 MEET DEMAND. he or she may choose to do so rather than electing to allow the original retailer to meet demand later (through back-order). In order for a retailer to stay in business.

such as Nissan in Smyrna. HEDGE. Inventory can also be used as a hedge against price increases and inflation. Nissan takes delivery on truck seats as many as 18 times per day. then each machine can maintain its operations for a limited time. steel mills may have a lead time of up to three months. the larger the quantity of goods the firm must carry in inventory. A just-in-time (JIT) manufacturing firm. in excess of current need. an on-hand inventory of three months' steel requirements would be necessary. If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand. However. then all subsequent centers will shut down for lack of work. LEAD TIME. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. can maintain extremely low levels of inventory. If a supply of work-in-process inventory is kept between each workcenter. hopefully until operations resume the original center. The longer the lead time. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. then the client firm must keep an inventory of the needed goods. Lead time is the time that elapses between the placing of an order (either a purchase order or a production order issued to the shop or the factory floor) and actually receiving the goods ordered. at a price that is lower than it would be if the buyer INVENTORY MANAGEMENT Page 27 . This gives the buyer a chance to purchase material.If work ceases at a workcenter. In order to keep their operations running in the meantime. Tennessee.

QUANTITY DISCOUNT. Notice how the use of inventory has allowed the firm to maintain a steady rate of output (thus avoiding the cost of hiring and training new personnel). Consider the demand forecast and production schedule outlined in Table 1. Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. Often firms are given a price discount when purchasing large quantities of a good. if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory. the use of inventory has allowed the firm to move demand requirements to earlier periods. while building up inventory in anticipation of an increase in demand.waited until after the price increase occurs. thus smoothing the demand. SMOOTHING REQUIREMENTS. However. In essence. Accounting for inventory Accountancy INVENTORY MANAGEMENT Page 28 . In fact. This also frequently results in inventory in excess of what is currently needed to meet demand. this is often called anticipation inventory. the decision to buy the large quantity is justified.

S. there is much inventory that would once have been finished goods which is now held as 'work in process' (WIP). there is a market for the goods created.Each country has its own rules about accounting for inventory that fit with their financial-reporting rules. one-process factories. organizations in the U. It is intentional that financial accounting uses standards that allow the public to compare firms' performance. such enterprises are quite probably in the minority in the 21st century. but the valuation is a management decision since there is no market for the partially finished product. Today. define inventory to suit their needs within US Generally Accepted Accounting Practices (GAAP).S. INVENTORY MANAGEMENT Page 29 . The internal costing/valuation of inventory can be complex. which establishes an independent market value for the good. the rules defined by the Financial Accounting Standards Board (FASB) (and others) and enforced by the U. Securities and Exchange Commission (SEC) and other federal and state agencies. cost accounting functions internally to an organization and potentially with much greater flexibility. A discussion of inventory from standard and Theory of Constraints-based (throughput) cost accounting perspective follows some examples and a discussion of inventory from a financial accounting perspective. This needs to be valued in the accounts. Where 'one process' factories exist. Other countries often have similar arrangements but with their own GAAP and national agencies instead. with multistage-process companies. For example. Whereas in the past most enterprises ran simple.

Salespeople. This effort. In addition to the money tied up by acquiring inventory. since it counts as an asset on the balance sheet. for utilities. as in Thor Power Tool Company v. Inventory may also cause significant tax expenses. inventory also brings associated costs for warehouse space. in particular. often receive sales-commission payments. obsolescence. Some organizations hold larger inventories than their operations require in order to inflate their apparent asset value and their perceived profitability. and others. in principle. Commissioner. INVENTORY MANAGEMENT Page 30 . shrinkage (theft and errors).This somewhat arbitrary 'valuation' of WIP combined with the allocation of overheads to it has led to some unintended and undesirable results. Businesses that stock too little inventory cannot take advantage of large orders from customers if they cannot deliver. so unavailable goods may reduce their potential personal income. The conflicting objectives of cost control and customer service often pit an organization's financial and operating managers against its sales and marketing departments. Inventory appears as a current asset on an organization's balance sheet because the organization can. turn it into cash by selling it. Financial accounting An organization's inventory can appear a mixed blessing. depending on particular countries' laws regarding depreciation of inventory. known as "Lean production" will significantly reduce working capital tied up in inventory and reduce manufacturing costs (See the Toyota Production System). and for insurance to cover staff to handle and protect it from fire and other disasters. but it also ties up money that could serve for other purposes and requires additional expense for its protection. This conflict can be minimised by reducing production time to being near or less than customers' expected delivery time. Such holding costs can mount up: between a third and a half of its acquisition value per year.

Standard cost accounting Standard cost accounting uses ratios called efficiencies that compare the labour and materials actually used to produce a good with those that the same goods would have required under "standard" conditions. Standard methods continue to emphasize labor efficiency even though that resource now constitutes a (very) small part of cost in most cases.first out. Which method an accountant selects can have a significant effect on net income and book value and. Using LIFO accounting for inventory. few problems arise. Standard cost accounting can hurt managers. a company generally reports lower net income and lower book value. For commodity items that one cannot track individually. Due to LIFO's potential to skew inventory value. a policy decision to increase inventory can harm a manufacturing INVENTORY MANAGEMENT Page 31 . This generally results in lower taxation. on taxation. Two popular methods that normally exist are: FIFO and LIFO accounting (first in . For example. UK GAAP and IAS have effectively banned LIFO inventory accounting. LIFO accounting When a merchant buys goods from inventory. workers. and firms in several ways.first out).FIFO vs. LIFO considers the last unit arriving in inventory as the first one sold. Unfortunately. the value of the inventory account is reduced by the cost of goods sold (COGS). but where it has. last in . then an agreed method must be derived to evaluate it. accountants must choose a method that fits the nature of the sale. in turn. due to the effects of inflation. when labor comprised the most important cost in manufactured goods. As long as similar actual and standard conditions obtain. standard cost accounting methods developed about 100 years ago. FIFO regards the first unit that arrived in inventory as the first one sold. This is simple where the CoG has not varied across those held in stock.

firms use the same efficiencies to downsize.manager's performance evaluation. Goldratt developed the Theory of Constraints in part to address the cost-accounting problems in what he calls the "cost world. Workers laid off under those circumstances have even less control over excess inventory and cost efficiencies than their managers. They have not. the process takes longer and uses more than the standard labor time. Instead of an incentive to reduce labor cost. however. which means that processes must operate at higher rates. and many other things in addition to the categories listed here. rightsize. Theory of constraints cost accounting Eliyahu M. When (not if) something goes wrong. called throughput accounting. found a successor. Finished goods inventories remain balance-sheet assets. or otherwise reduce their labor force. even though s/he has no control over the production requirement or the problem. machinery. including buildings. Many financial and cost accountants have agreed for many years on the desirability of replacing standard cost accounting. throughput accounting focuses attention on the relationships between throughput (revenue or income) on one hand and controllable operating expenses INVENTORY MANAGEMENT Page 32 . The manager appears responsible for the excess." He offers a substitute. like materials and components. but labor-efficiency ratios no longer evaluate managers and workers. Increasing inventory requires increased production. He defines inventory simply as everything the organization owns that it plans to sell. Throughput accounting recognizes only one class of variable costs: the truly variable costs. that uses throughput (money for goods sold to customers) in place of output (goods produced that may sell or may boost inventory) and considers labor as a fixed rather than as a variable cost. In adverse economic times. which vary directly with the quantity produced.

The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. it was the need for audited accounts that sealed the fate of managerial cost accounting.the gains of jointly producing two or more products in one facility. High-level inventory management It seems that around 1880[7] there was a change in manufacturing practice from companies with relatively homogeneous lines of products to vertically integrated companies with unprecedented diversity in processes and products. The dominance of financial reporting accounting over management accounting remains to this day with few exceptions. In particular. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. Those companies (especially in metalworking) attempted to achieve success through economies of scope . INVENTORY MANAGEMENT Page 33 . rather than to people . Some short-term macroeconomic fluctuations are attributed to the inventory cycle.and changes in inventory on the other. This is particularly true of inventory. National accounts Inventories also play an important role in national accounts and the analysis of the business cycle.who have little or no control over their situations. the burgeoning need for financial reporting after 1900 created unavoidable pressure for financial accounting of stock and the management need to cost manage products became overshadowed. and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. However. Those relationships direct attention to the constraints or bottlenecks that prevent the system from producing more throughput.

Hence. Cost of Beginning Inventory at the start of the period + inventory purchases within the period + cost of production within the period = cost of goods available 2. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. which relate to the accounting period: 1. Inventory turnover ratio (also known as inventory turns) = cost of goods sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory + Ending Inventory) / 2) and its inverse Average Days to Sell Inventory = Number of Days a Year / Inventory Turnover Ratio = 365 days a year / Inventory Turnover Ratio This ratio estimates how many times the inventory turns over a year. high-level financial inventory has these two basic formulas. So a factory with two inventory turns has six months stock on hand. Cost of goods available í cost of ending inventory at the end of the period = cost of goods sold The benefit of these formulae is that the first absorbs all overheads of production and raw material costs into a value of inventory for reporting. The second formula then creates the new start point for the next period and gives a figure to be subtracted from the sales price to determine some form of sales-margin figure. Manufacturing management is more interested in inventory turnover ratio or average days to sell inventory since it tells them something about relative inventory levels. which is generally not a good figure INVENTORY MANAGEMENT Page 34 .

(depending upon the industry). These include: y y y y Specific Identification Weighted Average Cost Moving-Average Cost FIFO and LIFO. Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI). Whilst these accounting measures of inventory are very useful because of their simplicity. they are also fraught with the danger of their own assumptions. as well as customer demand. in fact. The ratio may not be able to reflect the usability of future production demand. This improvement will have some negative results in the financial reporting. including Just in Time (JIT) Inventory. distressed inventory is inventory whose potential to be sold at a normal cost has passed or will soon pass. In certain INVENTORY MANAGEMENT Page 35 . There are. The methodology applied is based on historical cost of goods sold. VMI and CMI have gained considerable attention due to the success of third-party vendors who offer added expertise and knowledge that organizations may not possess. Inventory management should be forward looking. attempt to minimize on-hand inventory and increase inventory turns. Business models. Distressed inventory Also known as distressed or expired stock. Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. since the 'value' now stored in the factory as inventory is reduced. so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used.

for example in developing countries where land title may be lacking. Banks also face problems in valuing the inventory. this implies the existence of a reliable network of certified warehouses. The possibility of sudden falls in commodity prices means that they are usually reluctant to lend more than about 60% of the value of the inventory at the time of the loan. archaeological evidence suggests that it was practiced in Ancient Rome. It also includes computer or consumer-electronic equipment that is obsolete or discontinued and whose manufacturer is unable to support it. One current example of distressed inventory is the VHS format. INVENTORY MANAGEMENT Page 36 . Inventory credit on the basis of stored agricultural produce is widely used in Latin American countries and in some Asian countries. and old newspapers or magazines. A precondition for such credit is that banks must be confident that the stored product will be available if they need to call on the collateral. or inventory. Inventory credit Inventory credit refers to the use of stock. This is not a new concept. In 2001.g. It is. 3 months left to expiry). This is one of the biggest inventory write-offs in business history. Examples of distressed inventory include products that have reached their expiry date. Obtaining finance against stocks of a wide range of products held in a bonded warehouse is common in much of the world. or have reached a date in advance of expiry at which the planned market will no longer purchase them (e. as collateral to raise finance. used with Parmesan cheese in Italy. for example. Cisco wrote off inventory worth US $2. Where banks may be reluctant to accept traditional collateral.25 billion due to duplicate orders. clothing that is defective or out of fashion.industries it could also mean that the stock is or will soon be impossible to sell. inventory credit is a potentially important way of overcoming financing constraints.

y Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. 3. requires that you maintain certain amounts of inventory to use in this "lead time. Economies of scale . All these stock reasons can apply to any owner or product stage. These classifications apply along the whole Supply chain. thus inventory. So bulk buying. from supplier to user at every stage. This stock can be eliminated by tools like SMED. not just within a facility or plant. movement and storing brings in economies of scale. when he needs it" principle tends to incur lots of costs in terms of logistics.Ideal condition of "one unit at a time at a place where a user needs it. Where these stocks contain the same or similar items. supply and movements of goods. Time . Because they are mixed up together there is no INVENTORY MANAGEMENT Page 37 . 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. This stock is then used while that changeover is happening. Uncertainty ." 2.The time lags present in the supply chain.Inventories are maintained as buffers to meet uncertainties in demand.Business inventory The reasons for keeping stock There are three basic reasons for keeping an inventory: 1.

