Industry Profile Management Inventory

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.
INVENTORY MANAGEMENT Page 1
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.
DEFINITION
Definition Inventory Management Inventory Management: Inventory Management relations Software and definition processes, and logistics, processes, inventory
wholesaler/retailer
management, compliance definition of inventory system: definition of inventory system Can Be Found On This Site. definition of inventory system updated daily. requirement level risk definition, inventory management assumptions .
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

revolutionary innovation in organization or technology largely ignored by its contemporaries, rather than instantly copied like we in the modern world have come to expect. The most famous example is the failure of China to apply gunpowder technology to weapons. The Ancient Greek discovery of the steam engine principle, and its use to power a toy, comes in second. Major innovations in manufacturing and were made at the Venetian Arsenal, but the spread of these innovations throughout Europe would wait until the start of the "Industrial Revolution".
By the 16th century the Arsenal was the most powerful and efficient ships and munitions manufacturer in the world. It was capable of producing one fully equipped merchant or military vessel per day, whereas production of similar sized and featured ships elsewhere in Europe took months. 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. The employees directly engaged in producing ships and the rope, oars, cloth, storage containers, weapons and other goods they required often lived close by, in the buildings around the shipyard.
The records of Christendom's wars against the Turks are full of references to the power and influence of Venice, 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. Despite its geographical diminutiveness, Venice's naval power
enabled it to control the strategic islands of Crete and Cyprus in Ottoman coastal waters. The naval power of Venice in this period was a result of factors additional to its effective shipbuilding. The Venetian government had all its merchant ships carry arms on board. 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, not slaves or mercenaries, and debtors could pay off their obligations by serving as rowers. Nevertheless, it was Venice's logistical and manufacturing muscle that floated and maintained its powerful navy.
To ensure access to necessary raw materials Venice had seized and kept control over passes through the Alps to German lands in the North. 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 Venetian bureaucracy well understood that the city's success depended on its navy and army, and that the success of its navy and army depended on logistics. To this end, Venice devoted 10% of its public budget to the mighty Arsenal.
At the Arsenal, shipbuilding parts were standardized, and each major component of this early bill of materials was produced by a specialized team of workers. The necessary parts were then assembled by another team, following which the ship would be moved to another part of the workbuildings for furnishing. The
managers of the Arsenal closely coordinated their policies and projects with officers of the Venice government. The buildings housing the Arsenal were continually expanded to ensure
sufficient space for the ever-growing workforce. Eventually even technological research, experimentation, and weapon and ship design were being carried out at the Arsenal.
Concentration of every necessary asset at one spot, division of labor, government-protected access to plentiful raw materials, and close coordination with the government bureaucracy were the keys to the power of the Arsenal. At the Arsenal, the modern concepts specialized anticipated. of standardized work groups, parts, and assembly-line vertical production, were
integration
That is why it is sometimes called the first factory in the world.
The Words we Use - the words factory and manufacturing are related, both deriving from the Latin factor, meaning doer, maker. Manufacture means to make with the hands from factor and another Latin word, manus, meaning hands.
Purpose of Inventory Management

INVENTORY MANAGEMENT must tie together the following objectives ,to ensure that there is continuity between functions : Companys Strategic Goals Sales Forecasting Sales & Operations Planning Production & Materials Requirement Planning.
Inventory Management must be designed to meet the dictates of market place and support the companys Strategic Plan . The many changes in the market demand , new opportunities due to worldwide marketing , 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 .
Inventory Management system provides information to efficiently manage the flow of materials , effectively utilize people and equipment , coordinate internal activities and communicate with customers . Inventory Management does not make decisions or manage operations, they provide the information to managers who make more accurate and timely decisions to manage their operations.
INVENTORY is defined as the blocked Working Capital of an organization in the form of materials . As this is the blocked Working Capital of organization, ideally it should be zero. But we are maintaining Inventory . This Inventory is maintained to take care of fluctuations in demand and lead time. In some cases it is maintained to take care of increasing price tendency of commodities or rebate in bulk buying.
Traditional Supply Chain solutions such as Materials Requirement Planning , 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 . Optimization means providing a balance of supply to meet the demand at a minimum total cost , Inventory level and workload to meet customers service goal for each items in the link of Inventory Chain .
It is strategic in the sense that top management sets goals . These include deployment strategies ( Push versus Pull ) , control policies , the determination of the optimal levels of order quantities and reorder points and setting safety stock levels . These levels are critical , since they are primary determinants of customer service levels.
Keeping in view all concerns , the latest concept of Vendor Managed Inventory is used to optimize the Inventory . We are entering into Vendor Managed Inventory , Annual Rate Contracts with manufacturers or their authorized dealers , who maintain Inventory on our behalf and supply the items as and when required .
VMI reduces stock-outs and optimize inventory in supply chain . Some features of VMI include : Shortening of Supply Chain Centralized Forecasting Frequent communication of inventory, stock-outs and planned promotions Trucks are filled in a prioritized order , e.g. 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, the basic principles of Inventory Management and Inventory Control remain the same. Some of the new approaches and techniques are wrapped in new terminology, but the underlying principles for accomplishing good Inventory Management and Inventory activities have not changed.
The Inventory Management system and the Inventory Control Process provides information to efficiently manage the flow of materials, effectively utilize people and equipment, coordinate internal activities, and communicate with customers. Inventory Management and the activities of Inventory Control do not make decisions or manage operations; they provide the information to Managers who make more accurate and timely decisions to manage their operations.
The emphases on each area will vary depending on the company and how it operates, and what requirements are placed on it due to market demands. 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.
Inventory is usually a distributors largest asset. But many distributors arent 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), backorders and customer lost sales are common. The material a distributor has committed to stock isnt available when customers request it. Computer inventory records are not accurate. Inventory balance information in
the distributors expensive computer system does not accurately reflect what is available for sale in the warehouse. The return on investment is not satisfactory. The companys profits, considering its substantial investment in inventory, is far less than what could be earned if the money were invested elsewhere
Role of inventory accounting

By helping the organization to make better decisions, the accountants can help the public sector to change in a very positive way that delivers increased value for the taxpayers investment. It can also help to incentivise progress and to ensure that reforms are sustainable and effective in the long term, by ensuring that success is appropriately recognized in both the formal and informal reward systems of the organization. To say that they have a key role to play is an understatement. Finance is connected to most, if not all, of the key business processes within the organization. It should be steering the stewardship and accountability systems that ensure that the organization is conducting its business in an appropriate, ethical manner. It is critical that these foundations are firmly laid. So often they are the litmus test by which public confidence in the institution is either won or lost. Finance should also be providing the information, analysis and advice to enable the organizations service managers to operate effectively. This goes beyond the traditional preoccupation with budgets how much have we spent so far, how much do we have left to spend? It is about helping the organization to better understand its own performance. 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. It is also about
understanding and actively managing risks within the organization and its activities.
Inventory Management Techniques

Inventory management techniques are used by enterprises to strike an effective balance between inputs and outputs of a given process of production or trade. The following article covers some effective steps and techniques that can be used by people to properly manage their inventories. What are inventory management techniques is a question that is quite commonly asked by businessmen. Inventory is often the largest priced asset of the business after the fixed assets. The inventory of a business is often defined to be a list of all items that are present in the stock of raw materials. Keeping the inventory also means keeping a tab on the realizable value, market value the book value of all the stocks. Often inventory control methods are mistaken with inventory management methods, due to the almost synonymous meaning of the terms. 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. Inventory control also involves the measurement of time element that is required to consume a given volume of raw materials. 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
Page 11
INVENTORY MANAGEMENT
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.
Modern inventory management techniques are basically formulas and models that are established by firms on the basis of the need of the raw material and availability of the raw material. 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. The formula of EOQ, goes as follows. 2.A.R. C.O. / C.U. C.C. %
Where, 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. It basically means that if your inventory has 1000 unites, and your EOQ, is say 250, then the moment this stock reaches 250, you should be placing an order for a new stock. Such an order will ensure that the stock arrives on time and the stock is also cheap. The given formula is
quite complex and there are a considerable number of modifications that can be included. Though the economic order and reorder quantity formula is just the basic formula, there are several constraints and problems due to which this model has to modified. The following are some inventory management techniques that are based upon the EOQ, but have some or the other modification as per necessity:
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, 10 kg of stainless steel, etc. In such a situation, the carrying costs, cost per order or even carrying cost per unit are constant. The annual requirement is, however, uniform and has to be set according to the supply denominations. Fixed Order Interval Model: The fixed order interval models are used when the supply has to be uniform at uniform intervals, such as 10 meters cloth per week. Here all the costs and annual requirements are uniform, with an occasional rise or fall in ordering costs. Single Period Models: Single period models are used in cases where the inventory items are of perishable nature. Here all time elements of the EOQ are uniform and unchangeable.
To know more about inventory management techniques and cost control methods, 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. The key to formulate really good inventory management techniques is to have really good order cost, frequency and amount of ordered material. Many companies have also programmed different inventory software that simplify the process even further. Starts with MIT CTL Partner with the best!
OTHER LOT-SIZING TECHNIQUES

There are a number of other lot-sizing techniques available in addition to EOQ. These include the fixed-order quantity, fixed-order-interval model, the single-period model, and part-period balancing.
FIXED-ORDER-QUANTITY MODEL.
EOQ is an example of the fixed-order-quantity model since the same quantity is ordered every time an order is placed. A firm might also use a fixed-order quantity when it is captive to packaging situations. If you were to walk into an office supply store and ask to buy 22 paper clips, chances are you would walk out with 100 paper clips. You were captive to the packaging requirements of paper clips, i.e., they come 100 to a box and you cannot purchase a partial box. It works the same way for other purchasing situations. A supplier may package their goods in certain quantities so that their customers must buy that quantity or a multiple of that quantity.
FIXED-ORDER-INTERVAL MODEL.
The fixed-order-interval model is used when orders have to be placed at fixed time intervals such as weekly, biweekly, or monthly. 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). This system requires periodic checks of inventory levels and is used by many retail firms such as drug stores and small grocery stores. SINGLE-PERIOD MODEL. The single-period model is used in ordering perishables, such as food and flowers, and items with a limited life, such as newspapers. Unsold or unused goods are not typically carried over from one period to another and there may even be some disposal costs involved. This model tries to balance the cost of lost customer goodwill and opportunity cost that is incurred from not having enough inventory, 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. When a proper lot size has been determined, utilizing one of the above techniques, the reorder point, or point at which an order should be placed, can be determined by the rate of demand and the lead time. If safety stock is necessary it would be added to the reorder point quantity. Reorder point = Expected demand during lead time + Safety stock Thus, an inventory item with a demand of 100 per month, a two-month lead time and a desired safety stock of two weeks would have reorder point of 250. In other words, an order would be placed whenever the inventory level for that good reached 250 units.
Reorder
point
100/month 2 months + 2 weeks' safety stock = 250
Principle of inventory proportionality

