Inventory Management

Introduction
Inventory management is the process of managing or controlling stock of resources of economic value by minimizing the cost of resource storage and maintenance in order to meet the customer requirement in right quantity, right place, right time and right cost, where the resources are manpower, machines, capital goods or material at various stages of production. This paper describes the needs and methods of inventory management. It also provides some good ideas on the risk and benefits of keeping inventory.

Inventory Management

One of the important parts of supply chain management is the inventory management. It is the process of maintaining appropriate level of inventories in the warehouse. The basic processes in inventory management are analyzing the inventory requirement, setting inventory targets of the firm, implementing replenishment techniques in maintaining the inventory, monitoring the usages of goods, accommodating the inventory balances, reporting inventory status.
According to Sookdeo, inventories are of different types like inventories raw materials and purchased part, partially completed goods, finished goods. The functions of inventory are to meet the expected demand, to smooth the production requirements, to increase the speed of production, to prevent stock outs, to take advantage of order cycle, to help hedge against price increases, to permit operations, to get advantage of quantity discounts.

Need for Inventory Management

The reason why companies keep inventory is to meet the demands of their customers, to keep the organization running, to get lead time, to avoid financial risk, to get discounts in price, to meet the sudden requirements, etc. The Companies want profit, for that their business has to run good. In other way, they should be capable of meeting the customer demands. Improper inventory management can cause loss to a company.
The product manufacturing companies get profit by selling their products. But to manufacture the product, resources should be available in inventory when it is needed. To attain profit, the inventory should be reliable, efficient and affordable. Improper management of inventory may lead to either excess stock or insufficient stock. For the successful management of stock, the stocks should be classified properly. The inventories are of different types, some goods may get damaged, if it is stored for a long duration. On other hand some goods are needed more and some are less in amount while manufacturing a product, in that case the stocks should be maintained in proportion of usage. That means, the goods used more should be stocked more and the goods used less should be stocked less. This proportional way of keeping inventory improves storage space utilization and efficiency.
Safety stock is the additional stock above the current and short term needs. The necessity of safety stock comes into existence when the unexpected element of event happens. For example, once due to some technical or natural reason, the replacement order for the inventory delayed, that its lead time increased a lot. At that time, the firm has to depend on the safety stock to run their business.
Anticipation Stock is the stock of goods stored in the view of performing a marketing promotion or an upcoming season or any event. The firm has to decide first on the promotional activity and has to start stocking the inventory for that event.
Hedge stock is the stock kept or accumulated based on the expectation of rising prices or supply uncertainty in the market place.

Implementing Inventory Management

One of the important steps to maintain a good inventory is the purchasing plan. Purchasing plan is important, because it helps to prevent the shortage of stocks. The company should find out the usage of stock, based on other conditions like different seasons, festivals, etc. In this plan, company should know when to order for supplies, when to keep high stock, what proportion of goods to be stocked, how long a good can be stocked, etc.
Another method for inventory planning is accurate demand forecasting. In this method, software systems predict the future demand of the product by using mathematical formulae based on historical usage data. This demand forecasting is an ongoing process; it can be done based on the duration of acquirement of inventory goods.
Inventory monitoring is the other important process in maintaining accurate inventory management. In this process, Firm has to track the arrival of product, usage of product, shipment of product, and disposition of inventory items to ensure the accuracy of inventory management. A cycle counting process can be done for this purpose.
Inventory report is the overview of what is there and what is not there in the inventory. Based on these reports, the Firm has to make decision for managing the inventory.