Pipeline stock (Goods still in transit or in the process of distribution . excluding buffer stock) 3. Anticipation stock (Building up extra stock for periods of increased demand . ice cream for summer) 5.visual reminder to operators of the adjacent sub-processes or line management of the stock. Some plants have centralized stock holding across sub-processes. which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. and the new old stock may represent the only market source of a particular item at the present time. y y Stockout means running out of the inventory of an SKU. which makes the situation even more acute. Typology 1. Therefore. De-coupling (Buffer stock that is held by both the supplier and the user) 4. This level of detailed specification assists in managing inventory. Special terms used in dealing with inventory y Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. it is the available inventory.have left the factory but not arrived at the customer yet) Inventory examples INVENTORY MANAGEMENT Page 38 . any change in the packaging or product is a new SKU. Buffer/safety stock 2. Such merchandise may not be produced anymore.g. "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Cycle stock (Used in batch processes.e.

While accountants often discuss inventory in terms of goods for sale.manufacturers. it will be impossible to know the actual level of stocks and therefore impossible to control them. supplies. Goods for resale . empty cans and their lids (or coils of steel or aluminum for constructing those components). if uncontrolled. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. furniture.materials and components scheduled for use in making a product.also have inventories (fixtures. organizations . y y Finished goods .goods ready for sale to customers.materials and components that have begun their transformation to finished goods.. Manufacturers'. . This may be vats of prepared food.) that they do not intend to sell.. most manufacturing organizations usually divide their "goods for sale" inventory into: y Raw materials . service-providers and not-for-profits . Stock ties up cash and. and anything else (solder. y Work in process. WIP . While the reasons for holding stock were covered earlier. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. It may also INVENTORY MANAGEMENT Page 39 . distributors'.returned goods that are salable. . filled cans not yet labeled or sub-assemblies of food components.. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. labels.) that will form part of a finished can. For example: Manufacturing A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned. glue.. and wholesalers' inventory tends to cluster in warehouses.

A more sophisticated method takes these two techniques further. Reduction and elimination of these inventory 'wait' states is a key concept in Lean. and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory. the system cannot bring the necessary benefits to the organisation in isolation. There are well-proven processes and techniques to assist in inventory planning and strategy. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers). Too big an inventory reduction too quickly can cause a business to be anorexic. For example.include finished cans that are not yet packaged into cartons or pallets. BALANCING INVENTORY AND COSTS INVENTORY MANAGEMENT Page 40 . Unnecessary inventory adds enormously to the working capital tied up in the business. both at the business overview and part number level. and the way in which it chooses to do so. Examples of case studies are very revealing. and even perhaps to consumers through arrangements like factory stores and outlet centers. as well as the complexity of the supply chain. a company may wish to install a complex inventory system. A case study of k-curve benefits to one company shows a successful implementation. Typical Inventory Management techniques include Pareto Curve ABC Classification and Economic Order Quantity Management. and an effective business process to support that. to grocery stores (retailers). but unless there is a good understanding of the role of inventory and its perameters. combining certain aspects of each to create The K Curve Methodology[3].

inventory management is an attempt to maintain an adequate supply of goods while minimizing inventory costs. forklifts may be necessary to move it around. The firm must pay taxes on the inventory. and water. obsolescence. There are three types of costs that together constitute total inventory costs: holding costs. Storage facilities also require heating. also called carrying costs. set-up costs. We saw a variety of reasons companies hold inventory and these reasons dictate what is deemed to be an adequate supply of inventory. If the inventory is heavy or bulky. Average inventory can be computed by dividing the amount of goods that INVENTORY MANAGEMENT Page 41 . Now. Holding costs. cooling. how do we balance this supply with its costs? First let's look at what kind of costs we are talking about. Also. HOLDING COSTS. All of these things add cost to holding or carrying inventory. This could range from a small storage area near the production line to a huge warehouse or distribution center. pilferage (theft).As stated earlier. and opportunity costs occur from the lost use of the funds that were spent on the inventory. A storage facility requires personnel to move the inventory when needed and to keep track of what is stored and where it is stored. If the firm can determine the cost of holding one unit of inventory for one year ( H ) it can determine its annual holding cost by multiplying the cost of holding one unit by the average inventory held for a one-year period. and purchasing costs. and shrinkage are problems. are the costs that result from maintaining the inventory. Inventory in excess of current demand frequently means that its holder must provide a place for its storage when not in use. lighting.

In a manufacturing setting this would require the use of a skilled technician (a cost) who disassembles the tooling that is currently in use on the machine. As one can see. then. forms and documents. can be expressed as H ( Q /2). rather than a set-up cost. The disassembled tooling is then taken to a tool room or tool shop for maintenance or possible repair (another cost). there is considerable cost involved in set-up. INVENTORY MANAGEMENT Page 42 . SET-UP COSTS. There the technician has to assemble the tooling on the machine in the manner required for the good to be produced (this is known as a "set-up"). Then the technician has to calibrate the machine and probably will run a number of parts. some firms include the cost of shipping the purchased goods in the order cost. All the while the machine has been idle and not producing any parts (opportunity cost). Ordering costs include the purchasing agent's salary and travel/entertainment budget. office space. Thus. Set-up costs are the costs incurred from getting a machine ready to produce the desired good. average inventory is expressed as Q /2. long-distance telephone bills. then an order cost. is incurred. The technician then takes the currently needed tooling from the tool room (where it has been maintained. If the firm purchases the part or raw material. another cost) and brings it to the machine in question. administrative and secretarial support. Also. and computer systems and support. copiers and office supplies.are ordered every time an order is placed ( Q ) by two. that will have to be scrapped (a cost). Annual holding cost. in order to get the machine correctly calibrated and running.

Suppose a firm has an annual demand ( D ) of 1. Now Total or Total = H ( Q /2) + S ( D / Q ) + PD If holding costs and set-up costs were plotted as lines on a graph. every time we place an order.If the firm can determine the cost of one set-up ( S ) or one order. If H we ( set the Q two /2) costs = equal S and ( solve D for / Q we Q get: ) = total inventory cost + cost can be cost + expressed Purchasing as: cost Holding Set-up/Order Q = 2 DS / H INVENTORY MANAGEMENT Page 43 . If the firm purchases a part that goes into its finished product. PURCHASING COST. Purchasing cost is simply the cost of the purchased item itself. the firm will obviously place 10 orders per year ( D / Q ). we should order the quantity ( Q ) that corresponds to the point where the two values are equal. Hence. Therefore. Hence. the point at which they intersect (that is. if we want to minimize total inventory cost. annual set-up/order cost can be expressed as S ( D / Q ). If the firm orders 100 units ( Q ) every time it places and order. the point at which they are equal) would indicate the lowest total inventory cost. the firm can determine its annual purchasing cost by multiplying the cost of one purchased unit ( P ) by the number of finished products demanded in a year ( D ).000 units. purchasing cost is expressed as PD. it can determine its annual setup/order cost by multiplying the cost of one set-up by the number of set-ups made or orders placed annually.

a firm with an annual demand of 12. First.The quantity Q is known as the economic order quantity (EOQ). Constant demand (demand is stable through-out the year). If a quantity discount is available. annual holding cost of $10 per unit and an order cost of $150 per order (with orders placed once a month) could save $800 annually by utilizing the EOQ. No quantity discounts.000/1000) + $25(12. There are a number of assumptions that must be made with the use of the EOQ. we determine the total costs without using we = we calculate total costs the EOQ calculate 2(12. It must be noted that this is true only as long as no quantity discount exists. These include: y y y y Only one product is involved. the savings is still $800.000) = $306. INVENTORY MANAGEMENT Page 44 .000/600) + $25(12. we subtract the total cost of Q from Q to determine the savings: $306. the firm must determine whether the savings of the quantity discount are sufficient to offset the loss of the savings resulting from the use of the EOQ. In order to minimize total inventory cost.000 Finally.000 units (at a purchase price of $25 each).800 Then EOQ And Q = $10(600/2) + $150(12.800 í 306. the firm will order Q every time it places an order.000) = $306. Deterministic demand (demand is known with certainty).000)($150)/$10= at the EOQ of method: EOQ: 600 600: Q = $10(1000/2) + $150(12. For example.000 = $800 Notice that if you remove purchasing cost from the equation. We might assume this means that purchasing cost is not relevant to our order decision and can be eliminated from the equation.

In this way inventory levels can be kept at a very low level. Just-in-time (JIT) is a philosophy that advocates the lowest possible levels of inventory. JUST-IN-TIME (JIT). MRP and MRP II are computer-based resource management systems designed for items that have dependent demand. For example. MRP AND MRP II. allow discrete ordering (ordering only what is currently needed).y Constant costs (no price increases or inflation). it is relevant for items that have independent demand. MRP and MRP II look at order quantities period by period and. While these assumptions would seem to make EOQ irrelevant for use in a realistic situation. as such. purses have independent demand. OTHER SCHOOLS OF THOUGHT IN INVENTORY MANAGEMENT There are a number of techniques and philosophies that view inventory management from different perspectives. This means that the demand for the item is not derived from the demand for something else (usually a parent item for which the unit in question is a component). the demand for steering wheels would be derived from the demand for automobiles (dependent demand) but the demand for purses is not derived from anything else. JIT espouses that firms need only keep inventory in the right INVENTORY MANAGEMENT Page 45 . a necessity for a complex item with dependent demand.

Instead of managing one's inventory to maximize profit and minimize cost for the individual firm. supply chain management has had a considerable impact on inventory management. In addition to raw materials. through altruism or legislation. While it agrees with JIT that inventory should be at the lowest level possible in most instances. finish. recycling. it advocates that there be some buffer inventory around any capacity constraint (e. today's firm has to make inventory decisions that benefit the entire supply chain. of environmental management has added a new dimension to inventory management-reverse supply chain logistics. reusable or recyclable containers. and MRO goods. INVENTORY MANAGEMENT Page 46 . or color. even though one hears the term "zero inventory" used. or outright "I changed my mind" responses from customers. and any number of items that require repair. The ideal lot size for JIT is one. THE FUTURE OF INVENTORY MANAGEMENT The advent. Environmental management has expanded the number of inventory types that firms have to coordinate. THEORY OF CONSTRAINTS (TOC). returned goods. Finally. finished goods. or secondary use in another product. poor fit. work-in-process.quantity at the right time with the right quality. Retailers have the same type problems dealing with inventory that has been returned due to defective material or manufacture. the slowest machine) and before finished goods. Theory of constraints (TOC) is a philosophy which emphasizes that all management actions should center around the firm's constraints. firms now have to deal with post-consumer items such as scrap. reuse..g.

Inventory Management Types
Use

When using the Replenishment application component, you can manage inventory in one of two ways:
y

Materials Management-based Inventory Management In this case Replenishment is based on the Inventory Management data of Materials Management. Each goods movement is recorded in a document. You should use this type of inventory management to as great an extent as possible. It can, however, only be used for Replenishment if you manage stocks on an exact article basis (that is, not on a merchandise category basis).

y

Replenishment-based Inventory Management
Replenishment-based Inventory Management allows you to replenish stocks of articles managed in Materials Management-based Inventory Management on a merchandise category basis (value-only article). In this case the Replenishment application component automatically activates replenishment-based inventory management. With replenishment-based Inventory Management, you can manage stocks for external customers for which there is no MM-Inventory Management data.