Purpose
Inventory proportionality is the goal of demand-driven inventory management. The primary optimal outcome is to have the same number of days' (or hours', etc.) worth of inventory on hand across all products so that the time of runout of all products would be simultaneous. In such a case, there is no "excess inventory," that is, inventory that would be left over of another product when the first product runs out. Excess inventory is sub-optimal because the money spent to obtain it could have been utilized better elsewhere, i.e. to the product that just ran out. The secondary goal of inventory proportionality is inventory minimization. By integrating accurate demand forecasting with inventory management,
replenishment inventories can be scheduled to arrive just in time to replenish the product destined to run out first, while at the same time balancing out the inventory supply of all products to make their inventories more proportional, and thereby closer to achieving the primary goal. Accurate demand forecasting also allows the desired inventory proportions to be dynamic by determining expected sales out into the future; this allows for inventory to be in proportion to expected short-term sales or consumption rather than to past averages, a much more accurate and optimal outcome.
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.
Applications
The technique of inventory proportionality is most appropriate for inventories that remain unseen by the consumer. 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, unwanted or stale; and differentiated from the "trigger point" systems where product is reordered when it hits a certain level; inventory proportionality is used effectively by just-in-time manufacturing processes and retail applications where the product is hidden from view. One early example of inventory proportionality used in a retail application in the United States is for motor fuel. Motor fuel (e.g. gasoline) is generally stored in underground storage tanks. The motorists do not know whether they are buying gasoline off the top or bottom of the tank, nor need they care. Additionally, these storage tanks have a maximum capacity and cannot be overfilled. Finally, the product is expensive. Inventory proportionality is used to balance the inventories of the different grades of motor fuel, each stored in dedicated tanks, in proportion to the sales of each grade. Excess inventory is not seen or valued by the consumer, so it is simply cash sunk (literally) into the ground. Inventory proportionality minimizes the amount of excess inventory carried in underground storage tanks. This application for motor fuel was first developed and implemented by Petrolsoft Corporation in 1990 for Chevron Products Company. Most major oil companies use such systems today.
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.
Supply Chain and Inventory Management Total Visibility and Control of Your Supply Chain
NetSuite inventory management software offers a complete set of inventory management, manufacturing, and purchasing capabilities that will provide you with integrated supply chain management and control across your entire organization. NetSuite delivers an end-to-end procure-to-pay process that truly creates competitive advantage. With NetSuite, you gain an in-depth, real-time view into key supplier, inventory and procurement indicators. Self-service capabilities for partners, vendors and customers allow you to share supply and demand informationimproving collaboration throughout the entire supply chain. With NetSuite, you'll be able to better manage inventory levels and costsand better meet fulfillment expectations, improving customer service.
Benefits
y
Get complete real-time visibility into demand, supply, costs and fulfillment measures and trends
Manage margins with a clear view into inventory costs, turn rates and inventory profitability
Eliminate manual inventory management processes and improve vendor satisfaction with a seamless procure-to-pay process
Significantly
improve your relationships with
suppliers,
vendors and partners by providing self service and real-time visibility

y
Effectively and efficiently meet customer demand, helping drive and maintain superior customer service levels
Meet your industry's specific inventory management and purchasing needs with easily integrated add-on solutions available from SuiteApp.com.
Key Features
y
Warehouse and Inventory Control

o
Enjoy real-time, detailed visibility into key inventory control and supply chain management measures,
including inventory trends, stock on order, and supplier on-time performance

o
Slash inventory costs by tightening control of stock levels while increasing operational efficiencies
Increase
product
margins
by
effectively
managing
pricing based on different types of customers, channels and currencies

o
Gain control over inventory replenishment and ensure that you have enough on hand to fill anticipated orders, while keeping excess stock to a minimum
Extensive inventory management software features also include bin and lot management, landed cost, demandbased replenishment, customer and volume pricing, multi-location inventory, and more.
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
Streamline
requisition
processes
and
improve
collaboration with vendors by giving them self-serve access to key data and information, including inventory reordering points and transaction histories
o
Track costs and eliminate errors by creating a complete business process flow through purchasing, receiving and account payables.
Optimized Manufacturing Processes

o
Streamline the assembly process by efficiently managing production work orders, building multi-level assemblies, creating special purchase orders for components, and seamlessly integrating with back-office operations
Extend
the
reach system
of
your
NetSuite
inventory
management
with
industry
manufacturing
solutions available at SuiteApp.com.
Asset and Inventory Management

ServiceDesk Plus has an integrated Asset Management solution along with the basic help desk functions. With the integrated Asset Management, ServiceDesk provides you with an accurate inventory of all It the hardware, software and assets in your every
organization.
automatically
scans
updates
asset/nodes with an IP address within your network. ServiceDesk Plus offers IT asset management & network
inventory tracking functionality across both Windows and Linux workstations. Asset Management
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, Non-IT assets, 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
Scanning Inventory
y
Windows Domain Scan to scan all Windows machines
Scans Linux, Mac machines and other network devices like Printers, switches, 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 of time
y y y
y y y
Software Asset Management

y
Software Types to track different types of software like managed, prohibited, shareware, freeware etc. Tracks different types of licenses individual, enterprise, 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
Software Metering
Identifies the software usage in each machine Get reports on software installations where the software is being used rarely CMDB
y y
Ability
to
track
different
relationships
between
the
assets
(Connection, usage and container relationship)
Purchase Order
Tracks requests Orders
y
all using
purchase Purchase
Purchase Order Approvals by Approval Managers Maintains
Cost
Center
information and GL code for the Purchase Orders

y
Notification on any Purchase Order due Receives items from
Purchase Orders and move them to assets.

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.
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, csv, xls and HTML format Site-based reports
y y y y y y
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. In order to facilitate this, many firm's use an ABC approach. ABC analysis is based on Pareto Analysis, also known as the "80/20" rule. The 80/20 comes from Pareto's finding that 20 percent of the populace possessed 80 percent of the wealth. From an inventory perspective it can restated thusly: approximately 20 percent of all inventory items represent 80 percent of inventory costs. Therefore, a firm can control 80 percent of its inventory costs by monitoring and controlling 20 percent of its inventory. But, it has to be the correct 20 percent. 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). Items that are extremely inexpensive or have low demand are termed "C" items, with "B" items falling in between A and C items. The percentages may vary with each firm, but B items usually represent about 30 percent of the total inventory items and 15 percent of the costs. C items generally constitute 50 percent of all inventory items but only around 5 percent of the costs. By classifying each inventory item as an A, B or C the firm can determine the resources (time, effort and money) to dedicate to each item. 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, monthly for B items and quarterly for C items). Another control method related to the ABC concept is cycle counting. 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. When cycle counting is used the firm is continually taking a physical count but not of total inventory. A firm may physically count a certain section of the plant or warehouse, moving on to other sections upon completion, until the entire facility is counted. Then the process starts all over again. The firm may also choose to count all the A items, then the B items, and finally the C items. Certainly, the counting frequency will vary with the classification of each item. In other words, A item may be counted monthly, B items quarterly, and C items yearly. In addition the required accuracy of inventory records may vary according to classification, with A items
requiring the most accurate record keeping. Inventory Control keeps track of all furniture, equipment, and real property. Capital items are assigned an inventory number and are entered into the system with all pertinent information (i.e., inventory control number, description, location, cost, date purchased, etc.) Inventory Control also reconciles local records with the State Property Accounting System (SPAS) to insure all assets are properly recorded.
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 maintaining what would appear to be "excess" inventory. 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.
In order for a retailer to stay in business, it must have the products that the customer wants on hand when the customer wants them. If not, the retailer will have to back-order the product. If the customer can get the good from
some other source, he or she may choose to do so rather than electing to allow the original retailer to meet demand later (through back-order). Hence, in many instances, if a good is not in inventory, a sale is lost forever.
KEEP OPERATIONS RUNNING?

A manufacturer must have certain purchased items (raw materials, components, or subassemblies) in order to manufacture its product. Running out of only one item can prevent a manufacturer from completing the production of its finished goods. Inventory between successive dependent operations also serves to decouple the dependency of the operations. A machine or workcenter is often dependent upon the previous operation to provide it with parts to work on. If work ceases at a work center, then all subsequent centers will shut down for lack of work. If a supply of work-in-process inventory is kept between each work center, then each machine can maintain its operations for a limited time, hopefully until operations resume the original center.
LEAD TIME.
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. If a supplier (an external firm or an internal department or plant) cannot supply the required goods on demand, then the client firm must keep an inventory of the needed goods. The longer the lead time, the larger the quantity of goods the firm must carry in inventory.
A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna, Tennessee, can maintain extremely low levels of inventory. Nissan takes delivery on truck seats as many as 18 times per day. However, steel mills may have a lead time of up to three months. That means that a firm that uses steel produced at the mill must place orders at least three months in advance of their need. In order to keep their operations running in the meantime, an on-hand inventory of three months' steel requirements would be necessary.
HEDGE.
Inventory can also be used as a hedge against price increases and inflation. Salesmen routinely call purchasing agents shortly before a price increase goes into effect. This gives the buyer a chance to purchase material, in excess of current need, at a price that is lower than it would be if the buyer waited until after the price increase occurs.
QUANTITY DISCOUNT.
Often firms are given a price discount when purchasing large quantities of a good. This also frequently results in inventory in excess of what is currently needed to meet demand. However, if the discount is sufficient to offset the extra holding cost incurred as a result of the excess inventory, the decision to buy the large quantity is justified.
SMOOTHING REQUIREMENTS.
Sometimes inventory is used to smooth demand requirements in a market where demand is somewhat erratic. Consider the demand forecast and production schedule outlined in Table 1.
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), while building up inventory in anticipation of an increase in demand. In fact, this is often called anticipation inventory. In essence, the use of inventory has allowed the firm to move demand requirements to earlier periods, thus smoothing the demand.
Accounting for inventory

Accountancy
Each country has its own rules about accounting for inventory that fit with their financial-reporting rules. For example, organizations in the U.S. define inventory to suit their needs within US Generally Accepted Accounting Practices (GAAP), the rules defined by the Financial Accounting Standards Board (FASB) (and others) and enforced by the U.S. Securities and Exchange Commission (SEC) and other federal and state agencies. Other countries often have similar arrangements but with their own GAAP and national agencies instead. It is intentional that financial accounting uses standards that allow the public to compare firms' performance, 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. The internal costing/valuation of inventory can be complex. Whereas in the past most enterprises ran simple, one-process factories, such enterprises are quite probably in the minority in the 21st century. Where 'one process' factories exist, there is a market for the goods created, which establishes an independent market value for the good. Today, with multistage-process companies, there is much inventory that would once have been finished goods which is now held as 'work in process' (WIP). This needs to be valued in the accounts, but the valuation is a management decision since there is no market for the partially finished product. This somewhat arbitrary 'valuation' of WIP combined with the allocation of overheads to it has led to some unintended and undesirable results.
Financial accounting
An organization's inventory can appear a mixed blessing, since it counts as an asset on the balance sheet, but it also ties up money that could serve for other purposes and requires additional expense for its protection. Inventory may also cause significant tax expenses, depending on particular countries' laws regarding depreciation of inventory, as in Thor Power Tool Company v. Commissioner. Inventory appears as a current asset on an organization's balance sheet because the organization can, in principle, turn it into cash by selling it. Some organizations hold larger inventories than their operations require in order to inflate their apparent asset value and their perceived profitability. In addition to the money tied up by acquiring inventory, inventory also brings associated costs for warehouse space, for utilities, and for insurance to cover staff to handle and protect it from fire and other disasters, obsolescence, shrinkage (theft
and errors), and others. Such holding costs can mount up: between a third and a half of its acquisition value per year. Businesses that stock too little inventory cannot take advantage of large orders from customers if they cannot deliver. The conflicting objectives of cost control and customer service often pit an organization's financial and operating managers against its sales and marketing departments. Salespeople, in particular, often receive sales-commission payments, so unavailable goods may reduce their potential personal income. This conflict can be minimised by reducing production time to being near or less than customers' expected delivery time. This effort, known as "Lean production" will significantly reduce working capital tied up in inventory and reduce manufacturing costs (See the Toyota Production System).
FIFO vs. LIFO accounting

