Mrp inventory management

of 34 INVENTORY MANAGEMENT

MRP INVENTORY MANAGEMENT

BY VIBHASH

MANUFACTURING CAN BE A HIGHLY DETAILED, HIGHLY COMPLEX PROCESS THAT REQUIRES SPECIFIC PLANNING. MATERIAL REQUIREMENT

PLANNING (OR MRP) IS AN INVENTORY SYSTEM THAT IS COMPUTER BASED AND USED TO MANAGE THE MANUFACTURING PROCESS. IT IS

DESIGNED TO ASSIST IN THE SCHEDULING AND FILLING OF ORDERS FOR RAW MATERIALS THAT ARE MANUFACTURED INTO FINISHED

PRODUCTS.

WHAT DOES MRP DO?

THE MAIN OBJECTIVE OF MRP IS TO MANAGE DEPENDENT DEMAND ITEMS. THESE ARE THE RAW MATERIALS AND UNFINISHED GOODS USED

IN THE MANUFACTURING PROCESS. RAW MATERIALS MUST BE KEPT AS INVENTORY STOCK. AS THEY ARE USED, STOCK MUST BE

REPLENISHED THROUGH RE-ORDERING. MRP FULFILLS THREE MAINS FUNCTIONS:

MRP MAKES SURE THAT DEPENDENT DEMAND ITEMS ON KEPT IN STOCK.

MRP MAINTAINS THE OPTIMAL LEVEL OF INVENTORY THAT IS MOST COST EFFECTIVE FOR A COMPANY.

MRP IS USED TO PURCHASE NEW STOCK, DELIVER FINISHED PRODUCTS, AND PLAN THE DAILY MANUFACTURING PROCESSES.

WHAT MAKES MRP EFFECTIVE IS THAT IT WORKS BACKWARD FROM A PLAN FOR PRODUCING FINISHED PRODUCTS IN ORDER TO DEVELOP

THE AMOUNT OF RAW MATERIALS THAT A COMPANY NEEDS. HOW THIS WORKS IS MRP BREAKS DOWN INVENTORY REQUIREMENTS INTO

SEPARATE STAGES. THIS HELPS TO MANAGE PRODUCTION AND KEEP IT FLOWING AT AN EVEN LEVEL. IT ALSO HELPS TO KEEP INVENTORY

COSTS TO A MINIMUM.

THE DRAWBACK IS THAT MRP SYSTEMS CAN BE EXPENSIVE TO IMPLEMENT AND THE COSTS CAN BE QUITE HIGH, OFFSETTING THE AMOUNT

OF MONEY THAT A COMPANY COULD SAVE IN INVENTORY COSTS. LARGER COMPANIES THAT PRODUCE LARGE VOLUMES OF FINISHED

PRODUCTS MAY FIND IT BENEFICIAL BUT THE SAME MAY NOT BE TRUE FOR SMALLER COMPANIES. PLUS, FOR MRP TO PRODUCE ACCURATE

RESULTS, YOU NEED TO HAVE ACCURATE DATA. INFORMATION SUCH AS ORDERS, BILLS, ITEM NUMBERS, AND RECORDS MUST BE ACCURATE

OR THE RESULTS WILL BE OFF.

HISTORY OF MRP

THE ROOTS FOR MRP HAVE BEEN AROUND SINCE THE EARLY 1950’S. MRP IS ONE OF THE PREDECESSORS FOR ENTERPRISE RESOURCE

PLANNING (OR ERP), A COMPUTER SOFTWARE SYSTEM THAT IS WIDELY USED TO LINK A COMPANY’S ENTIRE INFRASTRUCTURE TOGETHER.

MRP WAS ESPECIALLY POPULAR DURING THE 1980’S. MANUFACTURERS NEEDED BETTER RESOURCES TO MANAGE THEIR PROCESSES AND

INVENTORY REQUIREMENTS. MANUFACTURING MANAGERS REALIZED THAT COMPUTERS COULD KEEP TRACK OF INVENTORY QUICKER AND

WITH MORE ACCURATE RESULTS. MAINFRAME COMPUTERS THAT RAN ON CUSTOM SOFTWARE WERE BUILT THAT COULD EXTRACT

INFORMATION FROM A LIST OF RAW MATERIALS AND CREATE A PRODUCTION PLAN.


AS MRP PROVED SUCCESSFUL, IT WAS EVENTUALLY USED TO INCLUDE INFORMATION FEEDBACK LOOPS SO THAT MANAGERS COULD MODIFY

THE INPUTS INTO THE SYSTEM FOR BETTER PRODUCTION RESULTS.

INPUTS FOR MRP

TO GET RESULTS, YOU HAVE TO INPUT INFORMATION INTO THE MRP SYSTEM. THERE ARE THREE MAIN SOURCES OF INFORMATION FOR

INPUT: A BILL OF SALE FOR MATERIALS, A MASTER SCHEDULE, AND AN ACCURATE RECORD OF EXISTING INVENTORY.