INVENTORY MANAGEMENT Page 47

In

Replenishment-based

Inventory

Management,

inventory

is

managed in a much simpler way than in Materials Management. The only figure relevant to Replenishment for a particular article at a particular recipient is the stock on-hand. No goods movements documents are kept. You can manually activate replenishment-based inventory

management by selecting the indicator in the replenishment master data for the article for the recipient concerned. The inventory management data in Materials Management, even when activated, is not used in Replenishment. The following table illustrates the differences between the two types of inventory management:

Presented in this Small Business Inventory Management guide is a sampling of information that should be helpful to business owners and managers in dealing with small business inventory management problems. Included is a balanced selection in terms of emphasis on techniques, on the one hand, and general management principles on the other. "Inventory" to many business owners is one of the more visible and tangible aspects of doing business. Raw materials, goods in process, and finished goods, all represent various forms of inventory

encountered in a manufacturing organization. Each type represents money tied up until the inventory leaves the factory as a purchased product. Likewise, merchandise stocks in a retail store contribute to
INVENTORY MANAGEMENT Page 48

profits only when their sale puts money into the cash register. In a literal sense, inventory refers to stock of anything necessary to do business. These stocks represent a large portion of the business investment and must be well managed in order to maximize profits. In fact, many small businesses cannot absorb the types of losses arising from poor inventory management. Unless inventories are controlled they are unreliable, inefficient, and costly. In attempting to control inventories, managers usually lean towards keeping inventory levels on the high side, yet this greater investment (given a constant amount of profit), yields a lower return on the dollar invested. This is one of the contradictory demands made upon the manager with respect to keeping inventory, others include:
y y y y

Maintain a good assortment of products - but not too many; Increase inventory turnover - but only at a good profit level; Keep stocks low - but not too low; Make volume purchases to obtain lower prices - but don't overbuy; and

y

Get rid of obsolete items - but not before their replacements have taken hold in the market.

To Small Business Inventory Management - Top Successful Inventory Management Successful inventory management involves simultaneously attempting to balance the costs of inventory with the benefits of inventory. Many business owners often fail to appreciate fully the true costs of carrying
INVENTORY MANAGEMENT Page 49

depend upon the type and size of INVENTORY MANAGEMENT Page 50 . as well as the type of control system needed. but it must be realized that the turnover rate varies with the function of inventory. And it is often not realized that small reductions in inventory investment may result in large percentage changes in the company's total cash position. etc. they can be useful in setting guidelines for one's own company. one reward of improved inventory management may be an increase in working capital without the necessity of having to borrow money. insurance. the average inventory turnover rate for manufacturers of paperboard containers ranges from 4. Computation of the Inventory Turnover Rate One commonly used. on a cost of goods sold basis.0. For example.5 to 21.which include not only direct costs of storage. taxes.inventory . simple measure of managerial performance is the inventory turnover rate. but is also the cost of money tied up in inventory. but must be used with care.. the type of business. This value gives a rough guideline by which managers can set goals and measure performance. and how the ratio is calculated (whether on sales or cost of goods sold). business inventory records provide the information needed to make decisions about inventory management. Values such as these are published periodically by the trade associations and professional organizations. Manual Record keeping Methods At a very basic level. For example. But the number and kinds of records maintained.

Using Computers in Inventory Management Today. however. Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing INVENTORY MANAGEMENT Page 51 . They use card records. supplies. Many small manufacturers. both through the widespread existence of computer services organizations (listed in the yellow pages of many telephone directories) and the decreasing cost of micro computers. It is important to remember. But in a larger organization where many items from various suppliers are involved. that in many cases attempts to improve management and reduce costs fail. the use of computer systems to control inventory is far more feasible for small business than ever before. not simply because of insufficient records. inventory tags and accounting data to capture the information necessary to establish economic order quantities. order points. In very small businesses where visual control is used. and general importance of inventory increases. and retailers with relatively few items in inventory use manual inventory control system. In such a case. records may not be needed at all or only for slowly moving or expensive items. the accuracy and discipline of the recording system is critical. are appropriate. regardless of the type of records maintained. such as kardex files. and other parameters for effective inventory control.inventory. but rather because of inaccurate and carelessly recorded inventory data. it is often desirable to consider use of a computerized system for inventory control. as the number of item. more formal inventory records. However. wholesalers.

Inventory management refers to the procedure of organization the stocks of finished products and supplies by a compact.procedures can also be handled on the computer. as well as help on specific inventory management problems. the second is making sure that the items. Not a substance what the business size it must administer many fixed assets. but closely related elements: the first is knowing what and how much to order. Most computer manufacturers offer free. once brought into inventory. quickly changing asset bases. when to order and what price to pay. Whether a manual or computerized inventory management system is used. and ever-changing tax laws and requirements. are used properly to produce a profit. computer service companies often have material readily available describing the use of their particular computer "software" programs for inventory management. the important thing to remember is that inventory management involves two separate. Fixed asset inventory software can also reduce encumber of fixed asset reduction calculations for financial and tax exposure. types of assets. written information on the inventory management systems available for their computers. Inventory management. asset inventory tracking and reconciliation services. INVENTORY MANAGEMENT Page 52 . can transport down expenses and increase the profits of a compact. In addition. These companies provide a good source of information on general descriptions of particular inventory management techniques. and private property tax filings. many locations. if done accurately.

Inventory management software has an amplified business on the web. Inventory management software is perfect for business. stock balance management. following the importunate increase and achievement of e-commerce. Our Accounting Services. The software makes easy the making of an account. Inventory management software correspondences are designed for inventory control. and inventory control. materials. The distributed design allows a business to assemble modules from different vendors without the need for the placement of multiple copies of complex and expensive computer systems in areas which will not use their full capacity. and human resources.[2] INVENTORY MANAGEMENT Page 53 . can provide to the demanding supplies of global customers in Inventory management. ERP systems consolidate all business operations into a uniform and enterprise-wide system environment. Enterprise resource planning Enterprise Resource Planning (ERP) is an integrated computer-based system used to manage internal and external resources. goods item direction. financial resources. Inventory management software helps administer inventory from any location in the world. a company leader in this area of specialty.[1] An ERP system can either reside on a centralized server or be distributed across modular hardware and software units that provide "services" and communicate on a local area network. including tangible assets. Built on a centralized database and normally utilizing a common computing platform. Its purpose is to facilitate the flow of information between all business functions inside the boundaries of the organization and manage the connections to outside stakeholders.

To be considered an ERP system. All applications should access one database to prevent redundant data and multiple data definitions. and while not supplanting these terms. it has come to represent a larger whole. y y All modules should have the same look and feel. It came into use as makers of MRP software started to develop software applications beyond the manufacturing arena. Components y Transactional Backbone o o o Financials Distribution Human Resources Page 54 INVENTORY MANAGEMENT .Origin of the term The initialism ERP was first employed by research and analysis firm Gartner Group in 1990 as an extension of MRP (Material Requirements Planning. non-profit organizations and governments . ERP systems now attempt to cover all core functions of an enterprise. These systems can now be found in non-manufacturing businesses. a software package should have the following traits: y y Should be integrated and operate in real time with no periodic batch updates. Users should be able to access any information in the system without needing integration work on the part of the IS department. later manufacturing resource planning) and CIM (Computer Integrated Manufacturing). regardless of the organization's business or charter.

manufacturing flow Supply chain management Order to cash. billing. capacity. fixed assets Project management Costing. purchasing. cost management. work orders. time and expense.o Product lifecycle management y Advanced Applications o o Customer Relationship Management (CRM) Supply chain management software    Purchasing Manufacturing Distribution (business)Distribution o Warehouse Management System y Management Portal/Dashboard o Decision Support System These modules can exist in a system or utilized in an ad-hoc fashion. cash management. product configurator. performance units. activity management INVENTORY MANAGEMENT Page 55 . manufacturing process. supply chain planning. accounts payable. scheduling. claim processing. manufacturing projects. inventory. quality control. supplier scheduling. commission calculation Financials General ledger. inspection of goods. Commercial applications Manufacturing Engineering. order entry. accounts receivable. bills of material. workflow management.

billing. MRP evolved into ERP when "routings" became a major part of the software architecture and a company's capacity planning activity also became a part of the standard software activity. ERP software can aid in the control of many business activities. ERP systems are often incorrectly called back office systems. distribution. ERP systems saw a large boost in sales in the 1990s as companies faced the Y2K problem in their legacy systems. time and attendance. benefits Customer relationship management Sales and marketing. marketing. service.Human resources Human resources. inventory management. delivery. inventory. and accounting for a company. training. logistics. at which time most companies had already implemented their Y2K solution. payroll. commissions. production. This is contrasted with INVENTORY MANAGEMENT Page 56 . rostering. and human resource management. quality management. invoicing. ERP systems typically handle the manufacturing. suppliers and/or employees Access control Management of user privileges for various processes History The term "Enterprise resource planning" originally derived from manufacturing resource planning (MRP II) that followed material requirements planning (MRP). customer contact. Many companies took this opportunity to replace such information systems with ERP systems. including sales. indicating that customers and the general public are not directly involved. shipping. call-center support Data services Various "self-service" interfaces for customers. This rapid growth in sales was followed by a slump in 1999.

front office systems like customer relationship management (CRM) systems that deal directly with the customers. human resources. and eFinance. Best practices are incorporated into most ERP vendor's software packages. eGovernment. or supplier relationship management (SRM) systems. Though traditionally ERP packages have been on-premise installations. logistics. EAS ² Enterprise Application Suite is a new name for formerly developed ERP systems which include (almost) all segments of business using ordinary Internet browsers as thin clients. a term coined in the early 2000s. ERP systems are cross-functional and enterprise-wide. Prior to ERP. In addition to areas such as manufacturing. marketing and strategic management. All functional departments that are involved in operations or production are integrated in one system. This new generation of software is web-based and allows both employees and external resources (such as suppliers and customers) real-time access to the system's data. is often used to describe what would be the next generation of ERP software. ERP II. ERP systems are now also available as Software as a Service. warehousing. software was developed to fit individual processes of an individual business. most vendors have included "Best INVENTORY MANAGEMENT Page 57 . eTelecom. and information technology. this typically includes accounting. or the eBusiness systems such as eCommerce. When implementing an ERP system. Due to the complexities of most ERP systems and the negative consequences of a failed ERP implementation. organizations can choose between customizing the software or modifying their business processes to the "best practice" function delivered in the "out-of-the-box" version of the software .

documentation. They can also help where the process is a commodity such as electronic funds transfer. There are three types of services that may be employed for . A study conducted by Ludwigshafen University of Applied Science surveyed 192 companies and concluded that companies which implemented industry best practices decreased mission-critical project tasks such as configuration. and then replicated with confidence across multiple businesses who have the same business requirement. or phase-ins.Consulting. Implementing ERP software is typically too complex for "in-house" skill. the number of modules. Customization. The typical project is about 14 months and requires INVENTORY MANAGEMENT Page 58 . This is because the procedure of capturing and reporting legislative or commodity content can be readily codified within the ERP software. The use of best practices can make complying with requirements such as IFRS. Support. the scope of the change and the willingness of the customer to take ownership for the project. the use of best practices reduced over risk by 71% when compared to other software implementations. the extent of customization. It can be divided into various stages. These "Best Practices" are what the Vendor deems as the most efficient way to carry out a particular business process in an Integrated Enterprise-Wide system. This is typically the most cost effective way.Practices" into their software. ERP systems are modular. or Basel II easier. producing ERP software systems that are typically complex and usually impose significant changes on staff work practices. The length of time to implement an ERP system depends on the size of the business. so they don't all need be implemented at once. so it is desirable and highly advised to hire outside consultants who are professionally trained to implement these systems. In addition. Implementation Businesses have a wide scope of applications and processes throughout their functional units. Sarbanes-Oxley. testing and training.

companies often seek the help of an ERP vendor or of third-party consulting companies. Since many decisions must be made before migration. Deciding on migration related setups 6. a significant amount of planning must occur. The client organization can also employ independent program management. however. and therefore receives minimal attention due to time constraints. Unfortunately. A small project (e. data migration is the last activity before the production phase of an ERP implementation. business analysis. customization. Deciding on data archiving Process preparation INVENTORY MANAGEMENT Page 59 . a company of less than 100 staff) can be planned and delivered within 3±9 months. and UAT specialists to ensure their business requirements remain a priority during implementation. The following are steps of a data migration strategy that can help with the success of an ERP implementation: 1. multi-site or multicountry implementation can take years. and support. Determining the timing of data migration 3. change management. The length of the implementations is closely tied to the amount of customization desired.g. Freezing the tools for data migration 5. Data Migration Data migration is one of the most important activities in determining the success of an ERP implementation. To implement ERP systems. These firms typically provide three areas of professional services: consulting. Identifying the data to be migrated 2. Generating the data templates 4.. a large.around 150 consultants.