When a merchant buys goods from inventory, the value of the inventory account is reduced by the cost of goods sold (COGS). This is simple where the CoG has not varied across those held in stock; but where it has, then an agreed method must be derived to evaluate it. For commodity items that one cannot track individually, accountants must choose a method that fits the nature of the sale. Two popular methods that normally exist are: FIFO and LIFO accounting (first in - first out, last in - first out). FIFO regards the first unit that arrived in inventory as the first one sold. LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value, due to the effects of inflation. This generally results in lower taxation. Due to LIFO's potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.
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. As long as similar actual and standard conditions obtain, few problems arise. Unfortunately, standard cost accounting methods developed about 100 years ago, when labor comprised the most important cost in manufactured goods. Standard methods continue to emphasize labor efficiency even though that resource now constitutes a (very) small part of cost in most cases. Standard cost accounting can hurt managers, workers, and firms in several ways. For example, a policy decision to increase inventory can harm a manufacturing manager's performance evaluation. Increasing inventory requires increased production, which means that processes must operate at higher rates. When (not if) something goes wrong, the process takes longer and uses more than the standard labor time. The manager appears responsible for the excess, even though s/he has no control over the production requirement or the problem. In adverse economic times, firms use the same efficiencies to downsize, rightsize, or otherwise reduce their labor force. Workers laid off under those circumstances have even less control over excess inventory and cost efficiencies than their managers. Many financial and cost accountants have agreed for many years on the desirability of replacing standard cost accounting. They have not, however, found a successor.
Theory of constraints cost accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the cost-accounting problems in what he calls the "cost world." He offers a substitute,
called throughput accounting, 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. He defines inventory simply as everything the organization owns that it plans to sell, including buildings, machinery, and many other things in addition to the categories listed here. Throughput accounting recognizes only one class of variable costs: the truly variable costs, like materials and components, which vary directly with the quantity produced. Finished goods inventories remain balance-sheet assets, but labor-efficiency ratios no longer evaluate managers and workers. Instead of an incentive to reduce labor cost, throughput accounting focuses attention on the relationships between throughput (revenue or income) on one hand and controllable operating expenses and changes in inventory on the other. Those relationships direct attention to the constraints or bottlenecks that prevent the system from producing more throughput, rather than to people - who have little or no control over their situations.
National accounts
Inventories also play an important role in national accounts and the analysis of the business cycle. Some short-term macroeconomic fluctuations are attributed to the inventory cycle.
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. Those companies (especially in metalworking) attempted to achieve success through economies of scope - the gains of jointly producing two or more products in one
facility. The managers now needed information on the effect of product-mix decisions on overall profits and therefore needed accurate product-cost information. A variety of attempts to achieve this were unsuccessful due to the huge overhead of the information processing of the time. However, 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. In particular, it was the need for audited accounts that sealed the fate of managerial cost accounting. The dominance of financial reporting accounting over management accounting remains to this day with few exceptions, and the financial reporting definitions of 'cost' have distorted effective management 'cost' accounting since that time. This is particularly true of inventory. Hence, high-level financial inventory has these two basic formulas, which relate to the accounting period: 1. 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. Cost of goods available 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.
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. This number tells how much cash/goods are tied up waiting for the process and is a critical measure of process reliability and effectiveness. So a factory with two inventory turns has six months stock on hand, which is generally not a good figure (depending upon the industry), whereas a factory that moves from six turns to twelve turns has probably improved effectiveness by 100%. This improvement will have some negative results in the financial reporting, since the 'value' now stored in the factory as inventory is reduced. Whilst these accounting measures of inventory are very useful because of their simplicity, they are also fraught with the danger of their own assumptions. There are, in fact, so many things that can vary hidden under this appearance of simplicity that a variety of 'adjusting' assumptions may be used. These include:
y y y y
Specific Identification Weighted Average Cost Moving-Average Cost FIFO and LIFO.
Inventory Turn is a financial accounting tool for evaluating inventory and it is not necessarily a management tool. Inventory management should be forward looking. The methodology applied is based on historical cost of goods sold. The ratio may
not be able to reflect the usability of future production demand, as well as customer demand. Business models, including Just in Time (JIT) Inventory, Vendor Managed Inventory (VMI) and Customer Managed Inventory (CMI), attempt to minimize on-hand inventory and increase inventory turns. 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.
Distressed inventory
Also known as distressed or expired stock, distressed inventory is inventory whose potential to be sold at a normal cost has passed or will soon pass. In certain industries it could also mean that the stock is or will soon be impossible to sell. Examples of distressed inventory include products that have reached their expiry date, or have reached a date in advance of expiry at which the planned market will no longer purchase them (e.g. 3 months left to expiry), clothing that is defective or out of fashion, and old newspapers or magazines. 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. In 2001, Cisco wrote off inventory worth US $2.25 billion due to duplicate orders. This is one of the biggest inventory write-offs in business history.
Inventory credit
Inventory credit refers to the use of stock, or inventory, as collateral to raise finance. Where banks may be reluctant to accept traditional collateral, for example in developing countries where land title may be lacking, inventory credit is a
potentially important way of overcoming financing constraints. This is not a new concept; archaeological evidence suggests that it was practiced in Ancient Rome. Obtaining finance against stocks of a wide range of products held in a bonded warehouse is common in much of the world. It is, for example, used with Parmesan cheese in Italy. Inventory credit on the basis of stored agricultural produce is widely used in Latin American countries and in some Asian countries. 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; this implies the existence of a reliable network of certified warehouses. Banks also face problems in valuing the inventory. 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.
Business inventory
The reasons for keeping stock
There are three basic reasons for keeping an inventory: 1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." 2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods. 3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory. All these stock reasons can apply to any owner or product stage.
Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in long setup or change over time. This stock is then used while that changeover is happening. This stock can be eliminated by tools like SMED.
These classifications apply along the whole Supply chain, not just within a facility or plant. Where these stocks contain the same or similar items, it is often the work practice to hold all these stocks mixed together before or after the sub-process to which they relate. This 'reduces' costs. Because they are mixed up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock, which is due to a particular cause and should be a particular individual's responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes, which makes the situation even more acute.
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. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory.
y y
Stockout means running out of the inventory of an SKU. "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. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.
Typology 1. Buffer/safety stock 2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock) 3. De-coupling (Buffer stock that is held by both the supplier and the user) 4. Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer) 5. Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet) Inventory examples While accountants often discuss inventory in terms of goods for sale, organizations - manufacturers, service-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them. While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:
y
Raw materials - materials and components scheduled for use in making a product.
Work in process, WIP - materials and components that have begun their transformation to finished goods.
Finished goods - goods ready for sale to customers.

Page 40
Goods for resale - returned goods that are salable.
For example:
Manufacturing
A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. 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. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. 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), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers. Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory, and the way in which it chooses to do so. For example, a company may wish to install a complex inventory system, but unless there is a good understanding of the role of inventory and its perameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organisation in isolation. Typical Inventory Management techniques include Pareto Curve ABC
Classification and Economic Order Quantity Management. A more sophisticated method takes these two techniques further, combining certain aspects of each to
create The K Curve Methodology[3]. A case study of k-curve benefits to one company shows a successful implementation. Unnecessary inventory adds enormously to the working capital tied up in the business, as well as the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a key concept in Lean. Too big an inventory reduction too quickly can cause a business to be anorexic. There are well-proven processes and techniques to assist in inventory planning and strategy, both at the business overview and part number level. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications.
BALANCING INVENTORY AND COSTS

As stated earlier, inventory management is an attempt to maintain an adequate supply of goods while minimizing inventory costs. We saw a variety of reasons companies hold inventory and these reasons dictate what is deemed to be an adequate supply of inventory. Now, how do we balance this supply with its costs? First let's look at what kind of costs we are talking about. There are three types of costs that together constitute total inventory costs: holding costs, set-up costs, and purchasing costs.
HOLDING COSTS.
Holding costs, also called carrying costs, 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. This could range from a small storage area near the production line to a huge warehouse or distribution center. 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 inventory is heavy or bulky, forklifts may be necessary to move it around. Storage facilities also require heating, cooling, lighting, and water. The firm must pay taxes on the inventory, and opportunity costs occur from the lost use of the funds that were spent on the inventory. Also, obsolescence, pilferage (theft), and shrinkage are problems. All of these things add cost to holding or carrying inventory. 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. Average inventory can be computed by dividing the amount of goods that are ordered every time an order is placed ( Q ) by two. Thus, average inventory is expressed as Q /2. Annual holding cost, then, can be expressed as H ( Q /2).
SET-UP COSTS.
Set-up costs are the costs incurred from getting a machine ready to produce the desired good. 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. The disassembled tooling is then taken to a tool room or tool shop for maintenance or possible repair (another cost). The technician then takes the currently needed tooling from the tool room (where it has been maintained; another cost) and brings it to the machine in question. 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, that will have to be scrapped (a cost), in order to get the machine correctly calibrated and running. All the while the machine has been idle and not producing any parts (opportunity cost). As one can see, there is considerable cost involved in set-up. If the firm purchases the part or raw material, then an order cost, rather than a set-up cost, is incurred. Ordering costs include the purchasing agent's salary and travel/entertainment budget, administrative and secretarial support, office space, copiers and office supplies, forms and documents, long-distance telephone bills, and computer systems and support. Also, some firms include the cost of shipping the purchased goods in the order cost. If the firm can determine the cost of one set-up ( S ) or one order, 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. Suppose a firm has an annual demand ( D ) of 1,000 units. If the firm orders 100 units ( Q ) every time it places and order, the firm will obviously place 10 orders per year ( D / Q ). Hence, annual set-up/order cost can be expressed as S ( D / Q ).
PURCHASING COST.
Purchasing cost is simply the cost of the purchased item itself. If the firm purchases a part that goes into its finished product, 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 ). Hence, purchasing cost is expressed as PD.
Now Total or =
total
inventory cost +
cost
can
be cost +
expressed Purchasing
as: cost
Holding
Set-up/Order
Total = H ( Q /2) + S ( D / Q ) + PD If holding costs and set-up costs were plotted as lines on a graph, the point at which they intersect (that is, the point at which they are equal) would indicate the lowest total inventory cost. Therefore, if we want to minimize total inventory cost, every time we place an order, we should order the quantity ( Q ) that corresponds to the point where the two values are equal. If H we ( set the Q two /2) costs = equal S and ( solve D for / Q we Q get: )
Q = 2 DS / H The quantity Q is known as the economic order quantity (EOQ). In order to minimize total inventory cost, the firm will order Q every time it places an order. For example, a firm with an annual demand of 12,000 units (at a purchase price of $25 each), 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. First, we determine the total costs without using we = we calculate total costs the EOQ calculate 2(12,000)($150)/$10= at the EOQ of method: EOQ: 600 600: Q = $10(1000/2) + $150(12,000/1000) + $25(12,000) = $306,800 Then EOQ And
Q = $10(600/2) + $150(12,000/600) + $25(12,000) = $306,000 Finally, we subtract the total cost of Q from Q to determine the savings: $306,800 306,000 = $800
Notice that if you remove purchasing cost from the equation, the savings is still $800. We might assume this means that purchasing cost is not relevant to our order decision and can be eliminated from the equation. It must be noted that this is true only as long as no quantity discount exists. If a quantity discount is available, 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. There are a number of assumptions that must be made with the use of the EOQ. These include:
y y y y y
Only one product is involved. Deterministic demand (demand is known with certainty). Constant demand (demand is stable through-out the year). No quantity discounts. Constant costs (no price increases or inflation).
While these assumptions would seem to make EOQ irrelevant for use in a realistic situation, it is relevant for items that have independent demand. 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). For example, 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; 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.
MRP AND MRP II.