THE BILL OF SALE FOR MATERIALS IS A LIST THAT CONTAINS ALL OF THE RAW MATERIALS, COMPONENTS, SUBCOMPONENTS, AND OTHER

MATERIALS NEEDED TO COMPLETE THE FINISHED PRODUCT. THE BILL IS USUALLY ARRANGED INTO SEPARATE SECTIONS SO THAT COMPANIES

CAN SEE WHAT MATERIALS ARE USED FOR EACH STAGE OF PRODUCTION. THIS HELPS TO DETERMINE THE AMOUNT OF MATERIALS NEEDED.

A MASTER SCHEDULE IS A PRODUCTION PLAN THAT COVERS ALL ASPECTS OF THE MANUFACTURING PROCESS. THE SCHEDULE STATES THE

AMOUNT OF FINISHED PRODUCTS THAT CAN BE PRODUCED AND THE TIME FRAME IN WHICH THEY CAN BE FINISHED. MASTER SCHEDULES

DO NOT TAKE INTO ACCOUNT AVAILABLE INVENTORY. THEY ONLY COVER HOW MANY FINISHED PRODUCTS ARE NEEDED.

THE RECORD OF EXISTING INVENTORY LISTS HOW MUCH INVENTORY IS ALREADY AVAILABLE. THIS IS USEFUL FOR DETERMINING HOW

MUCH, IF ANY, ADDITIONAL INVENTORY IS NEEDED TO FULFILL PRODUCTION ORDERS.

ADVANTAGES AND DISADVANTAGES OF MRP

MRP HAS SEVERAL BENEFITS AS WELL AS DRAWBACKS. AS FOR BENEFITS, MRP HELPS MANAGERS WITH THE FOLLOWING:

KEEP INVENTORY LEVELS TO A COST-EFFECTIVE MINIMUM

KEEPS TRACK OF INVENTORY THAT IS USED

TRACKS THE AMOUNT OF MATERIAL THAT IS REQUIRED

SET SAFETY STOCK LEVELS FOR EMERGENCIES

DETERMINE THE BEST LOT SIZES TO FULFILL ORDERS

SET UP PRODUCTION TIMES AMONG THE SEPARATE MANUFACTURING STAGES

PLAN FOR FUTURE NEEDS OF RAW MATERIALS

HOWEVER, MRP ALSO HAS ITS SHARE OF DRAWBACKS. THEY ARE:

INFORMATION USED AS INPUT MUST BE ACCURATE. INACCURATE INFORMATION CAN RESULT IN MISPLANNING, OVERSTOCK, UNDERSTOCK,

OR LACK OF APPROPRIATE RESOURCES.

THE MASTER SCHEDULE MUST BE ACCURATE IN ORDER TO PROVIDE APPROPRIATE LENGTHS OF TIME FOR PRODUCTION.


MRP SYSTEMS CAN BE COSTLY AND TIME-CONSUMING TO SET UP.

THERE MAY BE PROBLEMS WITH EMPLOYEES WHO, BEFORE MRP, WERE NOT DISCIPLINED IN THEIR RECORD KEEPING. ALSO, SOME

DEPARTMENTS MAY HOARD RAW MATERIALS FOR THEIR OWN USE.

WHAT IS MRP II?

THE ORIGINAL MRP SYSTEM WAS EVENTUALLY EXPANDED TO THE PLANNING FOR ALL COMPANY RESOURCES USED IN MANUFACTURING.

THIS NEW SYSTEM WAS CALLED MANUFACTURING RESOURCE PLANNING (OR MRP II). WITH THE SUCCESS OF MRP, MANUFACTURING

COMPANIES REALIZED THE SAME PRINCIPLES COULD BE USED TO SCHEDULE AND PLAN OTHER AREAS. WHILE MRP DEALT MOSTLY IN RAW

MATERIALS, MRP II WAS CONCERNED WITH AREAS SUCH AS HUMAN RESOURCES, FINANCING, MARKETING, AND ENGINEERING.

WHAT IS INVENTORY CONTROL?

BY VIBHASH

INVENTORY CONSISTS OF THE GOODS AND MATERIALS THAT A RETAIL BUSINESS HOLDS FOR SALE OR A MANUFACTURER KEEPS IN RAW

MATERIALS FOR PRODUCTION. INVENTORY CONTROL IS A MEANS FOR MAINTAINING THE RIGHT LEVEL OF SUPPLY AND REDUCING LOSS TO

GOODS OR MATERIALS BEFORE THEY BECOME A FINISHED PRODUCT OR ARE SOLD TO THE CONSUMER.

INVENTORY CONTROL IS ONE OF THE GREATEST FACTORS IN A COMPANY’S SUCCESS OR FAILURE. THIS PART OF THE SUPPLY CHAIN HAS A

GREAT IMPACT ON THE COMPANY’S ABILITY TO MANUFACTURE GOODS FOR SALE OR TO DELIVER CUSTOMER SATISFACTION ON ORDERS OF

FINISHED PRODUCTS. PROPER INVENTORY CONTROL WILL BALANCE THE CUSTOMER’S NEED TO SECURE PRODUCTS QUICKLY WITH THE

BUSINESS NEED TO CONTROL WAREHOUSING COSTS. TO MANAGE INVENTORY EFFECTIVELY, A BUSINESS MUST HAVE A FIRM

UNDERSTANDING OF DEMAND, AND COST OF INVENTORY.