A disadvantage usually attributed to ERP is that business process redesign to fit the standardized ERP modules can lead to a loss of competitive advantage. While INVENTORY MANAGEMENT Page 60 . enabling selection of an ERP vendor whose standard modules are most closely aligned with the established organization. This analysis should map out all present operational processes.g. based upon best business practices. each responsible for their own profit and loss. Neglecting to map current business processes prior to starting ERP implementation is a main reason for failure of ERP projects.ERP vendors have designed their systems around standard business processes. It is therefore crucial that organizations perform a thorough business process analysis before selecting an ERP vendor and setting off on the implementation track. linked via Master Data Management) specifically configured and/or customized to meet local needs . federated implementation using loosely integrated instances (e. if this is not possible. authorization hierarchies and decision centers. Research indicates that the risk of business process mismatch is decreased by: y y linking each current organizational process to the organization's strategy. Firms that want to implement ERP systems are consequently forced to adapt their organizations to standardized processes as opposed to adapting the ERP package to the existing processes. modular nature. Solutions include requirements coordination negotiated by local change management professionals or. because they will each have different processes. data semantics. Redesign can then be implemented to achieve further process congruence. Different vendor(s) have different types of processes but they are all of a standard. ERP implementation is considerably more difficult (and politically charged) in organizations structured into nearly independent business units. y understanding the automated solutions currently implemented. business rules. analyzing the effectiveness of each process in light of its current related business capability.

such as finance and accounting are adopted by nearly all companies implementing enterprise systems. Some common modules. It can re-write some of the enterprise system¶s code. For example. Configuration Configuring an ERP system is largely a matter of balancing the way you want the system to work with the way the system lets you work.[ Configuration Tables ± A configuration table enables a company to tailor a particular aspect of the system to the way it chooses to do business. Other times companies will not adopt a module because they already have their own proprietary system they believe to be superior.documented cases exist where this has indeed materialized. Both options will INVENTORY MANAGEMENT Page 61 . risks and changes involved. but also the increase in costs. Modules ² Most systems are modular simply for the flexibility of implementing some functions but not others. So what happens when the options the system allows just aren't good enough? At this point a company has two choices. A service company for example will not likely need a module for manufacturing. both of which are not ideal. then adjust the system using configuration tables to achieve the best possible fit in working with your company¶s processes. an organization can select the type of inventory accounting ± FIFO or LIFO ± it will employ or whether it wants to recognize revenue by geographical unit. others however such as human resource management are not needed by some companies and therefore not adopted. product line. the greater the integration benefits. or it can continue to use an existing system and build interfaces between it and the new enterprise system. other cases show that following thorough process preparation ERP systems can actually increase sustainable competitive advantage. Begin by deciding which modules to install. Generally speaking the greater number of modules selected. or distribution channel.

additional product training. Consulting services Many organizations do not have sufficient internal skills to implement an ERP project. testing 5. a consulting team is responsible for the entire ERP implementation including: 1. and especially those with multiple sites or countries. Examples of customization includes creating processes and reports for compliance. delivery of any customized modules. The more customized the system becomes the less possible seamless communication between suppliers and customers. selecting 2. This results in many organizations offering consulting services for ERP implementation. will often spend considerably more on the implementation than the cost of the user licenses²three to five times more is not uncommon for a multi-site implementation. the cost of the implementation will range from around the list price of the ERP user licenses to up to twice this amount (depending on the level of customization required).add time and cost to the implementation process. Large companies. Typically. planning 3. and assistance writing reports. Additionally they can dilute the system¶s integration benefits. For most mid-sized companies. creation of process triggers and workflow. specialist advice to improve how the ERP is used in the business. training 4. INVENTORY MANAGEMENT Page 62 . implementation 6. complex data extracts or implementing Business Intelligence. system optimization.

"Core system" customization vs configuration Increasingly. organisational trees.) may be needed before the software will work at all. The effect of customization is unpredictable and may require timeconsuming stress testing by the implementation team. y Configuration is available to all customers. code that uses pre-defined "hooks" that are called before/after displaying data screens) will survive INVENTORY MANAGEMENT Page 63 .g. Some customizations (e. ERP packages have historically included full source code and shipped with vendor-supported team IDEs for customizing and extending the delivered code. whereas customization usually requires some element of programming and/or changes to table structures or views. whereas customization allows individual customer to implement proprietary "market-beating" processes. y Configuration changes tend to be recorded as entries in vendor-supplied data tables. During the early years of ERP the guarantee of mature tools and support for extensive customization was an important sales argument when a potential customer was considering developing their own unique solution in-house. etc. Key differences between customization and configuration include: y Customization is always optional.g. purchase approval rules. or assembling a cross-functional solution by integrating multiple "best of breed" applications.. ERP vendors have tried to reduce the need for customization by providing built-in "configuration" tools to address most customers' needs for changing how the out-of-the-box core system works. setting up cost/profit centre structures. y The effect of configuration changes on the performance of the system is relatively predictable and is largely the responsibility of the ERP vendor. whereas some degree of configuration (e.Unlike most single-purpose applications. y Configuration changes are almost always guaranteed to survive upgrades to new software versions.

because they mainly address static data). Nevertheless. customizing an ERP suite gives the scope to implement secret recipes for excellence in specific areas while ensuring that industry best practices are achieved in less sensitive areas. Tasks that need to interface with one another may involve: INVENTORY MANAGEMENT Page 64 . tills or RFIDs (also relatively easy because they touch existing data). those involving changes to fundamental data structures) will be overwritten during upgrades and must be re-implemented manually. using scanners. Extensions In this context.upgrades. a large manufacturer may find itself with many software applications that cannot communicate or interface effectively with one another.g. because ERP applications typically contain sophisticated rules that control how data can be created or changed.g. e. y performing transactional data captures. e. customizing an ERP package can be unexpectedly expensive and complicated. and tends to delay delivery of the obvious benefits of an integrated system.g. More extensive customizations (e. Advantages In the absence of an ERP system.:] y archiving. It is technically easy to expose most ERP transactions to outside programs that do other things. some such functions can be very difficult to implement. "Extensions" refers to ways that an ERP environment can be "extended" (supplemented) with third-party programs. reporting and republishing (these are easiest to achieve. though they will still need to be re-tested. By this analysis. However.

such as industrial espionage. real time information is available to management anywhere.consolidation of finance. human resource. y y Shorten production leadtime and delivery time Facilitating business learning.y ERP systems connect the necessary software in order for accurate forecasting to be done. such as INVENTORY MANAGEMENT Page 65 . from acceptance through fulfillment The revenue cycle. Benefits of this include: y Eliminates the problem of synchronizing changes between multiple systems . and costing (what the vendor invoiced) y The accounting for all of these tasks: tracking the revenue. This allows inventory levels to be kept at maximum efficiency and the company to be more profitable. anytime to make proper decisions. marketing and sales. from invoice through cash receipt Managing inter-dependencies of complex processes bill of materials Tracking the three-way match between purchase orders (what was ordered). and insider crime. productivity and efficiency y y y y y Design engineering (how to best make the product) Order tracking. inventory receipts (what arrived). cost and profit at a granular level. y Integration among different functional areas to ensure proper communication. ERP Systems centralize the data in one place. and manufacturing applications y y Permits control of business processes that cross functional boundaries Provides top-down view of the enterprise (no "islands of information"). empowering. and building common visions Some security features are included within an ERP system to protect against both outsider crime. y Reduces the risk of loss of sensitive data by consolidating multiple permissions and security models into a single structure.

embezzlement.. might involve a disgruntled employee intentionally modifying prices to below-the-breakeven point in order to attempt to interfere with the company's profit or other sabotage. Disadvantages This section does not cite any references or sources. INVENTORY MANAGEMENT Page 66 . y ERP systems can be very expensive (This has led to a new category of "ERP light" solutions) y ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companies²this is cited as one of the main causes of their failure.including those implementing and testing changes . Please help improve this article by adding citations to reliable sources. ERP vendors are also moving toward better integration with other kinds of information security tools.. Problems with ERP systems are mainly due to inadequate investment in ongoing training for the involved IT personnel . Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage. Unsourced material may be challenged and removed. Disadvantages y y Customization of the ERP software is limited. A data-tampering scenario. ERP systems typically provide functionality for implementing internal controls to prevent actions of this kind.as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and the ways in which it is used. for example.

missions. chains-of-command. A company can achieve minimum standards. etc. Mechanical .y Many of the integrated links need high accuracy in other applications to work effectively. y The blurring of company boundaries can cause problems in accountability. switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level). then over time "dirty data" will reduce the reliability of some applications. and consolidation into a single enterprise may yield limited benefits. Inventory Control and Manufacturing Software Visual Inventory Control is a powerful and yet still simple to use Inventory Control types complete different Hotel of ERP types Maintenance barcode manufacturing of Inventory Software readers solution inventories Items It features a user friendly barcode requisition module that supports severa This Software can be used either as a simple inventory Control Software or a The unique picture driven aspect allows this software to be used with severa Including Electronic . independent resources. and employee morale. lines of responsibility. Clothing . Medical and You will Never find a more Intuitive Bill of Material Maintenance INVENTORY MANAGEMENT Page 67 . y Once a system is established. y Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software. Aeronautical. Food . y Some large organizations may have multiple departments with separate.

but also the cost of money tied up in inventory. Many small business owners fail to appreciate fully the true costs of carrying inventory. ! Keeping stock low -. * * * * * Detailed Email Quick Return Work Purchase Orders Order Directly history fo report. INVENTORY MANAGEMENT Page 68 .Screen anywhere. SUCCESSFUL INVENTORY MANAGEMENT Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Tracking. which include not only direct costs of storage. * Manufacturing Engineering Change Order (ECO) Tracking. Logging. Purchase Books Material Order Accounting Authorization Traveler with Software (RMA) Time * Spanish Language Support. Suppliers. Others include: ! Maintaining a wide assortment of stock -. * Receive Single Purchase Order into Multiple Warehouses.but not spreading the rapidly moving ones too thin. * Bill of material Management Option with Multi-Level BOM. Interface.but not sacrificing the service level.but not sacrificing service or performance. This fine line between keeping too much inventory and not enough is not the manager's only concern. * Serialized Inventory Support. ! Increasing inventory turnover -. * Multiple Inventory Warehouse Support. insurance and taxes.