MRP and MRP II are computer-based resource management systems designed for items that have dependent demand. MRP and MRP II look at order quantities period by period and, as such, allow discrete ordering (ordering only what is currently needed). In this way inventory levels can be kept at a very low level; a necessity for a complex item with dependent demand.
JUST-IN-TIME (JIT).
Just-in-time (JIT) is a philosophy that advocates the lowest possible levels of inventory. JIT espouses that firms need only keep inventory in the right quantity at the right time with the right quality. The ideal lot size for JIT is one, even though one hears the term "zero inventory" used.
THEORY OF CONSTRAINTS (TOC).
Theory of constraints (TOC) is a philosophy which emphasizes that all management actions should center around the firm's constraints. While it agrees with JIT that inventory should be at the lowest level possible in most instances, it advocates that there be some buffer inventory around any capacity constraint (e.g., the slowest machine) and before finished goods.
THE
FUTURE
OF
INVENTORY
MANAGEMENT
The advent, through altruism or legislation, of environmental management has added a new dimension to inventory management-reverse supply chain logistics. Environmental management has expanded the number of inventory types that firms have to coordinate. In addition to raw materials, work-in-process, finished goods, and MRO goods, firms now have to deal with post-consumer items such as scrap, returned goods, reusable or recyclable containers, and any number of items that require repair, reuse, recycling, or secondary use in another product. Retailers have the same type problems dealing with inventory that has been returned due to defective material or manufacture, poor fit, finish, or color, or outright "I changed my mind" responses from customers. Finally, supply chain management has had a considerable impact on inventory management. Instead of managing one's inventory to maximize profit and minimize cost for the individual firm, today's firm has to make inventory decisions that benefit the entire supply chain.
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. 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 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
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 - which include not only direct costs of storage, insurance, taxes, etc., but is also the cost of money tied up in 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. For example, one reward of improved inventory management may be an increase in working capital without the necessity of having to borrow money. Computation of the Inventory Turnover Rate One commonly used, simple measure of managerial performance is the inventory turnover rate. This value gives a rough guideline by which managers can set goals and measure performance, 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). For example, on a cost of goods sold basis, the average inventory turnover rate for
manufacturers of paperboard containers ranges from 4.5 to 21.0. Values such as these are published periodically by the trade associations and professional organizations; they can be useful in setting guidelines for one's own company, but must be used with care. Manual Record keeping Methods At a very basic level, business inventory records provide the information needed to make decisions about inventory management. But the number and kinds of records maintained, as well as the type of control system needed, depend upon the type and size of inventory. In very small businesses where visual control is used, records may not be needed at all or only for slowly moving or expensive items. But in a larger organization where many items from various suppliers are involved, more formal inventory records, such as kardex files, are appropriate. In such a case, regardless of the type of records maintained, the accuracy and discipline of the recording system is critical. It is important to remember, however, that in many cases attempts to improve management and reduce costs fail, not simply because of insufficient records, but rather because of
inaccurate and carelessly recorded inventory data. Many small manufacturers, wholesalers, and retailers with relatively few items in inventory use manual inventory control system. They use
card records, inventory tags and accounting data to capture the information necessary to establish economic order quantities, order points, and other parameters for effective inventory control. However, as the number of item, supplies, and general importance of inventory increases, it is often desirable to consider use of a computerized system for inventory control. Using Computers in Inventory Management Today, the use of computer systems to control inventory is far more feasible for small business than ever before, 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. 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. Most computer manufacturers offer free, written information on the inventory management systems available for their computers. In addition, computer service companies often have material readily available describing the use of their particular computer "software" programs for inventory management. These companies provide a good source of information on general descriptions of particular inventory management techniques, as well as help on specific inventory management problems. Whether a manual or computerized inventory management system is used, the important thing to remember is that inventory management
involves two separate, but closely related elements: the first is knowing what and how much to order, when to order and what price to pay; the second is making sure that the items, once brought into inventory, are used properly to produce a profit.
Inventory management refers to the procedure of organization the stocks of finished products and supplies by a compact. Inventory management, if done accurately, can transport down expenses and increase the profits of a compact. Not a substance what the business size it must administer many fixed assets, types of assets, quickly changing asset bases, many locations, and ever-changing tax laws and requirements. Fixed asset inventory software can also reduce encumber of fixed asset reduction calculations for financial and tax exposure, asset inventory tracking and reconciliation services, and private property tax filings. Inventory management software has an amplified business on the web, following the importunate increase and achievement of e-commerce. Inventory management software helps administer inventory from any location in the world. Inventory management software is perfect for business. Inventory management software correspondences are designed for inventory control. The software makes easy the making of an account, and inventory control, stock balance management, goods item direction. Our Accounting Services, a company leader in this area of specialty, can provide to the demanding supplies of global customers in Inventory management.
Enterprise resource planning

Enterprise Resource Planning (ERP) is an integrated computer-based system used to manage internal and external resources, including tangible assets, financial resources, materials, and human resources. 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. Built on a centralized database and normally utilizing a common computing platform, ERP systems consolidate all business operations into a uniform and enterprise-wide system environment.[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. 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.[2]
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; later manufacturing resource planning) and CIM (Computer Integrated Manufacturing), and while not supplanting these terms, it has come to represent a larger whole. It came into use as makers of MRP software started to develop software applications beyond the manufacturing arena. ERP systems now attempt to cover all core functions of an enterprise, regardless of the organization's business or charter.
These systems can now be found in non-manufacturing businesses, non-profit organizations and governments . To be considered an ERP system, a software package should have the following traits:
y y
Should be integrated and operate in real time with no periodic batch updates. All applications should access one database to prevent redundant data and multiple data definitions.
y y
All modules should have the same look and feel. Users should be able to access any information in the system without needing integration work on the part of the IS department.
Components
y
Transactional Backbone
o o o o
Financials Distribution Human Resources Product lifecycle management
Advanced Applications
o o
Customer Relationship Management (CRM) Supply chain management software

Purchasing Manufacturing Distribution (business)Distribution
Warehouse Management System
Management Portal/Dashboard
o
Decision Support System

Page 56
These modules can exist in a system or utilized in an ad-hoc fashion.
Commercial applications
Manufacturing Engineering, bills of material, work orders, scheduling, capacity, workflow management, quality control, cost management, manufacturing process, manufacturing projects, manufacturing flow Supply chain management Order to cash, inventory, order entry, purchasing, product configurator, supply chain planning, supplier scheduling, inspection of goods, claim processing, commission calculation Financials General ledger, cash management, accounts payable, accounts receivable, fixed assets Project management Costing, billing, time and expense, performance units, activity management Human resources Human resources, payroll, training, time and attendance, rostering, benefits Customer relationship management Sales and marketing, commissions, service, customer contact, call-center support Data services Various "self-service" interfaces for customers, 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). 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 systems typically handle the manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting for a company. ERP software can aid in the control of many business activities, including sales, marketing, delivery, billing, production, inventory management, quality management, and human resource management. ERP systems saw a large boost in sales in the 1990s as companies faced the Y2K problem in their legacy systems. Many companies took this opportunity to replace such information systems with ERP systems. This rapid growth in sales was followed by a slump in 1999, at which time most companies had already implemented their Y2K solution. ERP systems are often incorrectly called back office systems, indicating that customers and the general public are not directly involved. This is contrasted with front office systems like customer relationship management (CRM) systems that deal directly with the customers, or the eBusiness systems such as eCommerce, eGovernment, eTelecom, and eFinance, or supplier relationship management (SRM) systems. ERP systems are cross-functional and enterprise-wide. All functional departments that are involved in operations or production are integrated in one system. In addition to areas such as manufacturing, warehousing, logistics, and information technology, this typically includes accounting, human resources, marketing and strategic management.
ERP II, a term coined in the early 2000s, is often used to describe what would be the next generation of ERP software. 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. EAS 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. Though traditionally ERP packages have been on-premise installations, ERP systems are now also available as Software as a Service. Best practices are incorporated into most ERP vendor's software packages. When implementing an ERP system, 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 . Prior to ERP, software was developed to fit individual processes of an individual business. Due to the complexities of most ERP systems and the negative consequences of a failed ERP implementation, most vendors have included "Best Practices" into their software. 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. 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, documentation, testing and training. In addition, the use of best practices reduced over risk by 71% when compared to other software implementations. The use of best practices can make complying with requirements such as IFRS, Sarbanes-Oxley, or Basel II easier. They can also help where the process is a
commodity such as electronic funds transfer. This is because the procedure of capturing and reporting legislative or commodity content can be readily codified within the ERP software, and then replicated with confidence across multiple businesses who have the same business requirement.
Implementation
Businesses have a wide scope of applications and processes throughout their functional units; producing ERP software systems that are typically complex and usually impose significant changes on staff work practices. Implementing ERP software is typically too complex for "in-house" skill, so it is desirable and highly advised to hire outside consultants who are professionally trained to implement these systems. This is typically the most cost effective way. There are three types of services that may be employed for - Consulting, Customization, Support. The length of time to implement an ERP system depends on the size of the business, the number of modules, the extent of customization, the scope of the change and the willingness of the customer to take ownership for the project. ERP systems are modular, so they don't all need be implemented at once. It can be divided into various stages, or phase-ins. The typical project is about 14 months and requires around 150 consultants. A small project (e.g., a company of less than 100 staff) can be planned and delivered within 39 months; however, a large, multi-site or multicountry implementation can take years. The length of the implementations is closely tied to the amount of customization desired. To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. These firms typically provide three areas of professional services: consulting; customization; and support. The client organization can also employ independent program management, business analysis, change management, and UAT specialists to ensure their business requirements remain a priority during implementation.
Data Migration
Data migration is one of the most important activities in determining the success of an ERP implementation. Since many decisions must be made before migration, a significant amount of planning must occur. Unfortunately, data migration is the last activity before the production phase of an ERP implementation, and therefore receives minimal attention due to time constraints. The following are steps of a data migration strategy that can help with the success of an ERP implementation: 1. Identifying the data to be migrated 2. Determining the timing of data migration 3. Generating the data templates 4. Freezing the tools for data migration 5. Deciding on migration related setups 6. Deciding on data archiving
Process preparation
ERP vendors have designed their systems around standard business processes, based upon best business practices. Different vendor(s) have different types of processes but they are all of a standard, modular nature. 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. Neglecting to map current business processes prior to starting ERP implementation is a main reason for failure of ERP projects. It is therefore crucial that organizations perform a thorough business process analysis before selecting an ERP vendor and setting off on the implementation track. This analysis should map out all present operational processes, enabling selection of an ERP vendor whose standard modules are most closely aligned with the established organization.
Redesign can then be implemented to achieve further process congruence. Research indicates that the risk of business process mismatch is decreased by:
y y
linking each current organizational process to the organization's strategy; analyzing the effectiveness of each process in light of its current related business capability;
understanding the automated solutions currently implemented.
ERP implementation is considerably more difficult (and politically charged) in organizations structured into nearly independent business units, each responsible for their own profit and loss, because they will each have different processes, business rules, data semantics, authorization hierarchies and decision centers. Solutions include requirements coordination negotiated by local change management professionals or, if this is not possible, federated implementation using loosely integrated instances (e.g. linked via Master Data Management) specifically configured and/or customized to meet local needs . 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 documented cases exist where this has indeed materialized, other cases show that following thorough process preparation ERP systems can actually increase sustainable competitive advantage.
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. Begin by deciding which modules to install, then adjust the system using configuration tables to achieve the best possible fit in working with your companys processes.
Modules Most systems are modular simply for the flexibility of implementing some functions but not others. Some common modules, such as finance and accounting are adopted by nearly all companies implementing enterprise systems; others however such as human resource management are not needed by some companies and therefore not adopted. A service company for example will not likely need a module for manufacturing. Other times companies will not adopt a module because they already have their own proprietary system they believe to be superior. Generally speaking the greater number of modules selected, the greater the integration benefits, but also the increase in costs, risks and changes involved.[ Configuration Tables A configuration table enables a company to tailor a particular aspect of the system to the way it chooses to do business. For example, 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, product line, or distribution channel. So what happens when the options the system allows just aren't good enough? At this point a company has two choices, both of which are not ideal. It can re-write some of the enterprise systems code, or it can continue to use an existing system and build interfaces between it and the new enterprise system. Both options will add time and cost to the implementation process. Additionally they can dilute the systems integration benefits. The more customized the system becomes the less possible seamless communication between suppliers and customers.
Consulting services
Many organizations do not have sufficient internal skills to implement an ERP project. This results in many organizations offering consulting services for ERP implementation. Typically, a consulting team is responsible for the entire ERP implementation including:
1. selecting 2. planning 3. training 4. testing 5. implementation 6. delivery of any customized modules. Examples of customization includes creating processes and reports for compliance, additional product training; creation of process triggers and workflow; specialist advice to improve how the ERP is used in the business; system optimization; and assistance writing reports, complex data extracts or implementing Business Intelligence. For most mid-sized companies, 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). Large companies, and especially those with multiple sites or countries, will often spend considerably more on the implementation than the cost of the user licensesthree to five times more is not uncommon for a multi-site implementation. Unlike most single-purpose applications, ERP packages have historically included full source code and shipped with vendor-supported team IDEs for customizing and extending the delivered code. 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, or assembling a cross-functional solution by integrating multiple "best of breed" applications. "Core system" customization vs configuration
Increasingly, 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. Key differences between customization and configuration include:
y
Customization is always optional, whereas some degree of configuration (e.g., setting up cost/profit centre structures, organisational trees, purchase approval rules, etc.) may be needed before the software will work at all.
Configuration is available to all customers, whereas customization allows individual customer to implement proprietary "market-beating" processes.
Configuration changes tend to be recorded as entries in vendor-supplied data tables, whereas customization usually requires some element of
programming and/or changes to table structures or views.