UNCERTAINTY IN DEMAND

METHODS TO CONTROL INVENTORY CAN DEPEND ON THE KINDS OF DEMAND A BUSINESS EXPERIENCES. DERIVED DEMAND, OR THE

DEMAND OF RAW MATERIALS FOR PRODUCTION AND MANUFACTURE, CAN BE MET THROUGH CALCULATIONS IN MANUFACTURING OUTPUT,

BALANCED WITH DEMAND FORECASTS FOR A GIVEN PRODUCT. INDEPENDENT DEMAND COMES FROM CONSUMER DEMAND, MAKING IT

MORE SUSCEPTIBLE TO MARKET FLUCTUATIONS AND SEASONAL CHANGES. BY COORDINATING THE SUPPLY CHAIN BUSINESSES CAN REDUCE

UNCERTAINTY IN THIS AREA.

INVENTORY COSTS ARE CONTROLLED THROUGH DIFFERENT MODELS THAT WILL APPLY TO VARYING PRODUCTS. ITEMS THAT ARE IN

CONTINUOUS SUPPLY BENEFIT FROM THE ECONOMIC ORDER QUANTITY MODEL (EOQ). PRODUCTS AVAILABLE FOR A LIMITED PERIOD ARE

BEST SUITED TO NEWS VENDOR MODELS.

INVENTORY COSTS


THERE ARE THREE MAIN TYPES OF COST IN INVENTORY. THERE ARE THE COSTS TO CARRY STANDARD INVENTORIES AND SAFETY STOCK.

ORDERING AND SETUP COSTS COME INTO PLAY AS WELL. FINALLY, THERE ARE SHORTFALL COSTS. A GOOD INVENTORY CONTROL SYSTEM

WILL BALANCE CARRYING COSTS AGAINST SHORTFALL COSTS.

SAFETY STOCK

SAFETY STOCK IS COMPRISED OF THE GOODS NEEDED TO BE KEPT ON HAND TO SATISFY CONSUMER DEMAND. BECAUSE DEMAND IS

CONSTANTLY IN FLUX, OPTIMIZING THE SAFETY STOCK LEVELS IS A CHALLENGE. HOWEVER, DEMAND FLUCTUATIONS DO NOT WHOLLY

DICTATE A COMPANY’S ABILITY TO KEEP THE RIGHT SUPPLY ON HAND MOST OF THE TIME. COMPANIES CAN USE STATISTICAL CALCULATIONS

TO DETERMINE PROBABILITIES IN DEMAND.

ORDERING COSTS

ORDERING COSTS HAVE TO DO WITH PLACING ORDERS, RECEIVING AND STOWAGE. TRANSPORTATION AND INVOICE PROCESSING ARE ALSO

INCLUDED. INFORMATION TECHNOLOGY HAS PROVEN ITSELF USEFUL IN REDUCING THESE COSTS IN MANY INDUSTRIES. IF THE BUSINESS IS IN

MANUFACTURING, THEN TO PRODUCTION SETUP COSTS ARE CONSIDERED INSTEAD.

THE COST OF SHORTFALLS

STOCKOUT OR SHORTFALL COSTS REPRESENT LOST SALES DUE TO LACK OF SUPPLY FOR CONSUMERS. HOW THESE COSTS ARE CALCULATED

CAN BE A MATTER OF CONTENTION BETWEEN SALES AND LOGISTICS MANAGERS. SALES DEPARTMENTS PREFER THESE NUMBERS BE KEPT

LOW SO THAT AN AMPLE STOCK WILL ALWAYS BE KEPT. LOGISTICS MANAGERS PREFER TO ERR ON THE SIDE OF CAUTION TO REDUCE

WAREHOUSING COSTS.

SHORTFALL COSTS ARE AVOIDED BY KEEPING AN AMPLE SAFETY STOCK ON HAND. THIS PRACTICE ALSO INCREASES CUSTOMER

SATISFACTION. HOWEVER, THIS MUST BE BALANCED WITH THE COST TO CARRY GOODS. THE BEST WAY TO MANAGE STOCKOUT IS TO

DETERMINE THE ACCEPTABLE LEVEL OF CUSTOMER SERVICE FOR THE BUSINESS. ONE CAN THEN BALANCE THE NEED FOR HIGH SATISFACTION

WITH THE NEED TO REDUCE INVENTORY COSTS. CUSTOMER SATISFACTION MUST ALWAYS BE CONSIDERED AHEAD OF STORAGE COSTS.

INVENTORY COUNTS

RETAIL BUSINESSES RELY HEAVILY ON COUNTING TO MANAGE INVENTORY. COUNTS ARE COMPARED WITH RECORDS TO IDENTIFY

SHORTAGES, ERRORS OR SHRINKAGE. IN MANY CASES, COUNTS MUST BE RETAKEN TO ENSURE THE DISCREPANCY IS ACCURATE BEFORE THE

SOURCE OF THE PROBLEM CAN BE TRACKED.