Effective inventory management
An effective inventory management is needed to meet demand of the customer while keeping inventory costs in a reasonable level (William 2005). The following are some of the methods to implement effective inventory management.
The firm has to implement a system to track of inventory details. To manage an inventory, the firm should know the count of resources in the inventory. For counting the inventory, the firm can use either an inventory counting system which counts the number of items in the inventory at periodic intervals or perpetual inventory system which keeps track of removal of items in the inventory continuously. This helps in monitoring the current availability of each item in the stock. Based on this count, the firm can replace orders of needed resources.
Another way to manage the inventory effectively is by doing a reliable forecast of demand. For attaining this forecast, the firm can use one of the following inventory methods. Two bin system and Universal –barcode method. In two bin system, the inventory is divided into two containers. According to this system, the firm should reorder for goods when the first container is empty. On the other hand, universal barcode that is printed on a label which has information of the item to which it is attached.
To meet the demand of customer, the firm should have a good knowledge of lead time to replace a resource. Lead time is the time interval between the ordering and receiving the item. In this case, firm has to replace an order considering the lead time. In other words, the firm has to replace an order with lead time.
For managing the inventory, firm should be able to estimate reasonably the following costs. Holding cost is the cost to store an item in the inventory for a period of time. Most of the
cases, the holding cost is calculated in a year. Ordering cost is the cost of ordering and receiving an item. Shortage cost is the cost of an item when the demand exceeds supply.
Another method to improve inventory management is to classify the system based on ABC classification system. In this classification, some goods have given high importance and classifying inventory according to some measure of importance and allocating control efforts accordingly.
Replenishment order in inventory management is done based of the following models. The following model provides the accurate details of the time at which replenishment has to be done.

Economic order quantity model
In economic order quantity, the quantity of inventory is based on the following assumptions and formula. The assumptions are only one product should be involved, annual demand requirements should be known, demand should be there throughout the year, lead time should not vary, each order should be received in a single delivery, and there should not be any quantity discounts.
EOQ= square root of {(2*annual demand*order or set up cost)/annual holding cost}

Economic production model
Economic production model is based on the following assumptions lime production should be done in batches or lots, capacity to produce a part exceeds the part’s usage or demand rate, assumptions of EPQ are similar to EOQ, orders are received incrementally, only one product should be involved, annual demand requirements should be known, demand should be there
throughout the year, lead time should not vary, each order should be received in a single delivery, and there should not be any quantity discounts.

EPQ= square root of {(2*annual demand*order or set up cost)/annual holding cost}

Latest Trends in Market

Now in markets, there are different methods and tools are available to manage inventories like enterprise resource planning, manufacturing resource planning, just-in-time and lean manufacture. The application of information technology in grocery industry has reduced the cost and time to process an order and in turn improved the supply chain performance (Casher and Fisher 1997).
Enterprise Resource Planning (ERP) is the latest tool used in inventory management. An ERP is a real time information system which is modularized and integrated with a wide range of functional scope responsible for the processing and management of business transactions (Paull 2010). This ERP system integrates information across all departments. It helps in the flow of information among different processes and functions. It tracks manufacturing process, order entry, inventory details, etc at the same time. Hence, this is a real time system, firms can take decision on inventory based on this tools report. With the help of this system, Firm can able to see its inventory details at any point of time.
For example in trade industry, the daily operations involve procurement management, shipment schedule, consolidating sales orders, and delivery. With the help of a proper inventory management system or ERP system, the industry can automate its process.
According to Synergy-focus case study on trading industry in China, the implementation of inventory control system, the industry’s improvement in efficiency is 300%.
Manufacturing resource planning (MRP) is the planning process in which all processes in the manufacturing industries are integrated like business planning, production planning, order processing, capacity requirement planning, forecasting, inventory control planning, etc. According to Giraffe production system, the benefits of manufacturing resource planning are the following:
Order entry and production forecasting which deals elimination of duplicate information, attaining consistent productivity data across the enterprise, and making commitments based on capacity. Resource planning handles the forecast and plan of both human and machine resources. It also helps in attaining improved productivity and reduced production costs. Production Scheduling provides priority assigned to each order. It tracks jobs and generates reports automatically. It also does the rescheduling of uncompleted jobs. Order fulfillment is the other benefit of MRP. It improves customer service and product delivery on time.
Just-in-time production system purpose is to produce and deliver finished goods just in time to be sold. According to Schonberger, the purpose of JIT is to “produce and deliver finished goods just in time to be sold, sub-assemblies just in time to be assembled into finished goods, fabricated parts just in time to go into subassemblies, and purchased materials just in time to be transformed into fabricated parts." In Just-in-time system, the firm works with minimum finished goods in the inventory.