y
The effect of configuration changes on the performance of the system is relatively predictable and is largely the responsibility of the ERP vendor. The effect of customization is unpredictable and may require timeconsuming stress testing by the implementation team.
Configuration changes are almost always guaranteed to survive upgrades to new software versions. Some customizations (e.g. code that uses pre-defined "hooks" that are called before/after displaying data screens) will survive upgrades, though they will still need to be re-tested. More extensive customizations (e.g. those involving changes to fundamental data structures) will be overwritten during upgrades and must be re-implemented manually.
By this analysis, customizing an ERP package can be unexpectedly expensive and complicated, and tends to delay delivery of the obvious benefits of an integrated system. 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.
Extensions
In this context, "Extensions" refers to ways that an ERP environment can be "extended" (supplemented) with third-party programs. It is technically easy to expose most ERP transactions to outside programs that do other things, e.g.:]
y
archiving, reporting and republishing (these are easiest to achieve, because they mainly address static data);
performing transactional data captures, e.g. using scanners, tills or RFIDs (also relatively easy because they touch existing data);
However, because ERP applications typically contain sophisticated rules that control how data can be created or changed, some such functions can be very difficult to implement.
Advantages
In the absence of an ERP system, a large manufacturer may find itself with many software applications that cannot communicate or interface effectively with one another. Tasks that need to interface with one another may involve:
y
ERP systems connect the necessary software in order for accurate forecasting to be done. This allows inventory levels to be kept at maximum efficiency and the company to be more profitable.
Integration
among
different
functional
areas
to
ensure
proper
communication, productivity and efficiency

y y y y
Design engineering (how to best make the product) Order tracking, from acceptance through fulfillment The revenue cycle, 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), inventory receipts (what arrived), and costing (what the vendor invoiced)
The accounting for all of these tasks: tracking the revenue, cost and profit at a granular level.
ERP Systems centralize the data in one place. Benefits of this include:
y
Eliminates the problem of synchronizing changes between multiple systems - consolidation of finance, marketing and sales, human resource, 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"), real time information is available to management anywhere, anytime to make proper decisions.
Reduces the risk of loss of sensitive data by consolidating multiple permissions and security models into a single structure.
y y
Shorten production leadtime and delivery time Facilitating business learning, empowering, and building common visions
Some security features are included within an ERP system to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data-tampering scenario, for example, 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. ERP systems typically provide functionality for implementing internal controls to prevent actions of this kind. ERP vendors are also moving toward better integration with other kinds of information security tools.
Disadvantages
This
section
does
not
cite
any
references
or
sources.
Please help improve this article by adding citations to reliable sources. Unsourced material may be challenged and removed. Problems with ERP systems are mainly due to inadequate investment in ongoing training for the involved IT personnel - including those implementing and testing changes - 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. Disadvantages
y y
Customization of the ERP software is limited... Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage.
ERP systems can be very expensive (This has led to a new category of "ERP light" solutions)
ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companiesthis is cited as one of the main causes of their failure.
Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications.
Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level).
The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale.
Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software.
Some large organizations may have multiple departments with separate, independent resources, missions, chains-of-command, etc, 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 , Mechanical , Clothing , Food , Aeronautical, Medical and
You will Never find a more Intuitive Bill of Material Maintenance Screen anywhere. * Multiple Inventory Warehouse Support.
* Receive Single Purchase Order into Multiple Warehouses. * Serialized Inventory Support.
* Bill of material Management Option with Multi-Level BOM. * Manufacturing Engineering Change Order (ECO) Tracking. * * * Detailed Email Quick Purchase Orders Order Directly history fo report. Suppliers. Interface.
Purchase Books
Accounting
Software
* *
Return Work
Material Order
Authorization Traveler with
(RMA) Time
Logging. Tracking.
* Spanish Language Support.
SUCCESSFUL INVENTORY MANAGEMENT

Successful inventory management involves balancing the costs of inventory with the benefits of inventory. Many small business owners fail to appreciate fully the true costs of carrying inventory, which include not only direct costs of storage, insurance and taxes, but also the cost of money tied up in inventory. This fine line between keeping too much inventory and not enough is not the manager's only concern. Others include: ! Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones too thin; ! Increasing inventory turnover -- but not sacrificing the service level; ! Keeping stock low -- but not sacrificing service or performance. ! Obtaining lower prices by making volume purchases -- but not ending up with slow-moving inventory; and ! Having an adequate inventory on hand -- but not getting caught with obsolete items. The degree of success in addressing these concerns is easier to gauge for some than for others. For example, computing the inventory turnover ratio is a simple measure of managerial performance. This value gives a rough guideline by which managers can set goals and evaluate performance, 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). Average inventory turnover ratios for individual industries can be obtained from trade associations.
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. This includes going into the market to buy the
goods early enough to ensure delivery at the proper time. Thus, buying requires advance planning to determine inventory needs for each time period and then making the commitments without procrastination. For retailers, 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, it is imperative that buying plans be formulated early enough to allow for intelligent buying without any last minute panic purchases. 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. For example, many retailers view March 21 as the end of the spring season, June 21 as the end of summer and December 21 as the end of winter. Part of your purchasing plan must include accounting for the depletion of the inventory. Before a decision can be made as to the level of inventory to order, you must determine how long the inventory you have in stock will last. For instance, a retail firm must formulate a plan to ensure the sale of the greatest number of units. Likewise, a manufacturing business must formulate a plan to ensure enough inventory is on hand for production of a finished product.
____________________________________________________________________________________________
CONTROLLING YOUR INVENTORY

To maintain an in-stock position of wanted items and to dispose of unwanted items, it is necessary to establish adequate controls over inventory on order and inventory in stock. There are several proven methods for inventory control. They are listed below, from simplest to most complex. ! Visual control enables the manager to examine the inventory visually to determine if additional inventory is required. In very small businesses where this method is used, records may not be needed at all or only for slow moving or expensive items.
! 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. ! Click sheet control enables the manager to record the item as it is used on a sheet of paper. Such information is then used for reorder purposes. ! Stub control (used by retailers) enables the manager to retain a portion of the price ticket when the item is sold. The manager can then use the stub to record the item that was sold. As a business grows, it may find a need for a more sophisticated and technical form of inventory control. Today, the use of computer systems to control inventory is far more feasible for small business than ever before, both through the widespread existence of computer service organizations and the decreasing cost of small-sized computers. 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. ! Point-of-sale terminals relay information on each item used or sold. The manager receives information printouts at regular intervals for review and action. ! 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. The final method for inventory control is done by an outside agency. A manufacturer's representative visits the large retailer on a scheduled basis, takes the stock count and writes the reorder. Unwanted merchandise is removed from stock and returned to the manufacturer through a predetermined, authorized procedure. A principal goal for many of the methods described above is to determine the minimum possible annual cost of ordering and stocking each item. Two major control values are used: 1) the order quantity, that is, the size and
frequency of orders; and 2) the reorder point, that is, the minimum stock level at which additional quantities are ordered. The Economic Order Quantity (EOQ) formula is one widely used method of computing the minimum annual cost for ordering and stocking each item. The EOQ computation takes into account the cost of placing an order, the annual sales rate, the unit cost, and the cost of carrying inventory. Many books on management practices describe the EOQ model in detail.
____________________________________________________________________________________________
DEVELOPMENTS IN INVENTORY MANAGEMENT

In recent years, two approaches have had a major impact on inventory management: Material Requirements Planning (MRP) and Just-In-Time (JIT and Kanban). 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. 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. Materials are scheduled more closely, thereby reducing inventories, and delivery times become shorter and more predictable. Its primary use is with products composed of many components. MRP systems are practical for smaller firms. The computer system is only one part of the total project which is usually long-term, taking one to three years to develop. Just-in-time inventory management is an approach which works to eliminate inventories rather than optimize them. The inventory of raw materials and work-inprocess falls to that needed in a single day. This is accomplished by reducing setup times and lead times so that small lots may be ordered. Suppliers may have to make several deliveries a day or move close to the user plants to support this plan.
____________________________________________________________________________________________
TIPS FOR BETTER INVENTORY MANAGEMENT

At time of delivery
! Verify count -- Make sure you are receiving as many cartons as are listed on the delivery receipt. ! Carefully examine each carton for visible damage -- If damage is visible, note it on the delivery receipt and have the driver sign your copy. ! After delivery, immediately open all cartons and inspect for merchandise damage. When damage is discovered ! Retain damaged items -- All damaged materials must be held at the point received. ! Call carrier to report damage and request inspection. ! 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 -- Make certain the damaged items have not moved from the receiving area prior to inspection by carrier. ! After carrier/inspector prepares damage report, carefully read before signing. After inspection
! Keep damaged materials -- Damaged materials should not be used or disposed of without permission by the carrier. ! Do not return damaged items without written authorization from shipper/supplier.
____________________________________________________________________________________________
SPECIAL TIPS FOR MANUFACTURERS