WHEN LOW STOCK IS IDENTIFIED, ORDERING LEVELS CAN BE INCREASED TO ADJUST FOR CHANGES IN DEMAND. PAPERWORK ERRORS WILL

BE MORE DIFFICULT TO FIND, REQUIRING CHECKING AND RECHECKING OF RECEIVING SLIPS WITH INVENTORIES TAKEN WHEN THE GOODS

WERE RECEIVED. SHRINKAGE PROBLEMS ARE OFTEN THE RESULT OF EMPLOYEE THEFT, REQUIRING A THOROUGH INVESTIGATION.

CYCLICAL COUNTING


CYCLICAL COUNTING IS PREFERRED BECAUSE IT ALLOWS FOR OPERATIONS TO CONTINUE WHILE INVENTORY IS TAKEN. IF NOT FOR THIS

PRACTICE, A BUSINESS WOULD HAVE TO SHUT DOWN WHILE COUNTS WERE TAKEN, OFTEN REQUIRING THE HIRE OF A THIRD PARTY OR USE

OF OVERTIME EMPLOYEES. CYCLICAL COUNTING USUALLY UTILIZES THE ABC RULE, BUT THERE ARE OTHER VARIATIONS OF THIS METHOD

THAT CAN BE USED.

THE ABC RULE SPECIFIES THAT TRACKING 20 PERCENT OF INVENTORY WILL CONTROL 80 PERCENT OF THE COST TO STORE THE GOODS.

THEREFORE, BUSINESSES CONCENTRATE MORE ON THE TOP 20 PERCENT AND COUNTER OTHER GOODS LESS FREQUENTLY. ITEMS ARE

CATEGORIZED BASED ON THREE LEVELS:

A CATEGORY: TOP VALUED 20 PERCENT OF GOODS, WHETHER BY ECONOMIC OR DEMAND VALUE

B CATEGORY: MIDRANGE VALUE ITEMS

C CATEGORY: CHEAPER ITEMS, RARELY IN DEMAND

WAREHOUSE STAFF CAN NOW SCHEDULE COUNTING OF INVENTORIES BASED ON THESE CATEGORIES. THE “A” CATEGORY IS COUNTED ON A

REGULAR BASIS WHILE “B” AND “C” CATEGORIES ARE COUNTED ONLY ONCE A MONTH OR ONCE A QUARTER.

CYCLICAL COUNTING CAN ALSO TAKE PLACE BY PHYSICAL LOCATION WITHIN THE WAREHOUSE DURING SLOW HOURS, AS LONG AS

TRANSACTIONS CAN BE TRACKED DURING THE INVENTORY TAKING.

FLOW MANAGEMENT

MANUFACTURERS ARE LESS LIKELY TO USE CYCLICAL COUNTING AND OFTEN RELY ON FLOW MANAGEMENT, BY ANALYZING CYCLE TIMES IN

THE MANUFACTURING PROCESS. THIS INVOLVES CALCULATING LEAD TIMES FOR RAW MATERIALS AND THE MANUFACTURE TIME IN WHICH

THE MATERIALS ARE USED TO CREATE THE PRODUCT. BY ANALYZING THE TIME CYCLE, MANUFACTURERS LEARN WHEN THE OPTIMAL

ORDERING TIMES ARE FOR RAW MATERIALS.

BUSINESSES THAT PROCESS RAW MATERIALS FOR OTHER INDUSTRIES ARE NOT LIKELY TO EMPLOY INVENTORY MANAGEMENT TECHNIQUES,

OTHER THAN ENSURING THERE IS SUFFICIENT SPACE TO STORE PROCESSED MATERIALS UNTIL THEY ARE SHIPPED OR PICKED UP BY THE

MANUFACTURER THAT WILL USE THEM.

SPECIAL CONCERNS FOR RETAIL

RETAIL BUSINESSES HAVE A GREATER RISK OF LOSS TO GOODS THAN OTHER BUSINESSES. THEY SUFFER FROM SHRINKAGE DUE TO EMPLOYEE

AND THIRD PARTY THEFT ON A REGULAR BASIS. BECAUSE OF THIS, HIRING PRACTICES PLAY AN IMPORTANT ROLE IN INVENTORY CONTROL

FOR THESE BUSINESSES. BY SCREENING POTENTIAL EMPLOYEES FOR CRIMINAL RECORDS AND DRUG USE, RETAILERS ARE ABLE TO REDUCE

SHRINKAGE.