you must determine how long the inventory you have in stock will last. Part of your purchasing plan must include accounting for the depletion of the inventory. but it must be realized that the turnover rate varies with the function of inventory. the type of business and how the ratio is calculated (whether on sales or cost of goods sold). many retailers view March 21 as the end of the spring season. This includes going into the market to buy the goods early enough to ensure delivery at the proper time. This value gives a rough guideline by which managers can set goals and evaluate performance. The degree of success in addressing these concerns is easier to gauge for some than for others. planning ahead is very crucial. Since they offer new items for sale months before the actual calendar date for the beginning of the new season. For retailers. Before a decision can be made as to the level of inventory to order. THE PURCHASING PLAN One of the most important aspects of inventory control is to have the items in stock at the moment they are needed.! Obtaining lower prices by making volume purchases -. Thus. buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination. INVENTORY MANAGEMENT Page 69 . it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases. computing the inventory turnover ratio is a simple measure of managerial performance. For example. For example. The main reason for this early offering for sale of new items is that the retailer regards the calendar date for the beginning of the new season as the merchandise date for the end of the old season. Average inventory turnover ratios for individual industries can be obtained from trade associations. June 21 as the end of summer and December 21 as the end of winter.but not ending up with slow-moving inventory.but not getting caught with obsolete items. and ! Having an adequate inventory on hand -.

records may not be needed at all or only for slow moving or expensive items. There are several proven methods for inventory control. both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers. They are listed below.For instance. INVENTORY MANAGEMENT Page 70 . ! Click sheet control enables the manager to record the item as it is used on a sheet of paper. In very small businesses where this method is used. ! Visual control enables the manager to examine the inventory visually to determine if additional inventory is required. a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product. Such information is then used for reorder purposes. As a business grows. a retail firm must formulate a plan to ensure the sale of the greatest number of units. Today. Often the justification for such a computer-based system is enhanced by the fact that company accounting and billing procedures can also be handled on the computer. it may find a need for a more sophisticated and technical form of inventory control. ____________________________________________________________________________________________ CONTROLLING YOUR INVENTORY To maintain an in-stock position of wanted items and to dispose of unwanted items. The manager can then use the stub to record the item that was sold. Likewise. from simplest to most complex. the use of computer systems to control inventory is far more feasible for small business than ever before. ! Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold. ! Tickler control enables the manager to physically count a small portion of the inventory each day so that each segment of the inventory is counted every so many days on a regular basis. it is necessary to establish adequate controls over inventory on order and inventory in stock.

A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item. The manager receives information printouts at regular intervals for review and action. Two major control values are used: 1) the order quantity. The final method for inventory control is done by an outside agency. ! Off-line point-of-sale terminals relay information directly to the supplier's computer who uses the information to ship additional items automatically to the buyer/inventory manager.! Point-of-sale terminals relay information on each item used or sold. takes the stock count and writes the reorder. Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined. authorized procedure. the size and INVENTORY MANAGEMENT Page 71 . that is. A manufacturer's representative visits the large retailer on a scheduled basis.

Just-in-time inventory management is an approach which works to eliminate inventories rather than optimize them. Suppliers may have to make several deliveries a day or move close to the user plants to support this plan. Materials are scheduled more closely.frequency of orders. The inventory of raw materials and work-inprocess falls to that needed in a single day. Their application is primarily within manufacturing but suppliers might find new requirements placed on them and sometimes buyers of manufactured items will experience a difference in delivery. and 2) the reorder point. two approaches have had a major impact on inventory management: Material Requirements Planning (MRP) and Just-In-Time (JIT and Kanban). The Economic Order Quantity (EOQ) formula is one widely used method of computing the minimum annual cost for ordering and stocking each item. that is. the unit cost. the minimum stock level at which additional quantities are ordered. MRP systems are practical for smaller firms. The EOQ computation takes into account the cost of placing an order. The computer system is only one part of the total project which is usually long-term. Many books on management practices describe the EOQ model in detail. the annual sales rate. thereby reducing inventories. and delivery times become shorter and more predictable. ____________________________________________________________________________________________ DEVELOPMENTS IN INVENTORY MANAGEMENT In recent years. ____________________________________________________________________________________________ TIPS FOR BETTER INVENTORY MANAGEMENT At time of delivery INVENTORY MANAGEMENT Page 72 . Material requirements planning is basically an information system in which sales are converted directly into loads on the facility by sub-unit and time period. This is accomplished by reducing setup times and lead times so that small lots may be ordered. and the cost of carrying inventory. taking one to three years to develop. Its primary use is with products composed of many components.

note it on the delivery receipt and have the driver sign your copy.If damage is visible. ! Carefully examine each carton for visible damage -.Make sure you are receiving as many cartons as are listed on the delivery receipt.All damaged materials must be held at the point received.Make certain the damaged items have not moved from the receiving area prior to inspection by carrier. immediately open all cartons and inspect for merchandise damage. When damage is discovered ! Retain damaged items -. After inspection INVENTORY MANAGEMENT Page 73 . ! Confirm call in writing--This is not mandatory but it is one way to protect yourself. Carrier inspection of damaged items ! Have all damaged items in the receiving area -. ! After carrier/inspector prepares damage report. ! After delivery.! Verify count -. ! Call carrier to report damage and request inspection. carefully read before signing.

! Improvement in quality or changes in specifications that would lead to savings in process time or other operating savings. ____________________________________________________________________________________________ SPECIAL TIPS FOR MANUFACTURERS If you are in the business of bidding. through consideration of economic order quantity. ! Developing new sources of supply. ! A reduction in unit prices due to negotiations. Four Essential Components for Skills Inventory Management 1. ! Greater use of bulk shipments. ! Application of new purchasing techniques. The following actions can help save money when you are stocking inventory: ! Substitution of less costly materials without impairing required quality. ! Include full descriptions of any testing to be performed. ! Using competition along with price. specifications play a very important role. A Well-defined Classification System INVENTORY MANAGEMENT Page 74 . ! Describe the quality of the items in clear terms.Damaged materials should not be used or disposed of without permission by the carrier. ! Do not request features or quality that are not necessary for the items' intended use. ! Include procedures for adding optional items. In writing specifications.! Keep damaged materials -. ! Quantity savings due to large volume. service and delivery when making the purchase selection decision. ! Initiating make-or-buy studies. ! Do not return damaged items without written authorization from shipper/supplier. the following elements should be considered.

unless you¶ve tried applying the age-old business principles of inventory management to the employee skills that are critical to the success of your enterprise. The following questions are on the minds of executives currently engaged in skills inventory management initiatives: ‡ Which of our employees¶ skills should be inventoried? ‡ How do I account for various levels of skill? ‡ What skill sets will be needed to meet the needs of critical projects. A Practical Tracking and Reporting System It¶s Business 101²track supply and demand for a critical business resource. A Consistent Unit of Measure 3. programs. Decision-makers in today¶s smartest companies are recognizing the importance and challenge of managing employee skills for bottom-line performance. you¶re not alone.2. skills can now be managed INVENTORY MANAGEMENT Page 75 . and by how much? These questions must be addressed as part of any skills inventory management initiative. Objective metrics are the missing link. and you can better manage inventory levels to maximize profitability. Sound simple? It is. If you find yourself frustrated as you try to inventory the skills that drive everything from customer satisfaction and product development to sales and operational success. and customers? ‡ Where does our inventory of critical skills fall short. An Efficient Measurement Process 4. The good news is.

employee skills don¶t have convenient item numbers for identification. But unlike physical inventory items.effectively as a vital business inventory. the problem often stems from a lack of standardized definitions for skills. A Well-defined Classification System A detailed system of classification is fundamental to any inventory management program. Thought Leadership Report October 2002 Reports: Four Essential Components for Skills Inventory Management 1. such as part numbers or products. What one manager refers to as a ³Programmer´ may be similar (but not the same as) another manager¶s definition of ³Systems INVENTORY MANAGEMENT Page 76 . When it comes to creating the basic classifications for building a skills inventory. What makes a skills inventory management initiative improve business performance. objective metrics. A system for achieving objective metrics enables companies to manage vital employee skills for measurable success. Problem²Lack of definition leads to an unmanageable array of skills to track. and how do objective metrics fit in? A look at four essential components of inventory management provides an answer. thanks to the development of new tools for delivering the missing link in skills inventory management: practical.

Engineer. 2: A Consistent Unit of Measure While companies have little difficulty tracking their inventory of office supplies or other physical INVENTORY MANAGEMENT Page 77 . Managers must be able to select a group of employees to participate in a skills inventory initiative and quickly decide which skills are critical to the group¶s success. And they must be able to do so without having to endure the timeconsuming process of defining each skill. Solution²A pre-defined classification system provides the basis for effective skills inventory management. An objective skills classification system frees decisionmakers to focus on critical skills and business objectives. many companies begin by agreeing on key business objectives and identifying the skills that most closely impact those goals. An objective system must rely on an established list of predefined skills and an agreed-upon set of criteria by which to measure them. and helps to clearly establish the parameters for a successful initiative. As a foundation for establishing a skills program.´ leading to an inaccurate or unreliable inventory measure. A focused list of critical skills is often the best foundation for what will later grow into a wider skills inventory management capability.´ The result: an inability to distinguish between ³apples and oranges.

For example. First. or volume± calculating the supply of employee skills is a different story. a manager from a department or project group may account for 25 Java programmers. how do you verify that the 25 Java programmers in the group have the level of Java skills required for the job at hand? Many organizations rely on subjective forms of assessments for the answer.´ That is. 2 Thought Leadership Report INVENTORY MANAGEMENT Page 78 . and 10 customer service experts. with inexperienced employees overrating their skills (because they don¶t ³know what they don¶t know´) or with experts underrating their ability. they may simply ask employees to rate their own skills. But the numbers can be deceiving for several reasons. or they may rely on the recommendations of others in the group. companies have measured skills by ³headcount. Self-assessments are routinely inaccurate. companies can¶t track or verify skills levels. weight. 4 project managers. Traditionally. Problem²Without a consistent unit of measure.resources±which can be measured by number of units. both are subjective forms of validation. While self-assessment or verification by a supervisor is important. Personal verification is subject to the variables of individual bias²not necessarily a question of a supervisor being fair. but more an issue of the supervisor being more familiar with one employee over another.

by online skills measurement provider Brainbench. Unlike subjective measures.October 2002 Reports: Four Essential Components for Skills Inventory Management Second. employees INVENTORY MANAGEMENT Page 79 .00 to 5. subjective skills data. and it ensures that strong performers are assigned to specific project roles. The SkillsBench system. with a consistent and detailed unit of measure to track skills. provides a detailed score ranging from 1. Online skills measurement systems are now giving managers the unit of measure they need to account for skills levels on a consistent basis. Another difference is that the objective measurement system calculates changes in skills levels over time. That is. and reported online. when a skills headcount is the unit of measure. how do you measure each employee¶s level of skill? A detailed knowledge of skills levels enables managers to identify top performers for leadership or mentoring roles. The whole system is accessed. delivered.00 for each skill. Solution²An objective skills measurement system provides detailed metrics for tracking skills levels across the enterprise. Without a detailed measurement system. decision-makers are forced to rely largely on unreliable. these metrics will not vary from one department or administrator to another.