McDonalds Inventory Management systems
McDonald uses Just-in-time inventory management system (Aktinson, 2005). As the name suggests, Just in time provides the supplies for the customer in time. When a customer orders a burger, McDonalds does not start to cook. It reheats and assembles the burger according to the particular order. If McDonalds begins to cook food when a customer places an order, McDonalds’s will take time to prepare a burger. As McDonalds is a fast food, it cannot make a customer to wait for a long time to get the ordered burger. With the help of just in time inventory management system, McDonalds pre-cook a batch of hamburgers and keep them under heat lamps. They keep them as long as possible and eventually discard what could not be sold. The advantage of this system is to serve a customer as fast as possible while having the finished product sitting in the inventory as short as possible.
The other benefit of just in time inventory management system is that the product will be good in quality. Because of this system, McDonalds prepares hamburger ‘just in time’. McDonald’s ability to produce faster reduced the ordering cost of the customer. Because of their ability to prepare fast, the customers need not to wait long for burgers. This firm has lower inventory levels, which may cause a bigger problem during high demand. But, McDonald’s ability to make burgers in record time prevents them from those situations. The holding cost of burger parts are costlier, hence it will be spoiled if it is kept for a month of time. If this frozen burger parts are cooked, the spoil time increases to 15 minutes. Because of this, in McDonalds old system the cost of burger was high to absorb cost of spoiled burger. But now they can prepare burger in record time, as a result of that there is less spoiling of burger in turn low cost of burger. Hence, this Just in time system is beneficial to McDonalds.
The advantages for McDonalds for using just in time inventory management system are reduction of cost of ordering and cost of holding, and reduction in safety stock. The reason for keeping the safety stock is to meet inconsistency in lead time and demand. In McDonalds case, the supplier is internal and they are using just in time system, so they can reduce the lead time and variation in lead time (Aktinson, 2005).

Conclusion
In short, this paper covers all the aspects of inventory management benefits, risk, etc. In this report, you can get information about the benefits of inventory management. This paper is also mentioning about the different methods followed in inventory management. This also details one of the inventory management based on the case study of McDonalds. From this paper, you can understand the reason, why inventory management is important in business process.



References
1. Jaber, Mohamad Y 2009, Inventory Management: Non-classical Views, viewed on 08/09/2010
2. Toomey, John W 2003, Inventory Management: Principles, Concepts and Techniques, Second Printing viewed on 08/09/2010
3. Stephan, Paull 2010, Enterprise Resource planning systems BCO6603, Victoria University,
4.
5. Reference for Business, n.d, Inventory Management, viewed on 8 September
6. Mercado, Ed C 2007, Hands on Inventory Management, viewed on 9 September, < http://reader.eblib.com.au.wallaby.vu.edu.au:2048/Reader.aspx?p=321556&o=158&u=0JZFAmWmBMZRW9PhQs6wTw%3d%3d&t=1284008156&h=AE832F6BA376D2B554139086E6CD7BC7C7530285&s=3502078&ut=507&pg=1&r=img&pat=n#>
7. U.S. Small Buisness Administration 2007, Inventory Management, viewed on 8 September,
8. Charles, Atkinson 2005, Inventory Management Review, viewed on 8/9/2010,9. JSTOR, viewed on 8 September,
10. Business Dictionary, viewed on 9 September,
11. Giraffe Production Systems, Viewed on 9 September,
12. Sang M. Lee; Maling Ebrahimpour 2007,Just-in-Time, viewed on 9/9/2010,
13. Schonberger, R.J., Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity, The Free Press, New York, 1982.
14. Bruce, Zhang n.d, Inventory Management Overview – Demand Forecasting, Inventory Monitoring and Inventory Reporting, Viewed on 9/9/2010,