ONLINE INVENTORY TOOLS

BY VIBHASH

ONLINE INVENTORY TOOLS ARE AVAILABLE TO HELP YOUR BUSINESS REDUCE COSTS THROUGH STRUCTURED INVENTORY CONTROL AND

ACCOUNTING. SUCH TOOLS ARE REALLY JUST ACCOUNTING SOFTWARE THAT HAS BEEN MODIFIED TO SERVE THE NEEDS OF MANUFACTURERS

AND RESELLERS. GONE ARE THE DAYS OF TRACKING YOUR INVENTORY IN A SPREADSHEET. TODAY, WEB APPLICATIONS ARE AVAILABLE THAT

GIVE YOU THE FLEXIBILITY THAT INVENTORY SOFTWARE OFFERS, WITHOUT THE CONSTANT UPGRADES. BECAUSE ONLINE INVENTORY TOOLS

ARE WEB BASED APPLICATIONS, THEY ARE ABLE TO HELP YOUR BUSINESS STAY ON THE CUTTING EDGE OF INVENTORY MANAGEMENT IN

MANY WAYS.

THE ADVANTAGE OF WEB-BASED SOFTWARE HAS LONG BEEN SEEN IN BACK OFFICE FUNCTIONS, SUCH AS DAY TO DAY ACCOUNTING AND

CASH FLOW MANAGEMENT. WITH THE INCLUSION OF INVENTORY MANAGEMENT, YOU END UP WITH A FULL SUITE OF TOOLS THAT CAN ALL

BE ACCESSED ONLINE. FOR A LOW MONTHLY COST, COMPANIES CAN USE BROWSER-BASED APPLICATIONS TO HANDLE ALL ASPECTS OF THE

BUSINESS FASTER AND MORE ACCURATELY. THESE APPLICATIONS MAKE REPORTS EASILY ACCESSIBLE TO ANY PERSON IN YOUR

ORGANIZATION THAT NEEDS THEM AT ANY LOCATION.

IN THE OLD DAYS, A COMPANY’S BUYER WOULD PERIODICALLY CHECK STOCK FOR INVENTORY ITEMS IN SHORT SUPPLY AND THEN PLACE AN

ORDER BASED ON HIS BEST GUESS OF HOW MUCH OF A STOCK WILL BE NEEDED. SUCH METHODS RESULTED IN OVERSTOCK AND SHORTAGES

ON A REGULAR BASIS. TODAY THINGS ARE DIFFERENT. NOW WE CAN GO ONLINE FOR THE TOOLS WE NEED TO ACCURATELY TRACK AND

REPLENISH SUPPLY.

JUST AS COMPUTERS REVOLUTIONIZED THE BUSINESS WORLD IN THE 80’S, THE INTERNET IS CHANGING EVERYTHING TODAY. THIS EVERY

CHANGING MEDIUM HAS EVOLVED TO A LEVEL WHERE ALL YOUR BUSINESS NEEDS CAN BE HANDLED IN ONE WEB BASED APPLICATION. THE

EASY AND SPEED OF SUCH APPLICATIONS HAVE GIVEN RISE TO NEW THINKING ABOUT THE SUPPLY CHAIN AND HOW INVENTORY IS

MANAGED. THESE NEW METHODS ARE INCREASING CUSTOMER SATISFACTION AND THE ABILITY FOR

WEB BROWSER INTERFACE

ONE OF THE BEST ASPECTS OF THESE APPLICATIONS IS THAT THE USER INTERFACE IS YOUR WEB BROWSER. THERE IS LESS TRAINING NEEDED

FOR MANAGERS AND EMPLOYEES BECAUSE THEY ARE ALREADY FAMILIAR WITH WEB BROWSERS. THIS UNIVERSAL INTERFACE GIVES YOU

EASY ACCESS TO YOUR INFORMATION FROM ANY LOCATION IN THE WORLD, WHETHER IT IS ON YOUR DESKTOP, LAPTOP, CELL PHONE OR

PDA.

BROWSER INTERFACE MEANS THAT YOU NO LONGER NEED TO WORRY ABOUT THE OPERATING SYSTEM YOU ARE WORKING WITH. ALL

PLATFORMS LIKE WINDOWS, MAC, LINUX OR UNIX ARE COMPATIBLE WITH INTERNET BROWSERS.

CENTRALIZED STORE FOR INFORMATION

THE REASON COMPUTERS HAVE BEEN SUCH A POWERFUL TOOL IN THE CORPORATE WORLD IS THAT THEY ALLOW COMPANIES TO KEEP ALL

OF THEIR DATA IN A CENTRALIZED LOCATION. THIS MEANS ANYONE IN YOUR BUSINESS, NO MATTER THEIR LOCATION, CAN ACCESS THE


INFORMATION NEEDED TO GET BUSINESS DONE. YOUR INVENTORY DATABASE, INVENTORY PROCEDURES AND MARKET FORECASTS WILL ALL

BE IN ONE PLACE FOR YOU TO ACCESS.

SECURITY MANAGEMENT

ONLINE INVENTORY TOOLS TAKE CARE OF SECURITY FOR YOU. YOUR DATA IS KEPT ON SECURE SERVERS USING STATE OF THE ART

TECHNOLOGY. THIS WILL BE AN ENORMOUS BOOM FOR YOUR BUDGET, NO LONGER NEEDED TO INVEST IN IT AND SECURITY SYSTEMS TO

KEEP YOUR DATA SAFE. THESE SYSTEMS ALLOW YOU TO SET SECURITY LEVELS AND PROTOCOLS FOR USERS, SO ONLY THOSE EMPLOYEES

THAT TRULY NEED TO GET THE INFORMATION CAN HAVE ACCESS.