Using the Brainbench skills measurement system. which includes a database of millions of test-takers. decision makers can benchmark against industry averages to identify relative skills gaps. identify shortfalls (skills gaps) and surpluses (skills strengths). Supervisors and managers can track skills inventories. An Efficient Measurement Process The need for an easily-administered measurement process is probably the most neglected requirement of a skills inventory management plan. information that is vital to meeting the demands of each client or project. How can companies develop a practical skills measurement system²one that continues to be used long after implementation? Ease of use and meaningful feedback are crucial. 3. INVENTORY MANAGEMENT Page 80 . A company¶s ability to assess skills on a periodic basis and arrive at a quantifiable measurement can determine program success. They can also distinguish between the skills levels of different employees. 3 Thought Leadership Report October 2002 Reports: Four Essential Components for Skills Inventory Management A consistent unit of measure enables decision makers to analyze skill levels within the enterprise.and managers can document skills improvement.

and participation declines. Employees may be asked to complete and submit self-rating forms. Without the ability to deliver repeat assessments. The secret to successful skills inventory management lies in the ability to automate test administration INVENTORY MANAGEMENT Page 81 . provides fast and meaningful feedback.Problem: Skills inventory management initiatives can fail due to a fall-off in employee and manager participation. a skills inventory management initiative becomes nothing more than a onetime employee test. the usefulness of the initiative is compromised. Many companies have made unsuccessful attempts at tracking skills in the past. While the enterprise may not have to re-measure its skills inventory with the same frequency as it tracks other items. the results of such assessments frequently ³disappear´ into a records system without re-emerging as actionable information for the company or for the employee. and ensures continued participation. and frequently they still apply the same flawed strategies today. or they may be asked to take a test associated with a career milestone such as a training event or a periodic review. Unfortunately. with perishable data that cannot track changes in a company¶s supply of skills. When results fail to facilitate action. Solution: An online objective measurement system enhances ease of testing. repeat measurement is essential.

without imposing a test administration burden on the company. INVENTORY MANAGEMENT Page 82 . In addition to easy accessibility. As a result. Company decision-makers can create an assessment schedule without committing the resources or facilities demanded by a traditional pencil-and-paper testing regimen. Through the use of Computer Adaptive Testing (CAT) technology. the user takes a different test with each assessment. ensuring a challenging experience with each test. an employee can take a skills assessment on his or her own time without the need for supervision. they tend to measure the test-taker's ability to memorize previous tests rather than provide an accurate measurement of skill and knowledge. online skills measurement also facilitates repeat testing. The system addresses the two issues that have traditionally hindered skills inventory management efforts: ‡ Ease of Testing²An online system makes it easy for employees to measure their skills at will.and provide fast. actionable feedback. Through an online testing system. an online system can facilitate challenging repeat assessment by dynamically selecting questions as the test is being taken. Because of this repetition. Traditional tests may present the employee with the same questions over repeat assessments. Results can be calculated and delivered immediately. Employees can access skills assessments online and take tests on their own schedules.

Skills inventory management is no exception. focus training. traditional skills management efforts must address a common reporting problem: INVENTORY MANAGEMENT Page 83 . and deploy project teams. For employees. an online system can provide a practical skills management resource for employees and company decision-makers alike. But what keeps them coming back? In an efficient skills inventory management effort. With one data repository at their fingertips. managers have real-time access to the information they need to assemble teams. 4 Thought Leadership Report October 2002 Reports: Four Essential Components for Skills Inventory Management 4. feedback stimulates selfimprovement and is provided at the time when motivation for improvement is strongest² immediately after an assessment.‡ Fast. A Practical Tracking and Reporting System The success of any inventory management initiative is based on its ability to deliver consistent. The immediate availability of objective metrics enables managers to take action to focus training. the answer lies in the immediate feedback provided by an online system. or make many skills or performance-related decisions. Meaningful Feedback²With ease of use and repeatability. actionable results. To be effective. make assignments.

accurate and relevant data is just as important. or track size of the enterprise. INVENTORY MANAGEMENT Page 84 measurement systems automate the reporting employee learning progress across the organization. The results delivered by online reporting systems can be used to determine skills gaps. In traditional skills management initiatives. An online system delivers results without bias.Problem²Skills data commonly becomes mired in disparate administrative processes before it can be interpreted into actionable information. based on calculations from the test-taker¶s answers. The idea of objective test results is not new²but the online measurement system is the first to be able to deliver objective results repeatedly. Solution²Objective process. the need for repeatable real-time measurement and reporting is often overlooked as impractical or impossible. regardless of the . With a skills inventory management initiative. identify top performers. easy access to detailed inventory information is crucial. Lying at the heart of an objective skills measurement system is the automated reporting function. Faced with the prospect of managing large amounts of raw data or continuously pursuing employees to assess and reassess their skills. across a large body of test-takers. manager support for a skills inventory management initiative will decline. If you are running a warehouse. and with no administrative burden.

the systems for applying Business 101 principles to the inventory of employee skills have not been available.Skills Inventory Management Delivers a Human Capital Advantage The need for skills inventory management has never been greater. however.6 billion multiyear investment in the agriculture INVENTORY MANAGEMENT Page 85 . Launched as 'your friendly neighbourhood store'. Just before its launch. For more information about Brainbench call 703. Mukesh Ambani had announced a $5.5 million).000 (Rs 0.2 million). The footfalls were as high as 4. its chairman.674. in June 2006.3461 or visit www. and you¶ll avoid many of the mistakes that have kept other skills inventory management initiatives from getting off the ground. as all organizations struggle with the challenge of optimizing their investment in human capital. the typical Reliance Fresh store was spread over an area of 2000 sq ft.000 per day. Until now.brainbench. 0. Sales from the recently opened ³Reliance Fresh´ outlets had exceeded all estimates with an average sale per store greater than $12.000 (Rs. against expectations of $5. Make sure that your organization¶s approach includes each of the above four basic components.com Reliance Fresh Stores in Food Retailing In April 2007. it was time for celebration at the headquarters of Reliance Industries Limited (RIL).

He aimed at making a new company. breads and dairy products. This was to be achieved through an integrated supply chain process and with efficient delivery of value to the consumers. there were plans to commission more city distribution centres and city processing centers that would further strengthen the supply chain. Yet his confidence and optimism did not mean that all questions about his business model were fully answered. said his firm offered "unmatched affordability. INVENTORY MANAGEMENT Page 86 . pulses. who visited all 11 shops on the eve of opening. The stores offered fresh produce. RIL Foods Business." President and CEO. "The focus was on fresh fruits and veggies. Ambani. vegetables. Looking at the very encouraging response from the public and the buyers. ³Reliance Fresh´ intended to bring high quality fresh food to the customers at an affordable price. groceries and staple products that consumers buy.and retail sectors. ³Reliance Retail´ the sector's dominant player. or that the answers had been validated yet. quality and choice of products and services to the customers". There certainly appeared to have been an overwhelming response to Reliance Retail in the first year of operations.

Karnataka and Tamil Nadu. pulses and spices from the farmers of Andhra Pradesh. retail was the fastest growing sector in the Indian economy. Western-style malls had begun appearing in metros and second-rung cities alike. Opportunities for Retailing in Agri-Business India's retail sector was undergoing a transformation and with a three year CAGR of 46. The stores directly procured vegetables. Raghu Pillai. hypermarkets.64%. Reliance Fresh aims to target and exploit this very segment in which it foresees huge potential for further robust growth. family-run stores and the sector has not been tapped by big businesses. supermarkets and specialty stores. rice. INVENTORY MANAGEMENT Page 87 . ³About 95% of India's retail sector is made up of small. Most of the products were being retailed under µReliance Select¶. the ³Reliance Select´ brand covered pulses.Gunender Kapur said. which contributed to quality and pricing advantage. a premium food brand launched by Reliance. introducing the Indian consumer to an unprecedented variety in shopping experiences. Traditional markets were making way for new formats such as departmental stores._ President of operations and strategy at Reliance Retail said.´ Yet Pillai was realistic about the need for strategies to survive existing and growing competition in this new sector. spices and vegetables. In April 2007.

it was the principal component of their consumption expenditure accounting for as much 53%.08 billion. strong income growth and favourable demographic patterns. the branded food industry was homing in on converting Indian consumers to branded food. growing at about 1. While organized retail in India was only 2% of the total US$ 215 billion retail industry. driven by changing lifestyles. provided a large and growing domestic market for food products.1 Unlike in the developed world. A retail consulting and research agency had predicted that by 2010. it was expected to grow 25% annually. The segment aged between 20-45 years was emerging as the fastest growing consumer group and the mean INVENTORY MANAGEMENT Page 88 .7% of the total private consumption expenditure for an average American. a huge population base of 1. the country¶s middle class had been expanding due to rapid urbanization.6% per annum. food dominated the shopping basket in India. organized retailing in India would cross US$ 21. At the same time. for the Indian. Since much of this was non-branded (including perishable items like fruits and vegetables).India's vast middle class and its almost untapped retail industry were key attractions for global retail giants wanting to enter newer markets. While food accounted for only 9. Also. 15% for the Japanese & British. increasing per capita income and credit card ownerships.5 billion mark. increased participation of women in the urban work force.

and agribusiness. Agriculture was the backbone of the Indian economy as Nature had been very favourable to the country. Source: Marketing Reforms & Enhancing Competitiveness. a mean age that reinforced spending across all retailing channels of grocery. this comparative advantage was one of the reasons for the advent of a number of retail majors into food retailing in the past few years. accounting for ¾ of overall retailing value sales as shown in Fig-1. as against the global average of 11%. non-grocery and non-stores. India had great bio-diversity and accounted for 17% of animals. Also. Of the land within its boundaries. tobacco business. There was hardly any supply chain integrator or channel master for retail INVENTORY MANAGEMENT Page 89 .age of Indians was now 27 years. Source: KMPG in India Retail Survey 2005. 12% of plants and 10% of fish genetic resources of the world. food & grocery retailers continued to be the staple of retailing in 2005. All the major 15 climate types existed in India and sunshine hours and day length were ideally suited for good cultivation round the year. Undoubtedly. 52% was cultivable. Unsurprisingly. Many were leading players in FMCGs. 2006 However. The result was lots of wastage (as much as 30%) and small remunerations for the farmers (Exhibit-1). the supply chain that connected the vast natural resources and the farmers to both organized as well as unorganized retail was highly inefficient with several intermediaries and manual handling.

First. distribution. cold chain. Reliance Fresh believed that it could unleash that potential for profitable foods and vegetables retailing.channels in this sector. store management warehouse and the entire supply chain were much neglected both by the Central and State Governments. There were three basic reasons for Reliance Industries Limited (RIL) choosing foods and vegetables for entering into retailing. Growth in Indian food market Reliance Fresh Reliance Fresh was the first foray into retailing by the $25 billion behemoth known as Reliance Industries Limited. it wanted to go after the very core of the great Indian retail INVENTORY MANAGEMENT Page 90 . pre-harvest and post-harvest methodologies. transport. packing. RIL was aware of this and hence was keen on setting up its own supply chain which could be more efficient than the existing ones. processed food product development. Research on improving farm productivity. the plentiful natural resources were underutilized or not efficiently utilized for agriculture in India as Indian rural life had not qualitatively changed over the decades. At the same time. chain in India In effect. There was little attention to value added agriculture in the whole country. it was generally recognized that there was tremendous potential for growth of the food market in the Indian context (Exhibit-2).

Second.CS-08-029 beginning in the southern states. its aim was to build a high-profitability business and food was perhaps the best place to start. Third. RIL planned to invest $63. there were several intermediaries. it had seen hardly any penetration by modern retail so far. In the traditional supply chain in India. Reliance Fresh launched by opening new retail stores in Hyderabad on 3 November 2006 (Exhibits 3-4).000 retail outlets in different cities.50 billion (Rs. Stores remained open from 9am to 9pm. the grossly inefficient food supply chain provided a well resourced and well managed organization like RIL with an opportunity to think of amending the flaws which would also make business sense.500 billion) over the next five years in the retail business with 4. 2. Small is Sensible INVENTORY MANAGEMENT Page 91 .opportunity. there was huge wastage in transit. Besides. 12 "Fresh" outlets opened in Chennai increasing the total store count to 40. On 24th January 2007. Food accounted for over two-thirds of the $200 billion Indian retail market and yet. . Reliance was testing its retail concepts by controlled entry.8 . This offered potential for savings and profits and Reliance Fresh was a step in that direction. who added their respective profit margin to the cost.