If you are in the business of bidding, specifications play a very important role. In writing specifications, the following elements should be considered. ! Do not request features or quality that are not necessary for the items' intended use. ! Include full descriptions of any testing to be performed. ! Include procedures for adding optional items. ! Describe the quality of the items in clear terms. The following actions can help save money when you are stocking inventory: ! Substitution of less costly materials without impairing required quality; ! Improvement in quality or changes in specifications that would lead to savings in process time or other operating savings; ! Developing new sources of supply; ! Greater use of bulk shipments; ! Quantity savings due to large volume, through consideration of economic order quantity; ! A reduction in unit prices due to negotiations; ! Initiating make-or-buy studies; ! Application of new purchasing techniques; ! Using competition along with price, service and delivery when making the purchase selection decision.
Four Essential Components for Skills Inventory Management 1. A Well-defined Classification System
2. A Consistent Unit of Measure 3. An Efficient Measurement Process 4. A Practical Tracking and Reporting System Its Business 101track supply and demand for a critical business resource, and you can better manage inventory levels to maximize profitability. Sound simple? It is, unless youve 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, programs, and customers? Where does our inventory of critical skills fall short, and by how much? These questions must be addressed as part of any skills inventory management initiative. 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, youre not alone. Objective metrics are the missing link. Decision-makers in todays smartest companies are recognizing the importance and challenge of managing employee skills for bottom-line performance. The good news is, skills can now be managed
effectively as a vital business inventory, thanks to the development of new tools for delivering the missing link in skills inventory management: practical, objective metrics. A system for achieving objective metrics enables companies to manage vital employee skills for measurable success. What makes a skills inventory management initiative improve business performance, and how do objective metrics fit in? A look at four essential components of inventory management provides an answer. Thought Leadership Report October 2002 Reports: Four Essential Components for Skills Inventory Management 1. A Well-defined Classification System A detailed system of classification is fundamental to any inventory management program. But unlike physical inventory items, such as part numbers or products, employee skills dont have convenient item numbers for identification. ProblemLack of definition leads to an unmanageable array of skills to track. When it comes to creating the basic classifications for building a skills inventory, the problem often stems from a lack of standardized definitions for skills. What one manager refers to as a Programmer may be similar (but not the same as) another managers definition of Systems
Engineer. The result: an inability to distinguish between apples and oranges, leading to an inaccurate or unreliable inventory measure. SolutionA pre-defined classification system provides the basis for effective skills inventory management. An objective system must rely on an established list of predefined skills and an agreed-upon set of criteria by which to measure them. 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 groups success. And they must be able to do so without having to endure the timeconsuming process of defining each skill. A focused list of critical skills is often the best foundation for what will later grow into a wider skills inventory management capability. As a foundation for establishing a skills program, many companies begin by agreeing on key business objectives and identifying the skills that most closely impact those goals. An objective skills classification system frees decisionmakers to focus on critical skills and business objectives, and helps to clearly establish the parameters for a successful initiative. 2: A Consistent Unit of Measure While companies have little difficulty tracking their inventory of office supplies or other physical
resourceswhich can be measured by number of units, weight, or volume calculating the supply of employee skills is a different story. ProblemWithout a consistent unit of measure, companies cant track or verify skills levels. Traditionally, companies have measured skills by headcount. That is, a manager from a department or project group may account for 25 Java programmers, 4 project managers, and 10 customer service experts. But the numbers can be deceiving for several reasons. First, 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. For example, they may simply ask employees to rate their own skills, or they may rely on the recommendations of others in the group. While self-assessment or verification by a supervisor is important, both are subjective forms of validation. Self-assessments are routinely inaccurate, with inexperienced employees overrating their skills (because they dont know what they dont know) or with experts underrating their ability. Personal verification is subject to the variables of individual biasnot necessarily a question of a supervisor being fair, but more an issue of the supervisor being more familiar with one employee over another.
2
Thought Leadership Report INVENTORY MANAGEMENT Page 79
October 2002
Reports: Four Essential Components for Skills Inventory Management Second, when a skills headcount is the unit of measure, how do you measure each employees level of skill? A detailed knowledge of skills levels enables managers to identify top performers for leadership or mentoring roles, and it ensures that strong performers are assigned to specific project roles. Without a detailed measurement system, decision-makers are forced to rely largely on unreliable, subjective skills data. SolutionAn objective skills measurement system provides detailed metrics for tracking skills levels across the enterprise. Online skills measurement systems are now giving managers the unit of measure they need to account for skills levels on a consistent basis. The SkillsBench system, by online skills measurement provider Brainbench, provides a detailed score ranging from 1.00 to 5.00 for each skill. Unlike subjective measures, these metrics will not vary from one department or administrator to another. The whole system is accessed, delivered, and reported online. Another difference is that the objective measurement system calculates changes in skills levels over time. That is, with a consistent and detailed unit of measure to track skills, employees
and managers can document skills improvement. Supervisors and managers can track skills inventories, identify shortfalls (skills gaps) and surpluses (skills strengths). They can also distinguish between the skills levels of different employees, information that is vital to meeting the demands of each client or project.
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. 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. 3. An Efficient Measurement Process The need for an easily-administered measurement process is probably the most neglected requirement of a skills inventory management plan. A companys ability to assess skills on a periodic basis and arrive at a quantifiable measurement can determine program success. How can companies develop a practical skills measurement systemone that continues to be used long after implementation? Ease of use and meaningful feedback are crucial.
Problem: Skills inventory management initiatives can fail due to a fall-off in employee and manager participation. While the enterprise may not have to re-measure its skills inventory with the same frequency as it tracks other items, repeat measurement is essential. Without the ability to deliver repeat assessments, a skills inventory management initiative becomes nothing more than a onetime employee test, with perishable data that cannot track changes in a companys supply of skills. Many companies have made unsuccessful attempts at tracking skills in the past, and frequently they still apply the same flawed strategies today. Employees may be asked to complete and submit self-rating forms, or they may be asked to take a test associated with a career milestone such as a training event or a periodic review. Unfortunately, the results of such assessments frequently disappear into a records system without re-emerging as actionable information for the company or for the employee. When results fail to facilitate action, the usefulness of the initiative is compromised, and participation declines. Solution: An online objective measurement system enhances ease of testing, provides fast and meaningful feedback, and ensures continued participation. The secret to successful skills inventory management lies in the ability to automate test administration
and provide fast, actionable feedback. Through an online testing system, an employee can take a skills assessment on his or her own time without the need for supervision. Results can be calculated and delivered immediately. The system addresses the two issues that have traditionally hindered skills inventory management efforts: Ease of TestingAn online system makes it easy for employees to measure their skills at will, without imposing a test administration burden on the company. Employees can access skills assessments online and take tests on their own schedules. Company decision-makers can create an assessment schedule without committing the resources or facilities demanded by a traditional pencil-and-paper testing regimen. In addition to easy accessibility, online skills measurement also facilitates repeat testing. Traditional tests may present the employee with the same questions over repeat assessments. Because of this repetition, they tend to measure the test-taker's ability to memorize previous tests rather than provide an accurate measurement of skill and knowledge. Through the use of Computer Adaptive Testing (CAT) technology, an online system can facilitate challenging repeat assessment by dynamically selecting questions as the test is being taken. As a result, the user takes a different test with each assessment, ensuring a challenging experience with each test.
Fast, Meaningful FeedbackWith ease of use and repeatability, 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, the answer lies in the immediate feedback provided by an online system. With one data repository at their fingertips, managers have real-time access to the information they need to assemble teams, focus training, or make many skills or performance-related decisions. For employees, feedback stimulates selfimprovement and is provided at the time when motivation for improvement is strongest immediately after an assessment. 4 Thought Leadership Report October 2002 Reports: Four Essential Components for Skills Inventory Management 4. A Practical Tracking and Reporting System The success of any inventory management initiative is based on its ability to deliver consistent, actionable results. Skills inventory management is no exception. The immediate availability of objective metrics enables managers to take action to focus training, make assignments, and deploy project teams. To be effective, traditional skills management efforts must address a common reporting problem:
ProblemSkills data commonly becomes mired in disparate administrative processes before it can be interpreted into actionable information. If you are running a warehouse, easy access to detailed inventory information is crucial. With a skills inventory management initiative, accurate and relevant data is just as important. In traditional skills management initiatives, the need for repeatable real-time measurement and reporting is often overlooked as impractical or impossible. Faced with the prospect of managing large amounts of raw data or continuously pursuing employees to assess and reassess their skills, manager support for a skills inventory management initiative will decline. SolutionObjective process. Lying at the heart of an objective skills measurement system is the automated reporting function. An online system delivers results without bias, based on calculations from the test-takers answers. The idea of objective test results is not newbut the online measurement system is the first to be able to deliver objective results repeatedly, across a large body of test-takers, and with no administrative burden. The results delivered by online reporting systems can be used to determine skills gaps, identify top performers, or track size of the enterprise.
measurement
systems
automate
the
reporting
employee learning progress across the
organization, regardless of the
Skills Inventory Management Delivers a Human Capital Advantage The need for skills inventory management has never been greater, as all organizations struggle with the challenge of optimizing their investment in human capital. Until now, however, the systems for applying Business 101 principles to the inventory of employee skills have not been available. Make sure that your organizations approach includes each of the above four basic components, and youll avoid many of the mistakes that have kept other skills inventory management initiatives from getting off the ground. For more information about Brainbench call 703.674.3461 or visit www.brainbench.com Reliance Fresh Stores in Food Retailing In April 2007, it was time for celebration at the headquarters of Reliance Industries Limited (RIL). Sales from the recently opened Reliance Fresh outlets had exceeded all estimates with an average sale per store greater than $12,000 (Rs. 0.5 million), against expectations of $5,000 (Rs 0.2 million). The footfalls were as high as 4,000 per day. Launched as 'your friendly neighbourhood store', the typical Reliance Fresh store was spread over an area of 2000 sq ft. Just before its launch, in June 2006, its chairman, Mukesh Ambani had announced a $5.6 billion multiyear investment in the agriculture
and retail sectors. He aimed at making a new company, Reliance Retail the sector's dominant player. Reliance Fresh intended to bring high quality fresh food to the customers at an affordable price. This was to be achieved through an integrated supply chain process and with efficient delivery of value to the consumers. Ambani, who visited all 11 shops on the eve of opening, said his firm offered "unmatched affordability, quality and choice of products and services to the customers". Yet his confidence and optimism did not mean that all questions about his business model were fully answered, or that the answers had been validated yet. There certainly appeared to have been an overwhelming response to Reliance Retail in the first year of operations. Looking at the very encouraging response from the public and the buyers, there were plans to commission more city distribution centres and city processing centers that would further strengthen the supply chain. The stores offered fresh produce, vegetables, pulses, breads and dairy products. "The focus was on fresh fruits and veggies, groceries and staple products that consumers buy," President and CEO, RIL Foods Business,
Gunender Kapur said. The stores directly procured vegetables, pulses and spices from the farmers of Andhra Pradesh, Karnataka and Tamil Nadu, which contributed to quality and pricing advantage. Most of the products were being retailed under Reliance Select, a premium food brand launched by Reliance. In April 2007, the Reliance Select brand covered pulses, rice, spices and vegetables. Raghu Pillai,_ President of operations and strategy at Reliance Retail said, About 95% of India's retail sector is made up of small, family-run stores and the sector has not been tapped by big businesses. Reliance Fresh aims to target and exploit this very segment in which it foresees huge potential for further robust growth. Yet Pillai was realistic about the need for strategies to survive existing and growing competition in this new sector. Opportunities for Retailing in Agri-Business India's retail sector was undergoing a transformation and with a three year CAGR of 46.64%, retail was the fastest growing sector in the Indian economy. Traditional markets were making way for new formats such as departmental stores, hypermarkets, supermarkets and specialty stores. Western-style malls had begun appearing in metros and second-rung cities alike, introducing the Indian consumer to an unprecedented variety in shopping experiences.
India's vast middle class and its almost untapped retail industry were key attractions for global retail giants wanting to enter newer markets. While organized retail in India was only 2% of the total US$ 215 billion retail industry, it was expected to grow 25% annually, driven by changing lifestyles, strong income growth and favourable demographic patterns. A retail consulting and research agency had predicted that by 2010, organized retailing in India would cross US$ 21.5 billion mark.1 Unlike in the developed world, food dominated the shopping basket in India. While food accounted for only 9.7% of the total private consumption expenditure for an average American, 15% for the Japanese & British, for the Indian, it was the principal component of their consumption expenditure accounting for as much 53%. Since much of this was non-branded (including perishable items like fruits and vegetables), the branded food industry was homing in on converting Indian consumers to branded food. At the same time, a huge population base of 1.08 billion, growing at about 1.6% per annum, provided a large and growing domestic market for food products. Also, the countrys middle class had been expanding due to rapid urbanization, increasing per capita income and credit card ownerships, increased participation of women in the urban work force. The segment aged between 20-45 years was emerging as the fastest growing consumer group and the mean
age of Indians was now 27 years, a mean age that reinforced spending across all retailing channels of grocery, non-grocery and non-stores. Unsurprisingly, food & grocery retailers continued to be the staple of retailing in 2005, accounting for of overall retailing value sales as shown in Fig-1, Source: KMPG in India Retail Survey 2005. Agriculture was the backbone of the Indian economy as Nature had been very favourable to the country. Of the land within its boundaries, 52% was cultivable, as against the global average of 11%. All the major 15 climate types existed in India and sunshine hours and day length were ideally suited for good cultivation round the year. Also, India had great bio-diversity and accounted for 17% of animals, 12% of plants and 10% of fish genetic resources of the world. Undoubtedly, 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. Many were leading players in FMCGs, tobacco business, and agribusiness. Source: Marketing Reforms & Enhancing Competitiveness, 2006 However, 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. The result was lots of wastage (as much as 30%) and small remunerations for the farmers (Exhibit-1). There was hardly any supply chain integrator or channel master for retail
channels in this sector. 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. chain in India In effect, 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. There was little attention to value added agriculture in the whole country. Research on improving farm productivity, pre-harvest and post-harvest methodologies, processed food product development, packing, distribution, transport, cold chain, store management warehouse and the entire supply chain were much neglected both by the Central and State Governments. At the same time, it was generally recognized that there was tremendous potential for growth of the food market in the Indian context (Exhibit-2). Reliance Fresh believed that it could unleash that potential for profitable foods and vegetables 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. There were three basic reasons for Reliance Industries Limited (RIL) choosing foods and vegetables for entering into retailing. First, it wanted to go after the very core of the great Indian retail
opportunity. Food accounted for over two-thirds of the $200 billion Indian retail market and yet, it had seen hardly any penetration by modern retail so far. Second, its aim was to build a high-profitability business and food was perhaps the best place to start. Third, 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. In the traditional supply chain in India, there were several intermediaries, who added their respective profit margin to the cost. Besides, there was huge wastage in transit. This offered potential for savings and profits and Reliance Fresh was a step in that direction. Reliance Fresh launched by opening new retail stores in Hyderabad on 3 November 2006 (Exhibits 3-4). Stores remained open from 9am to 9pm. On 24th January 2007, 12 "Fresh" outlets opened in Chennai increasing the total store count to 40. Reliance was testing its retail concepts by controlled entry, - 8 - CS-08-029 beginning in the southern states. RIL planned to invest $63.50 billion (Rs. 2,500 billion) over the next five years in the retail business with 4,000 retail outlets in different cities. Small is Sensible
The stores size varied from 1,500 sq ft to 3,000 sq ft, and stocked fresh fruits and vegetables, staples, FMCG products and dairy products (Exhibits 5-7). 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. The Fresh model was engineered to clock a faster turnover of inventory Reliance expected consumers to visit the store at least twice a week for their top-up groceries. Each store would have an investment of approx $127,000 (Rs. 5 million) to $153,000 (Rs. 6 million). Industry sources expected Reliance Fresh to turn this capital over six times. Each of our stores aim at catchments of only about 2,000 households in a 2-3 sq km radius, shared Jai Bendre, Head of Marketing (foods), Reliance Fresh. This was the concept of a neighbourhood store. Reliance Fresh opened its 100th outlet in the country in the national capital, New Delhi. In addition to this, Bangalore was said to have 40 stores in all by the end of the year. 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 6,000 rural towns in India over the next five years. Reliance Fresh aimed at opening stores in the top 70 cities within the next two years and attaining sales of $25 billion by 2011.
Reliance Fresh had consciously adopted a business model of operating through small and medium size stores. These stores would be of 2,000-5,000 sq ft in comparison to a supermarket which needed 8,000-10,000 sq ft. In the current business model it had positioned itself as a food and grocery convenience store. 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 Farm to Fork model. The company had been racing to set up deals with state governments to establish rural hubs to buy fruit, vegetables, pulses and dairy goods from farmers as it moved to build a 'state-of-the-art supply chain spanning the entire country'. Reliance Freshs shelves provided an indication that the group was looking for higher margins. Most of the staples were under its own private label brand Reliance Select. Except a few packets of Nestls Maggi, or MTRs Masalas or Pepsis Lays chips, there was very little shelf space given to the big brand owners in the country.
The traditional model of vegetable retailing in India involved vegetables being sold in small stores on the roadside, and there were no formal rules regarding weighing, bargaining and quality issues, let alone cold storage and sophisticated supply chains. Produce travelled slowly and inefficiently through a series of intermediaries before reaching the hands of customers, suffering mark-ups, wastages and quality losses along the way. Reliance Fresh marketing model operates on affordability and a hygienic ambience along with a good shopping experience, said Mukesh Ambani, the Chairman of RIL. Reliance Fresh intended to bring high quality fresh food to the customers at an affordable price. Reliance Fresh also wanted to establish a benchmark of hygiene and quality in their sales. 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 We will always buy from the farmer, almost never from the mandi (wholesalers), said a group official. For example, the leafy vegetables, aubergines, tomatoes and green chillies in the one of the outlets in Mumbai were sourced directly from farmers in nearby districts. This in effect got translated into lower prices by at least 15% to 20%. We'll be very affordable and competitive in the market, but we arent playing a price game here. The
full effort is to deliver value to the customer, said Chief Executive, Customer Operations, KS Venugopal. Produce from the farmers came to Reliance's city distribution centre, which connected two very different sides of India, the poverty-ridden countryside, steeped in tradition, and the wealthy city centers. Already, a few hundred farmers have been hooked on to the Reliance Retail supply chain. In the next five years, that number will grow to millions. Even contract farming by assisting farmers in procuring high-quality seeds, fertilisers and other essential raw materials is on the cards. By going to the farmer directly, Reliance Retail hoped to disintermediate the supply chain and eliminate waste. This meant fresher products at lower cost, reasoned the same group official. Still, 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. 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, supply chains were fairly mature and efficient. This gave the retailer little opportunity to improve profit margins. But in India, any retailer who built
an efficient supply chain stood to gain. With efficient sourcing, we can release margins into the system. This can be shared by customers and shareholders, said Gunender Kapur, president and CEO (Foods), Reliance Retail. 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, pack, store, process and distribute fresh and value-added products at the district level. 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. The first such hub would start by October 2007. RBHs would provide agricultural inputs, financial services, cash and carry wholesale format. This means even your local pushcart vendor could be selling vegetables sourced by Reliance," emphatically added Mr. 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 2,000 acres for its contract farming venture in the State of Karnataka, which could emerge as one of its hubs for farm produce exports. The company was also ready to enter into
contract farming operations in the states of Haryana and Maharashtra. Its plan entailed acquiring 10-acres each of the nearly 200 administrative subdivisions in the state. It was learnt that RIL had recruited a vast number of agriculture graduates for this project. Also in the pipeline were the companys plans to set up warehouses across the states. It had already unveiled ambitious contract - 12 - CS-08-029 farming plans nationwide, which would see it operating a massive fleet of cargo flights within India and overseas.
Win-Win Situation?
According to early news reports published in the Hindu Business Line (December 16, 2006 Exhibit-9), farm producers selling to Reliance Fresh were getting better returns on vegetables produced by them. For example, Rangers Farm, the farm produce procuring arm of Reliance Retail was buying Bhindi (okra) at more than $0.25 (Rs.10) per kg against $0.18 per kg (Rs.7.50) (less 10% commission) being offered by traditional vegetable wholesalers. 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, which in some cases were located 40-50km away from their villages. Reliance, on the other hand, had set up its procurement centres nearby. There was one
catch, however. Vegetables before being accepted by the Reliance arm were required to be graded based on their quality and freshness. Although wholesalers refused to admit any impact of Reliance and other chains on arrivals of farm products in the wholesale markets, 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. Efficient supply chains, backed by superior logistics management, had the potential of saving 30-35% in costs, particularly for perishable items like flowers and vegetables. And at the same time, government was getting improved tax revenue as vegetables and groceries were now taxed through these outlets.
Major Players in Food and Vegetable Retailing in India