YOUR INFORMATION IS BACKED UP DAILY ON REMOTE SERVERS ENSURING YOUR DATA CAN BE RECOVERED SHOULD ANYTHING GO WRONG.

IN MOST CASES, YOU CAN ALSO CREATE YOUR OWN DATA BACKUP IF YOU PREFER TO HAVE THE INFORMATION ONSITE.

LESS DOWN TIME

WEB BASED APPLICATION UPGRADES ARE DONE AUTOMATICALLY AND REMOTELY, SAVING YOU THE TIME TO HAVE A SERVICE

REPRESENTATIVE COME IN TO RECONFIGURE YOUR SYSTEM. THIS ALSO MEANS THAT YOU DO NOT NEED TO SERVICE AND MAINTAIN

SERVERS AT YOUR LOCATION IF YOU PREFER NOT TO. THIS SAVES ON IT INFRASTRUCTURE AND LABOR COSTS. BECAUSE YOUR DATA IS ALL

ONLINE, THE NEED TO INTEGRATE SOFTWARE AND UPGRADES WITH YOUR CURRENT SYSTEM BECOMES OBSOLETE. ORGANIZATIONS WITH

REMOTE OFFICES WILL BENEFITS ENORMOUSLY FROM THIS FEATURE. MOST APPLICATIONS DO NOT CHARGE FOR THESE REGULAR UPGRADES.

MANAGE MULTIPLE LOCATIONS

ONLINE INVENTORY TOOLS ALSO ALLOW YOU TO MANAGE SEVERAL WAREHOUSES AT ONCE, LETTING YOU SET DIFFERENT REPLENISHMENT

LEVELS FOR EACH LOCATION AND PRODUCT. THE INFORMATION IS AVAILABLE TO THE USERS YOU CHOOSE, SO YOUR WAREHOUSE

MANAGERS CAN EACH ACCESS THE INFORMATION WHENEVER IT IS NEEDED. YOU CAN MONITOR INVENTORY NOT ONLY IN YOUR

WAREHOUSE, BUT AT ANY POINT ALONG THE SUPPLY CHAIN. YOU CAN LOOK AT DATA AS A WHOLE FOR YOUR BUSINESS, OR LOOK ONLY AT

SPECIFIC LOCATIONS OR GROUPS OF LOCATIONS.

WHETHER YOUR DISTRIBUTION CHAIN INVOLVES EXTERNAL CUSTOMERS OR INTERNAL DEPARTMENTS, YOU CAN ALLOW USERS TO VIEW THE

INVENTORY AVAILABLE WHEN PLACING ORDERS, ELIMINATING BACK ORDERS AND OTHER PROBLEMS. USERS CAN EASILY PRINT CATALOGS

OF YOUR MERCHANDISE AND PLACE ORDERS FROM REMOTE LOCATIONS.

MANY OF THESE APPLICATIONS ALLOW YOU TO CHECK YOUR STOCK LEVELS AND REORDER FROM THE SAME INTERFACE. YOU CAN MONITOR

DISTRIBUTIONS, RUN REPORTS AND FORECAST TRENDS ALL FROM ONE SIMPLE APPLICATION. YOU CAN LOOK AT THE INBOUND ORDERS AND

WHEN THEY ARE EXPECTED AT YOUR WAREHOUSE TO TRACK THE TIMELINESS OF YOUR SUPPLIERS. IT ALSO ALLOWS YOU TO CHECK YOUR

OUTBOUND ORDERS AGAINST SHIPPING ORDERS SO YOU KNOW WHEN THE MATERIALS WILL LEAVE THE WAREHOUSE, AND COORDINATE

WITH INBOUND ORDERS. YOU CAN EVEN VIEW OPEN ORDERS THAT REMAIN TO BE FILLED.

IMPROVED COMMUNICATION


INTERNET BASED APPLICATIONS CAN ALSO ALLOW YOU TO COMMUNICATE MORE EFFECTIVELY WITH YOUR TEAM THROUGH MESSAGING. IF

YOU NOTICE A PROBLEM AT ONE LOCATION, YOU CAN EASILY CONTACT THE LOCATION MANAGER AND WORK OUT THE SOLUTION. THESE

APPLICATIONS GIVE YOU ACCESS TO EVERY BUSINESS FUNCTION YOU MAY NEED.

STREAMLINED ACCOUNTING

BECAUSE ONLINE INVENTORY TOOLS ALLOW YOU TO TRACK ALL ASPECTS OF YOUR BUSINESS IN ONE LOCATION, END OF YEAR ACCOUNTING

BECOMES MUCH EASIER. NOW YOU CAN CREATE A SEPARATE LISTING FOR ASSETS NOT FOUND INSTEAD OF PORING OVER REPORTS AND

INVOICES TO GET THE DATA. YOU WILL HAVE A CLEAR PICTURE OF YOUR ASSETS AND THE ABILITY TO TRACK THEM AT ALL TIMES. SYSTEMS

ALLOW YOU TO MANAGE BOTH TANGIBLE AND INTANGIBLE ASSETS.