Industry sources expected Reliance Fresh to turn this capital over six times. Reliance Fresh opened its 100th outlet in the country in the national capital.000 sq ft. ³Each of our stores aim at catchments of only about 2. New Delhi. Reliance Fresh. Each store would have an investment of approx $127.´ shared Jai Bendre. In addition to this.000 (Rs. Head of Marketing (foods).000 (Rs. INVENTORY MANAGEMENT Page 92 . Reliance Fresh aimed at opening stores in the top 70 cities within the next two years and attaining sales of $25 billion by 2011. The stores stocked their own private label in staples and food under the "Reliance Select" label (Exhibit-8). Eventually the label would include other food categories such as dairy products. jams and colas.000 rural towns in India over the next five years. Bangalore was said to have 40 stores in all by the end of the year. This was the concept of a neighbourhood store. staples.000 households in a 2-3 sq km radius. The push in the retailing of perishables was part of an overall planned $5 billion project which was aimed to cater to more than 780 cities and 6. 6 million). The Fresh model was engineered to clock a faster turnover of inventory ² Reliance expected consumers to visit the store at least twice a week for their top-up groceries. FMCG products and dairy products (Exhibits 5-7). and stocked fresh fruits and vegetables.500 sq ft to 3.The store¶s size varied from 1. 5 million) to $153.

000-10. or MTR¶s Masala¶s or Pepsi¶s Lays chips.000 sq ft in comparison to a supermarket which needed 8. It aimed to be a channel for not only consumer sales but also positioned itself as a distribution channel for other small outlets in various parts of the city by building an integrated supply chain to deliver and operate its µFarm to Fork model¶. pulses and dairy goods from farmers as it moved to build a 'state-of-the-art supply chain spanning the entire country'. there was very little shelf space given to the big brand owners in the country. Most of the staples were under its own private label brand ² µReliance Select¶. The company had been racing to set up deals with state governments to establish rural hubs to buy fruit. vegetables. Except a few packets of Nestlé¶s Maggi. These stores would be of 2. Reliance Fresh¶s shelves provided an indication that the group was looking for higher margins.Reliance Fresh had consciously adopted a business model of operating through small and medium size stores. In the current business model it had positioned itself as a food and grocery convenience store.000 sq ft.000-5. INVENTORY MANAGEMENT Page 93 .

´ said a group official. the leafy vegetables. The INVENTORY MANAGEMENT Page 94 . let alone cold storage and sophisticated supply chains. Reliance Fresh also wanted to establish a benchmark of hygiene and quality in their sales.The traditional model of vegetable retailing in India involved vegetables being sold in small ³stores´ on the roadside. said Mukesh Ambani. For example. and there were no formal rules regarding weighing. Produce travelled slowly and inefficiently through a series of intermediaries before reaching the hands of customers. suffering mark-ups. This in effect got translated into lower prices by at least 15% to 20%. bargaining and quality issues. ³Reliance Fresh´ marketing model operates on affordability and a hygienic ambience along with a good shopping experience´. almost never from the mandi (wholesalers). tomatoes and green chillies in the one of the outlets in Mumbai were sourced directly from farmers in nearby districts. but we aren¶t playing a price game here. aubergines. Reliance Fresh intended to bring high quality fresh food to the customers at an affordable price. ³We'll be very affordable and competitive in the market. the Chairman of RIL. It thus sought to provide the consumer affordable and quality produce in a congenial and pleasing environment and enforced stringent quality and hygiene guidelines which would help it bring high value to the consumer Supply Chain ³We will always buy from the farmer. wastages and quality losses along the way.

³Already. reasoned the same group official. fertilisers and other essential raw materials is on the cards. This gave the retailer little opportunity to improve profit margins. Reliance Retail hoped to disintermediate the supply chain and eliminate waste. How far backwards would Reliance have to integrate to assure such supply? Current Supply Chain Diagram of Reliance Fresh Scale behind the scenes: Rural Business Hubs Globally. In the next five years. Even contract farming ² by assisting farmers in procuring high-quality seeds. steeped in tradition. a few hundred farmers have been hooked on to the Reliance Retail supply chain. supply chains were fairly mature and efficient. But in India. Produce from the farmers came to Reliance's city distribution centre. which connected two very different sides of India. and the wealthy city centers. any retailer who built INVENTORY MANAGEMENT Page 95 .full effort is to deliver value to the customer. KS Venugopal. there was a general concern in the industry about the possibility of steady and high quality supply of vegetables and other perishable food items to the huge number of proposed retail outlets. This meant fresher products at lower cost´. Customer Operations. that number will grow to millions. By going to the farmer directly.´ said Chief Executive. the poverty-ridden countryside. Still.

process and distribute fresh and value-added products at the district level. This can be shared by customers and shareholders. RBHs would provide agricultural inputs.an efficient supply chain stood to gain. Kapoor quelling the apprehension that the presence of organized retailing could doom the fate of small neighborhood retail stores. Reliance Industries¶ (RIL) was planning to acquire over 2. ³With efficient sourcing. store. financial services. The first such hub would start by October 2007. which could emerge as one of its hubs for farm produce exports. This means even your local pushcart vendor could be selling vegetables sourced by Reliance. pack. The company was also ready to enter into INVENTORY MANAGEMENT Page 96 ." emphatically added Mr. we can release margins into the system. The company was planning to set up Rural Business Hubs (RBHs) which would be the strategic business platform for providing comprehensive range of products and services to the rural communities.´ said Gunender Kapur. president and CEO (Foods). The company planned to own and operate a complete value chain by identifying potential geographical clusters to implement farm initiatives and create an infrastructure to collect.000 acres for its contract farming venture in the State of Karnataka. Reliance Retail. cash and carry wholesale format.

which in some cases were located 40-50km away from their villages. 2006 ±Exhibit-9).12 . There was one INVENTORY MANAGEMENT Page 97 .7.25 (Rs. Most farmers were also able to save on time. effort and money as they were not required to transport their produce to the wholesale markets. farm producers selling to Reliance Fresh were getting better returns on vegetables produced by them. which would see it operating a massive fleet of cargo flights within India and overseas. had set up its procurement centres nearby. It had already unveiled ambitious contract . µRangers Farm¶. the farm produce procuring arm of µReliance Retail¶ was buying Bhindi (okra) at more than $0. Reliance.CS-08-029 farming plans nationwide. Its plan entailed acquiring 10-acres each of the nearly 200 administrative subdivisions in the state. Win-Win Situation? According to early news reports published in the Hindu Business Line (December 16.18 per kg (Rs.contract farming operations in the states of Haryana and Maharashtra. on the other hand.50) (less 10% commission) being offered by traditional vegetable wholesalers. For example. Also in the pipeline were the company¶s plans to set up warehouses across the states.10) per kg against $0. It was learnt that RIL had recruited a vast number of agriculture graduates for this project.

higher returns and improved cost-benefit ratio. Vegetables before being accepted by the Reliance arm were required to be graded based on their quality and freshness. The services offered were crop advisory services. transfer of information (weather. had the potential of saving 30-35% in costs. a venture of Godrej Agrovet was a complete solution provider for the Indian farmer. dairy and poultry retail business through their Nature¶s Basket stores in the urban areas. soil & water testing services. While INVENTORY MANAGEMENT Page 98 . It provided professional guidance with an objective to improve productivity. Although wholesalers refused to admit any impact of Reliance and other chains on arrivals of farm products in the wholesale markets. door delivery of products etc. The company started its fruits. Efficient supply chains. supply of agricultural inputs and animal feeds. And at the same time. there was no denying the fact that a quiet revolution was taking place in the countryside as more and more farmers had started to see the benefits of selling their produce directly to the retail chains. It already had 33 stores across the country. crop finance. which it planned to increase to 45 very soon. government was getting improved tax revenue as vegetables and groceries were now taxed through these outlets.catch. price & demand±supply). backed by superior logistics management. Major Players in Food and Vegetable Retailing in India Godrej Aadhar. however. particularly for perishable items like flowers and vegetables. vegetables.

100 million) last INVENTORY MANAGEMENT Page 99 The Chennai-based discount retail chain Subhiksha . the group planned to add another eight in Mumbai itself.seven Nature¶s Basket stores were already functioning in Mumbai. before it set base in Delhi. . The company had been making profit for the last eight years.CS-08-029 Subhiksha: announced a $0. As part of expansion. Besides Delhi.30 billion) expansion plan to venture beyond its home base of Tamil Nadu by setting up nearly 450 stores in the National Capital Region and four other states.2 billion (Rs. The target was for setting up 1000 outlets by 2010.13 . Gurgaon.81 billion (Rs.33 billion) with a profit of $2. the company proposed to open stores in the states of Maharashtra. For the Delhi market. and its revenues had grown 25% in the last two years. Amritsar and Ludhiana.7 billion (Rs. The company earned revenue of $0. Chennai.5 million (Rs. Chandigarh.10 billion) over two years. Hyderabad. Andhra Pradesh and Karnataka. the company had earmarked an investment of $0. the company planned to increase the number of stores to 600 from 150 now by end of 2007 to create a national footprint. It had adopted a ³Hub and Spokes Model´ for its distribution network. Gujarat.

And it expected the organised retail market for fresh produce would touch $12. the freezer trucks in which farmers send produce. The expansion was expected to add around $391 million (Rs. ITC had brought a network of insurance companies. sourced directly from farmers from all over the country. with their own cold chain supply to wholesale and retail clients. micro-finance entities.year. It was the first of 140 stores that ITC planned to open in 54 Indian cities over three years at an investment of $1. e-learning and training organisations to rural India. The e-choupal project was empowering farmers and in turn.9 billion (Rs.4 billion (Rs. ITC had designed the supply chain in collaboration with Ingersoll Rand and Mitsubish's Snowman. helping create new businesses for the company. ITC Choupal Fresh stores were started in the cities of Chandigarh.35 million). Internet access).86 million (Rs. Every store on an average had a billing of $0. 80 billion). Ingersoll Rand had designed the climate-control shelves. and Snowman managed the logistics of the produce. seed and fertiliser companies. 15. FMCG. These projects essentially worked on digital infrastructure (IT. The store stocked only fresh fruit and vegetables. banks. 500 billion) in the three years.750 million). physical infrastructure (rural Internet enabled offices) human infrastructure (managers and IT professionals) and network orchestration by ITC. As an intermediary. INVENTORY MANAGEMENT Page 100 . Hyderabad and Pune. the pre-coolers.

irrigation items and other key inputs like diesel and petrol at fair prices. pesticides. Each Hariyali Kisaan Bazaar centre operated in a catchment of about 20 km. It INVENTORY MANAGEMENT Page 101 . shrimp. A typical centre catered to agricultural land of about 50. wheat. coffee. animal feed. pulses. The chain successfully ran its business through 33 stores in five rural locations in North India. soyabean. seeds. access to new markets and output related services. It was looking at approximately 10 million square feet of retail space across all cities in India that had a population of over 1 million. which created a far-reaching positive impact in bringing a qualitative change and revolutionising the farming sector in India. Bharti Retail planned to invest $2-2. farm implements and tools. Each centre provided support through a team of qualified agronomists.Launched in June 2000. provided a complete range of good quality.500 strong e-choupal kiosk's services reached millions of farmers growing a wide range of crops and seafood.000-70.000 acres and made an impact in the life of nearly 15.5 billion by 2015 in its pan-India operations. rice. The centres also provided access to modern retail banking and farm credit. multi-brand agri-inputs like fertilizers.000 villages across nine states of the country. farm produce buyback opportunities. veterinary products. in over 38. in 7 years the 6.000 farmers across India. Hariyali Kisaan Bazaar: The Hariyali Kisaan Bazaar was a pioneering micro level effort.

000.000 people. vegetables.planned to employ 60. processed foods besides other FMCG and consumer durables. The company had grown exponentially with the number of stores. the company acquired another chain Fab Mall which operated 12 outlets and achieved sales worth $12.5 billion (Rs. when it procured a major chunk of apples from the hill state. This expansion would see the number of outlets increase from present 92 to 175. more than tripled in 5 years. Trinethra and Fab Mall had drawn up an ambitious plan to breakthrough the $2. 100 billion) barrier sales by 2008 and for this plans were afoot to cover six new states by 2008.000 sq ft. Adani Agri Fresh launched operations in Himachal Pradesh last year. Ahmedabad and Kolkata. dairy products. The orchardist in the largest apple growing state in the country got a much better price from the agrimajor and they were also spared the hassle of packaging their produce and transporting it to big markets in Delhi. Mumbai. operating in 9 cities of Andhra Pradesh. In 2003-04.4 million (Rs. The company planned to launch its retail outlets in multiple consumer friendly formats. staples. including hypermarkets and supermarkets. covering retail space of more than 15. INVENTORY MANAGEMENT Page 102 . They had plans to serve all regular shopping requirements of an Indian household²fruits. meat and poultry.500 million). Trinethra was a 98 outlet strong chain.