Godrej Aadhar, a venture of Godrej Agrovet was a complete solution provider for the Indian farmer. It provided professional guidance with an objective to improve productivity, higher returns and improved cost-benefit ratio. The services offered were crop advisory services, soil & water testing services, crop finance, supply of agricultural inputs and animal feeds, transfer of information (weather, price & demandsupply), door delivery of products etc. It already had 33 stores across the country, which it planned to increase to 45 very soon. The company started its fruits, vegetables, dairy and poultry retail business through their Natures Basket stores in the urban areas. While
seven Natures Basket stores were already functioning in Mumbai, the group planned to add another eight in Mumbai itself, before it set base in Delhi, Gurgaon, Hyderabad, Chennai, Chandigarh, Amritsar and Ludhiana. The target was for setting up 1000 outlets by 2010. It had adopted a Hub and Spokes Model for its distribution network. - 13 - CS-08-029 Subhiksha: announced a $0.7 billion (Rs.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. As part of expansion, the company planned to increase the number of stores to 600 from 150 now by end of 2007 to create a national footprint. Besides Delhi, the company proposed to open stores in the states of Maharashtra, Gujarat, Andhra Pradesh and Karnataka. For the Delhi market, the company had earmarked an investment of $0.2 billion (Rs.10 billion) over two years. The company had been making profit for the last eight years, and its revenues had grown 25% in the last two years. The company earned revenue of $0.81 billion (Rs.33 billion) with a profit of $2.5 million (Rs.100 million) last
The
Chennai-based
discount
retail
chain
Subhiksha
year. Every store on an average had a billing of $0.86 million (Rs.35 million). The expansion was expected to add around $391 million (Rs. 15,750 million). ITC Choupal Fresh stores were started in the cities of Chandigarh, Hyderabad and Pune, with their own cold chain supply to wholesale and retail clients. It was the first of 140 stores that ITC planned to open in 54 Indian cities over three years at an investment of $1.9 billion (Rs. 80 billion). ITC had designed the supply chain in collaboration with Ingersoll Rand and Mitsubish's Snowman. Ingersoll Rand had designed the climate-control shelves, the freezer trucks in which farmers send produce, the pre-coolers, and Snowman managed the logistics of the produce. The store stocked only fresh fruit and vegetables, sourced directly from farmers from all over the country. And it expected the organised retail market for fresh produce would touch $12.4 billion (Rs. 500 billion) in the three years. The e-choupal project was empowering farmers and in turn, helping create new businesses for the company. These projects essentially worked on digital infrastructure (IT, Internet access), physical infrastructure (rural Internet enabled offices) human infrastructure (managers and IT professionals) and network orchestration by ITC. As an intermediary, ITC had brought a network of insurance companies, banks, micro-finance entities, seed and fertiliser companies, FMCG, e-learning and training organisations to rural India.
Launched in June 2000, in 7 years the 6,500 strong e-choupal kiosk's services reached millions of farmers growing a wide range of crops and seafood, soyabean, coffee, wheat, rice, pulses, shrimp, in over 38,000 villages across nine states of the country. Hariyali Kisaan Bazaar: The Hariyali Kisaan Bazaar was a pioneering micro level effort, which created a far-reaching positive impact in bringing a qualitative change and revolutionising the farming sector in India. The chain successfully ran its business through 33 stores in five rural locations in North India. Each Hariyali Kisaan Bazaar centre operated in a catchment of about 20 km. A typical centre catered to agricultural land of about 50,000-70,000 acres and made an impact in the life of nearly 15,000 farmers across India. Each centre provided support through a team of qualified agronomists; provided a complete range of good quality, multi-brand agri-inputs like fertilizers, seeds, pesticides, farm implements and tools, veterinary products, animal feed, irrigation items and other key inputs like diesel and petrol at fair prices. The centres also provided access to modern retail banking and farm credit, farm produce buyback opportunities, access to new markets and output related services. Bharti Retail planned to invest $2-2.5 billion by 2015 in its pan-India operations. 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. It
planned to employ 60,000 people. The company planned to launch its retail outlets in multiple consumer friendly formats, including hypermarkets and supermarkets. They had plans to serve all regular shopping requirements of an Indian householdfruits, vegetables, meat and poultry, dairy products, staples, processed foods besides other FMCG and consumer durables. Trinethra was a 98 outlet strong chain, operating in 9 cities of Andhra Pradesh, covering retail space of more than 15,000,000 sq ft. The company had grown exponentially with the number of stores, more than tripled in 5 years. In 2003-04, the company acquired another chain Fab Mall which operated 12 outlets and achieved sales worth $12.4 million (Rs.500 million). Trinethra and Fab Mall had drawn up an ambitious plan to breakthrough the $2.5 billion (Rs. 100 billion) barrier sales by 2008 and for this plans were afoot to cover six new states by 2008. This expansion would see the number of outlets increase from present 92 to 175. Adani Agri Fresh launched operations in Himachal Pradesh last year, when it procured a major chunk of apples from the hill state. 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, Ahmedabad and Kolkata.
Adani had already made an investment of over $280 million (Rs. 11 billion) in the hill state for setting up controlled atmosphere packaging and storage units. This year, the company planned to invest over $408 million (Rs.16 billion) to set up its own cold chain of refrigerated vehicles for transporting apples, kiwi, almonds and peaches. Future Plans and Challenges Senior officers in the company were known to have set a conservative sales target of $25 billion for the next five years. The firm expected to employ 500,000 staff as well as create at least one million jobs indirectly. Reliance planned to invest $7-8 billion in setting up its stores arm that would cover 1,500 Indian cities and towns in the country, said a senior Reliance official. The company had hired 6,000 managers for the new business. Reliance was selecting locations for the stores, setting up agreements with farmers to buy their produce and tying up with manufacturers for merchandise ranging from consumer electronics to apparel. 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.
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 Freshs 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.
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 maal (produce) should be fresh. "It should be plucked too in a certain way. All my life I grew bhindi (okra) the
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 Ranger 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.
Case
Study:
Maslo
Profits
From
the
Computer Age
Case study PDF
Founded in 1978, Maslo Company, Inc., is a full-service, "recovered paper" reseller based in Conshohocken, Pennsylvania. Almost 80% of Maslos business is "brokerage"moving paper from point to point without the reseller ever physically taking ownership of the material. Started as a family business, Maslo has grown into a company that buys and sells over 250,000 tons of scrap paper every year. Although much of that paper never crosses Maslos threshold, those lots still need to be tracked and recorded while the product is in transit. The paper that does arrive on site must
be weighed, classified, and entered into inventory and the vendor must be credited. Each particular lot is then reprocessed and/or shipped to the buyer. 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. In addition, 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. Having no way to get a real-time picture of accounts payable and receivable was also a problem for Maslo executives. Like any other company, Maslo had much to gain from computer technology. 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. However, like many small to mid-sized businesses, Maslo lacked the funds for a full-time computer person, and none of Maslos current employees had the computer savvy nor the time to put together the muchINVENTORY MANAGEMENT Page 108
needed computer network and to shop around for the appropriate software products necessary to increase productivity. Maslos first foray into the tech world was to hire a retired IBM employee as a consultant to set up a network and inventory system. This attempt failed. Because the man was no longer working in the industry, his knowledge was dated and did not include the networking skills required to provide the desired functionality.
Operating in the crudest sense