INVENTORY ACCOUNTING

BY VIBHASH

INVENTORY ACCOUNTING IS THE METHOD BY WHICH A BUSINESS DETERMINES THE VALUE OF ASSETS BOTH FOR FINANCIAL STATEMENTS

AND TAX PURPOSES. INVENTORY IS COMPRISED OF FIXED ASSETS THAT ARE INTENDED FOR SALE OR BEING USED IN PRODUCTION. THE

VALUE OF YOUR INVENTORY IS DETERMINED BY TAKING THE VALUE OF THE BEGINNING INVENTORY, ADDING THE NET COST OF PURCHASES,

AND THEN SUBTRACTING THE COST OF GOODS SOLD. THIS RESULTS IN THE ENDING INVENTORY VALUE. RETAILERS AND MANUFACTURERS

CANNOT EXPENSE THE COST OF GOODS SOLD UNTIL THOSE GOODS HAVE ACTUALLY BEEN SOLD. UNTIL THEN, THOSE ITEMS ARE COUNTED AS

ASSETS ON THE BALANCE SHEET.

COMMON INVENTORY VALUATION METHODS

THE METHODS A COMPANY USES TO VALUE THE COSTS OF INVENTORY HAVE A DIRECT EFFECT ON THE BUSINESS BALANCE SHEETS, INCOME

STATEMENTS AND CASH FLOWS. THREE METHODS ARE WIDELY USED TO VALUE SUCH COSTS. THEY ARE FIRST-IN, FIRST-OUT (FIFO), LAST-

IN FIRST-OUT (LIFO) AND AVERAGE COST. INVENTORY CAN BE CALCULATED BASED ON THE LESSER OF COST OR MARKET VALUE. IT CAN BE

APPLIED TO EACH ITEM, EACH CATEGORY OR ON A TOTAL BASIS.

FIFO

FIFO OPERATES UNDER THE ASSUMPTION THAT THE FIRST PRODUCT THAT IS PUT INTO INVENTORY IS ALSO THE FIRST SOLD. AN EXAMPLE

OF THIS IN ACTION CAN BE MADE WHEN WE ASSUME THAT A WIDGET SELLER ACQUIRES 200 UNITS ON MONDAY FOR $1.00 PER UNIT. THE

NEXT DAY, HE SPOTS A GOOD DEAL AND GETS 500 MORE FOR $.75 PER UNIT. WHEN VALUING INVENTORY UNDER THE FIFO METHOD, THE

SALE OF 300 UNITS ON WEDNESDAY WOULD CREATE A COST OF GOODS SOLD OF $275. THAT IS, 200 UNITS AT $1.00 EACH AND 100

UNITS AT $.75 EACH. IN THIS WAY, THE FIRST 200 UNITS ON THE INCOME STATEMENT WERE VALUED HIGHER. THE REMAINING 400

WIDGETS WOULD BE VALUED AT $.75 EACH ON THE BALANCE SHEET IN ENDING INVENTORY.


LIFO

LIFO ASSUMES INSTEAD THAT THE LAST UNIT TO REACH INVENTORY IS THE FIRST SOLD. USING THE SAME EXAMPLE, THE INCOME

STATEMENT AND BALANCE SHEET WOULD INSTEAD SHOW A COST OF GOODS SOLD OF $225 FOR THE 300 UNITS SOLD. THE ENDING

INVENTORY ON THE BALANCE SHEET WOULD BE VALUED AT $350 IN ASSETS. WHEN THIS METHOD IS USED ON OLDER INVENTORIES, THE

COMPANY’S BALANCE SHEET CAN BE GREATLY SKEWED. CONSIDER THE COMPANY THAT CARRIES A LARGE QUANTITY OF MERCHANDISE OVER

A PERIOD OF 10 YEARS. THIS ACCOUNTING METHOD IS NOW USING 10-YEAR-OLD INFORMATION TO VALUE ITS ASSETS.

WEIGHTED AVERAGE

AVERAGE COST WORKS OUT A WEIGHTED AVERAGE FOR THE COST OF GOODS SOLD. IT TAKES AN AVERAGE COST FOR ALL UNITS AVAILABLE

FOR SALE DURING THE ACCOUNTING PERIOD AND USES THAT AS A BASIS FOR THE COST OF GOODS SOLD. TO SITE OUR EXAMPLE AGAIN, WE

WOULD CALCULATE THE COST OF GOODS SOLD AT [(200 X $1) + (500 X $.75)]/700, OR $.821 EACH. THE REMAINING 400 UNITS

WOULD ALSO BE VALUED AT THIS RATE ON THE BALANCE SHEET IN ENDING INVENTORY.