000 managers for the new business. INVENTORY MANAGEMENT Page 103 . Future Plans and Challenges Senior officers in the company were known to have set a ³conservative´ sales target of $25 billion for the next five years. 11 billion) in the hill state for setting up controlled atmosphere packaging and storage units. Reliance was selecting locations for the stores.16 billion) to set up its own cold chain of refrigerated vehicles for transporting apples.000 staff as well as create at least one million jobs indirectly. The company had aimed at setting up as many as 60 distribution centres across the nation to feed its retail chain and planed to initially contract trucks and warehouses with cold storage facilities and then build its own. setting up agreements with farmers to buy their produce and tying up with manufacturers for merchandise ranging from consumer electronics to apparel. This year.Adani had already made an investment of over $280 million (Rs. the company planned to invest over $408 million (Rs. said a senior Reliance official. almonds and peaches. kiwi. Reliance planned to invest $7-8 billion in setting up its stores arm that would cover 1. The firm expected to employ 500.500 Indian cities and towns in the country. The company had hired 6.

It was recognized that different retail formats other than the city based stores might be necessary in different markets. In towns and villages, it would have so-called hypermarkets ± warehouse style stores spread over 150,000 square feet, or about 14,000 square meters, selling groceries, fresh food, consumer electronics and clothes. The company would also open smaller, 75,000 square feet, supermarkets. Larger metropolises like New Delhi and Mumbai would have smaller stores depending on the availability of real estate. Yet, despite these dramatic expansion plans, several questions remained: How would competitors, including the formidably resourced ITC and Godrej groups respond to these expansion plans? Were they perhaps ignoring the most obvious source of competition- the traditional small neighbourhood grocery store, where the shopkeeper knew every customer (and his needs) by face, and was willing to extend credit till the next pay check? How necessary and realistic were Reliance Fresh¶s plans to backward integrate all the way to ATTRACTIVE RATES for produce, and no commission _ Twenty-five-year-old Mr Rami Reddy, whose joint family owns 20 acres in Lakshmareddy Gudem, a small village in Rangareddy district near Hyderabad, has been growing brinjals in one or two acres for the last eight years. But he never saw a price for his produce that he got this season from Reliance.
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Not only that. He could save money, time and effort in taking the produce to the Bowenpally market, 40 km away. "All we need is to take the produce there. We need not pay any commission not to speak of the hamali charges," he said. "Two months ago, Reliance representatives came to me and told me about their plans to procure quality brinjals for their upcoming outlets in Hyderabad," he told Business Line. Mr Reddy is not alone. "It has become a hot topic for discussion among the villagers. Everybody talks about the attractive rates," he said. Collection centre He is not exaggerating. About 200 farmers from villages in the area have started selling their produce at the Collection Centre set up by Reliance at Shankarpally. The centre collects 7-8 tonnes of vegetables a day and send the lot to the central processing centre at Medchal. Vegetables from 2-3 such centres get graded again and processed there before getting into the 17 `Fresh' outlets the company opened in the twin cities. "We used to sell a 20-kg bhindi (okra) bag for just Rs 150. But now we are getting Rs 10-11 a kg," Mr Jangaiah of Alamkhangudem said. "It is not just the higher price. We also save on the 10 per cent commission we pay at the market yards," he said. But they understood quite well that the µmaal¶ (produce) should be fresh. "It should be plucked too in a certain way. All my life I grew bhindi (okra) the
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way my father did and sold as he did in the market. They (Reliance) do not take the second grade vegetables. But it seems I have to change," said. Mr Venkatrami Reddy of Chinnareddy Gudem saw another advantage. "They would tell me what quantity of vegetables they need from me. I'll go there and get my consignment graded at their collection centre," he said. The centre would get the price-band and quantity of vegetables it needed to collect that particular day. Mr Vithal, Secretary of the Agriculture Market Committee at Shankarpally, felt that the procurement by µRanger Farms¶ (through which Reliance procures vegetables) has no impact on the arrivals at the committee. The committee accepts vegetable consignments two days in a week. "Some days we receive more and some days we see less arrivals. We haven't yet seen any decrease on account of their (Reliance's) entry," he said. Asked about farmers' claim that they paid 10 per cent as commission, Mr Vithal said the committee charged four per cent. The farmers also needed to pay for weighing and hamalis, he explained. immobile shop.

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Case Study: Maslo Profits From the Computer Age Case study PDF Founded in 1978. and none of Maslo¶s current employees had the computer savvy nor the time to put together the muchINVENTORY MANAGEMENT Page 107 .000 tons of scrap paper every year. Inc. Maslo has grown into a company that buys and sells over 250. Maslo was generating its own mountain of paperwork trying to keep on top of the large quantity of shipments coming into the warehouse and the orders going out. Almost 80% of Maslo¶s business is "brokerage"²moving paper from point to point without the reseller ever physically taking ownership of the material. is a full-service. classified. Although much of that paper never crosses Maslo¶s threshold. like many small to mid-sized businesses. Its executives saw the need for a computer network with integrated software packages where data would be entered only once and reports could be generated in minutes rather than days. In addition. and entered into inventory and the vendor must be credited. The paper that does arrive on site must be weighed. Like any other company. Maslo had much to gain from computer technology.. Pennsylvania. Having no way to get a real-time picture of accounts payable and receivable was also a problem for Maslo executives. those lots still need to be tracked and recorded while the product is in transit. "recovered paper" reseller based in Conshohocken. However. Started as a family business. Maslo Company. Each particular lot is then reprocessed and/or shipped to the buyer. Maslo needed to find faster ways to answer client questions such as how much of a particular paper was in stock or if there was a buyer for a specific lot. Maslo lacked the funds for a full-time computer person.

Prior to 1995 and the hiring of CISS. The basic computer infrastructure was severely out of date and unreliable: inventory was tracked via a program that was little more than a spreadsheet. installing cutting-edge business software.needed computer network and to shop around for the appropriate software products necessary to increase productivity. his knowledge was dated and did not include the networking skills required to provide the desired functionality. Ben Spalding. and restrictive to growth. Because the man was no longer working in the industry. perhaps the most frustrating of all. Maslo¶s first foray into the tech world was to hire a retired IBM employee as a consultant to set up a network and inventory system. buyer. Operating in the crudest sense The solution was to hire the newly formed CISS. payables and receivables were handled using a stand-alone computer program. the network was a daisy chain of 10b2 lines. The company was operating in what vice president and general office manager Rob Loose. Through a series of steps. and. Jr. and creating a customized database that would allow instant access to crucial vendor. Ltd. All personnel involved were overworked and harried by vendor and customer requests for more information. began working as a consultant to Maslo. which would be responsible for setting up a reliable computer network. This attempt failed. and business information. Spalding created a computer environment that INVENTORY MANAGEMENT Page 108 . and the server was noted mainly for its crashes." In 1995. frustrating. Maslo was utilizing a very low level of technology.. summed up as "the crudest sense. He immediately assessed Maslo¶s needs and set about turning the ³technologically challenged´ office into a ³technologically sophisticated´ business. no one knew the state of the business at the end of the day.. The day-to day operation was largely paper-based. cofounder of CISS.

antivirus software. this customized package gives Maslo the flexibility it needs to process orders. Spalding focused on three areas that required immediate attention: infrastructure.3 as the main software package to Windows 95 and MS Office. Spalding was able to reuse or reconfigure all of the existing hardware.2. increase profits. Although the other areas offered much to Maslo employees. upgrading the server. Spalding added auxiliary software products that are essential in today¶s computer environment. antivirus and backup software with a tape backup system is essential for every computer. Tapping into computer technology The infrastructure changes involved reconfiguring/purchasing computers. home or office. These included faxing software. (Many smaller companies do not have those vital pieces of software. and inventory tracking/order processing software. and get real-time sales figures or at-a-glance inventory reports. the users are most impressed and satisfied with the inventory tracking/order processing software. Based in MS Access. The environment was changed from OS/ 2 with Lotus 1. This ³cradle-to-grave´ transaction program ties inventory to actual orders. Several up to-date PCs were added later for the employees who did not previously have desktop computers. and upgrading the network. track inventory. Spalding upgraded to 10baseT network hubs. including five 486-25MHz PCs.has enabled Maslo to increase its volume of business. Maslo¶s customized software product contains many of the features INVENTORY MANAGEMENT Page 109 . and actually expand to a second office several states away. however. In addition to the infrastructure updates.) An integrated accounting interface known as Sage¶s Business Works was also added for accounts payable and receivable. auxiliary software. To eliminate the slowness of the previous network. Understanding a small business¶s desire to keep costs down. and automated backup software.

available in CISS¶s Inventory Pro. Both products are integrated with the web so users at remote sites are able to access them and additional users can be added without paying for another license. and has access to the same information available at the office. The web interface offers any user on a PC/Mac running a browser on the Internet the same functionality as the LAN-based. Harnessing the Internet CISS has also added several features to allow Maslo to make use of the vast potential of the Internet. And while the actual volume of paper handled has increased from 11. Maslo opened a second office in North Carolina and hired several field salespeople. The user simply types the URL. These employees are able to connect to Maslo¶s home office and inventory tracking/order processing software via the Internet. CISS has set up a web-based Internet server with a DSL connection at Maslo headquarters.000 tons per month to 17. Maslo has gone from processing 550 orders per month to 850 per month. An employee is able to connect to the inventory/order database evenings and weekends to check things such as contact information or company reports. employee email accounts. Along with standard web server features.000 tons per month. This server hosts the company website. Since the inception of these changes. In addition. Maslo needed to hire only one new office assistant to process these additional orders. MSAccess application running in Maslo¶s headquarters. Maslo maximizes its use of the Internet through a special interface developed by CISS. This interface gives Maslo employees and execs access to their customized inventory tracking/order processing software when they are at home or on the road. INVENTORY MANAGEMENT Page 110 . enters an assigned username and password. That equates to a 54% increase. and other web services.

and all of the Internet components. IPOL is capable of exchanging information with third-party applications on a multiplatform basis using a new industrywide BizTalkTM initiative sponsored by major Internet players including MicrosoftTM. This decreases down time and cuts costs because a CISS staff member is able to troubleshoot a problem or reset a system without making an in-person service call. As the volume of data increases. Originally. CISS personnel are also able to access crucial Maslo computers through remote access software when necessary. through monthly office visits.The next phase in Internet development will be to set up a information site where customers can access real-time order and shipment status. Maintaining the technological edge In order to keep Maslo¶s computer network on the cutting edge. At a later date. CISS increases the size of the server and updates its software accordingly. IPOL also supports the popular IBM MQ SeriesTM package. Maslo may decide to maintain INVENTORY MANAGEMENT Page 111 . the web server. currently CISS maintains all of the fifteen or so desktops. Other third-party messenger services or electronic data interchange (EDI) formats can be supported on a custom basis. A shopping cart interface may also be established to offer available inventory to customers. CISS maintains regular contact with Maslo and. This will give clients a place to look up important information without having to contact the Maslo office and a place where orders can be taken 24 hours a day with no employee interaction. Maslo planned to maintain its own computers. the NT servers. however. performs software/ network updates that add to the functionality of the customized software.

the computers in-house. but for now it finds CISS¶s service to be cost effective and far superior to what it could provide itself. INVENTORY MANAGEMENT Page 112 . Through their relationship with CISS. They are able to make informed choices when confronted with new technology and have computer support. Maslo executives now have a state-of-theart computer network.