The solution was to hire the newly formed CISS, Ltd., which would be responsible for setting up a reliable computer network, installing cutting-edge business software, and creating a customized database that would allow instant access to crucial vendor, buyer, and business information. Prior to 1995 and the hiring of CISS, Maslo was utilizing a very low level of technology. The day-to day operation was largely paper-based, frustrating, and restrictive to growth. The basic computer infrastructure was severely out of date and unreliable: inventory was tracked via a program that was little more than a spreadsheet, the network was a daisy chain of 10b2 lines, payables and receivables were handled using a stand-alone computer program, and the server was noted mainly for its crashes. All personnel involved were overworked and harried by vendor and customer requests for more information, and, perhaps the most frustrating of all, no one knew the state of the business at the end of the day. The company was operating in what vice president and general office manager Rob Loose, Jr., summed up as "the crudest sense." In 1995, Ben Spalding, cofounder of CISS, began working as a consultant to Maslo. He immediately assessed Maslos needs and set about turning the technologically challenged office into a technologically sophisticated business. Through a series of steps, Spalding created a computer environment that
has enabled Maslo to increase its volume of business, increase profits, and actually expand to a second office several states away. Spalding focused on three areas that required immediate attention: infrastructure, auxiliary software, and inventory tracking/order processing software.
Tapping into computer technology

The infrastructure changes involved reconfiguring/purchasing computers, upgrading the server, and upgrading the network. Understanding a small businesss desire to keep costs down, Spalding was able to reuse or reconfigure all of the existing hardware, including five 486-25MHz PCs. Several up to-date PCs were added later for the employees who did not previously have desktop computers. The environment was changed from OS/ 2 with Lotus 1,2,3 as the main software package to Windows 95 and MS Office. To eliminate the slowness of the previous network, Spalding upgraded to 10baseT network hubs. In addition to the infrastructure updates, Spalding added auxiliary software products that are essential in todays computer environment. These included faxing software, antivirus software, and automated backup software. (Many smaller companies do not have those vital pieces of software; however, antivirus and backup software with a tape backup system is essential for every computer, home or office.) An integrated accounting interface known as Sages Business Works was also added for accounts payable and receivable. Although the other areas offered much to Maslo employees, the users are most impressed and satisfied with the inventory tracking/order processing software. Based in MS Access, this customized package gives Maslo the flexibility it needs to process orders, track inventory, and get real-time sales figures or at-a-glance inventory reports. This cradle-to-grave transaction program ties inventory to actual orders. Maslos customized software product contains many of the features
available in CISSs 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. Since the inception of these changes, Maslo has gone from processing 550 orders per month to 850 per month. That equates to a 54% increase. And while the actual volume of paper handled has increased from 11,000 tons per month to 17,000 tons per month, Maslo needed to hire only one new office assistant to process these additional orders. In addition, Maslo opened a second office in North Carolina and hired several field salespeople. These employees are able to connect to Maslos home office and inventory tracking/order processing software via the Internet.
Harnessing the Internet

CISS has also added several features to allow Maslo to make use of the vast potential of the Internet. CISS has set up a web-based Internet server with a DSL connection at Maslo headquarters. This server hosts the company website, employee email accounts, and other web services. Along with standard web server features, 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. The web interface offers any user on a PC/Mac running a browser on the Internet the same functionality as the LAN-based, MSAccess application running in Maslos headquarters. An employee is able to connect to the inventory/order database evenings and weekends to check things such as contact information or company reports. The user simply types the URL, enters an assigned username and password, and has access to the same information available at the office.
The next phase in Internet development will be to set up a information site where customers can access real-time order and shipment status. A shopping cart interface may also be established to offer available inventory to customers. 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. 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. IPOL also supports the popular IBM MQ SeriesTM package. Other third-party messenger services or electronic data interchange (EDI) formats can be supported on a custom basis.
Maintaining the technological edge

In order to keep Maslos computer network on the cutting edge, CISS maintains regular contact with Maslo and, through monthly office visits, performs software/ network updates that add to the functionality of the customized software. As the volume of data increases, CISS increases the size of the server and updates its software accordingly. CISS personnel are also able to access crucial Maslo computers through remote access software when necessary. 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. Originally, Maslo planned to maintain its own computers; however, currently CISS maintains all of the fifteen or so desktops, the NT servers, the web server, and all of the Internet components. At a later date, Maslo may decide to maintain
the computers in-house, but for now it finds CISSs service to be cost effective and far superior to what it could provide itself. Through their relationship with CISS, Maslo executives now have a state-of-theart computer network. They are able to make informed choices when confronted with new technology and have computer support.

Industry Profile Management Inventory

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Industry Profile Management Inventory

Uploaded by

Copyright:

Available Formats

WHAT IS INVENTORY?

INVENTORY MANAGEMENT Page 1

INVENTORY MANAGEMENT Page 2

It often happens that we find what seems to us in hindsight like

That is why it is sometimes called the first factory in the world.

INVENTORY MANAGEMENT Page 6

Purpose of Inventory Management

INVENTORY MANAGEMENT Page 7

Role of inventory accounting

INVENTORY MANAGEMENT Page 10

Inventory Management Techniques

INVENTORY MANAGEMENT Page 13

OTHER LOT-SIZING TECHNIQUES

INVENTORY MANAGEMENT Page 15

100/month 2 months + 2 weeks' safety stock = 250

Principle of inventory proportionality

INVENTORY MANAGEMENT Page 16

INVENTORY MANAGEMENT Page 17

INVENTORY MANAGEMENT Page 18

improve your relationships with

vendors and partners by providing self service and real-time visibility

Warehouse and Inventory Control

including inventory trends, stock on order, and supplier on-time performance

pricing based on different types of customers, channels and currencies

INVENTORY MANAGEMENT Page 19

Purchasing and Vendor Management

Optimized Manufacturing Processes

solutions available at SuiteApp.com.

INVENTORY MANAGEMENT Page 20

Asset and Inventory Management

Windows Domain Scan to scan all Windows machines

INVENTORY MANAGEMENT Page 21

Software Asset Management

INVENTORY MANAGEMENT Page 22

INVENTORY MANAGEMENT Page 23

(Connection, usage and container relationship)

Purchase Order Approvals by Approval Managers Maintains

information and GL code for the Purchase Orders

Notification on any Purchase Order due Receives items from

Purchase Orders and move them to assets.

Order form with additional

INVENTORY MANAGEMENT Page 24

WHY KEEP INVENTORY?

INVENTORY MANAGEMENT Page 27

KEEP OPERATIONS RUNNING?

INVENTORY MANAGEMENT Page 28

INVENTORY MANAGEMENT Page 29

Accounting for inventory

FIFO vs. LIFO accounting

INVENTORY MANAGEMENT Page 32

Standard cost accounting

Theory of constraints cost accounting

High-level inventory management

INVENTORY MANAGEMENT Page 35

Special terms used in dealing with inventory

INVENTORY MANAGEMENT Page 39

Finished goods - goods ready for sale to customers.

Goods for resale - returned goods that are salable.

BALANCING INVENTORY AND COSTS

INVENTORY MANAGEMENT Page 44

INVENTORY MANAGEMENT Page 45

INVENTORY MANAGEMENT Page 46

MRP AND MRP II.