SPECIFIC IDENTIFICATION

A LESS COMMONLY USED, BUT IMPORTANT METHOD TO VALUATION IS CALLED SPECIFIC IDENTIFICATION. THIS METHOD IS USED FOR HIGH-

END ITEMS THAT ARE MORE EASILY TRACKED. IN SOME CASES, THIS METHOD CAN BE USED FOR MORE COMMON ITEMS, BUT LESS VALUE IS

REALIZED FROM THIS ACCOUNTING METHOD IS SUCH CASES. THIS IS BECAUSE POWERFUL AND DETAILED TRACKING SOFTWARE IS REQUIRED

TO EMPLOY SPECIFIC IDENTIFICATION ON LARGE NUMBERS OF GOODS. THE COST OF SUCH SOFTWARE OFTEN OUTWEIGHS THE FINANCIAL

BENEFITS THAT MIGHT BE GAINED.

INFLATIONARY EFFECTS ON VALUATION

NO MATTER HOW YOU LOOK AT IT, YOU ARE STILL COMING UP WITH 700 WIDGETS THAT COST YOU A TOTAL OF $575. THIS WOULD ALL

BE WELL AND GOOD IF THE VALUE OF MONEY REMAINED STATIC. HOWEVER, MARKET CONDITIONS CHANGE CAUSING INFLATIONARY

CHANGES. WHEN THIS HAPPENS, YOUR ACCOUNTING METHOD CAN HAVE A STRONG IMPACT ON HOW HEALTHY THE BUSINESS LOOKS ON

INCOME STATEMENTS AND BALANCE SHEETS. THE AFFECTS CASH FLOW WHEN BUSINESSES SEEK CREDIT TO PAY FOR ONGOING OPERATIONS.

RISING PRICES

WHEN PRICES ARE RISING (AND THEY USUALLY ARE), EACH OF THESE VALUATION METHODS PRODUCES A DIFFERENT RESULT ON A

COMPANY’S FINANCES. USING FIFO UNDER SUCH CONDITIONS WILL SHOW A GREATER VALUE ON THE BALANCE SHEET, THEREBY

INCREASING TAX LIABILITIES BUT ALSO IMPROVING CREDIT SCORES AND THE ABILITY TO BORROW CASH FOR ONGOING OPERATIONS. OLDER

INVENTORY IS BEING USED TO DETERMINE THE COST OF GOODS SOLD AND NEWER INVENTORY IS BEING USED TO REPORT ASSETS.

LIFO DECREASES THE VALUE ON THE INCOME STATEMENT, BUT CAN REDUCE THE LEVEL OF DEPRECIATION YOU ARE ABLE TO TAKE ON

ASSETS. THIS IS GOOD FOR TAXES BUT BAD FOR BORROWING. INDUSTRIES MOST LIKELY TO ADOPT LIFO ARE DEPARTMENT STORES AND

FOOD RETAILERS. THE METHOD IS RARELY USED IN DEFENSE OR RETAIL APPAREL.


FALLING PRICES

WHEN PRICES ARE FALLING, THE EFFECT ON FIFO AND LIFO VALUES IS REVERSED. FIFO PRODUCES A LOWER INCOME STATEMENT AND

HIGHER BALANCE SHEET. LIFO PRODUCES A HIGHER INCOME STATEMENT AND A LOWER BALANCE SHEET. IN EITHER CASE, AVERAGE COSTS

FALLS SOMEWHERE BETWEEN, WHILE SPECIFIC IDENTIFICATION WILL GIVE THE MOST ACCURATE AND RELIABLE RESULTS.

IT IS IMPORTANT TO UNDERSTAND THAT LIFO IS ONLY USED WIDELY IN THE UNITED STATES. THIS VALUATION METHOD IS DISALLOWED

UNDER INTERNATIONAL FINANCIAL REPORTING STANDARDS. WHEN FIRMS ADOPT LIFO, IT IS FOR THE TAX ADVANTAGES DURING PERIODS

OF HIGH INFLATION. ONCE ADOPTED HOWEVER, SWITCH BACK TO FIFO DURING A PERIOD OF MARKET GROWTH CAN BE PAINFUL. THE

SWITCH WILL CREATE AN ARTIFICIALLY LOWER NET INCOME.

MAKING THE COMMITMENT

THE PROBLEM WITH COMMITTING TO EITHER FIFO OR LIFO IS FOUND IN TAX FILING. ONCE A COMPANY USES ONE OR THE OTHER ON ITS

TAX FILING, IT MUST USE THE SAME METHOD WHEN REPORTING TO SHAREHOLDERS. SO USING ONE METHOD TO A COMPANY’S BENEFIT ON

TAXES CAN HARM EARNINGS PER SHARE. IN EITHER CASE, THE COMPANY’S FINANCIAL STATEMENTS MUST DISCLOSE THE METHOD USED. IT

MUST ALSO DISCLOSE THE LIFO RESERVE, OR THE DIFFERENCE IN VALUE BETWEEN WHAT THE INVENTORY WOULD HAVE BEEN WORTH

UNDER FIFO ACCOUNTING.

THE METHOD A COMPANY CHOOSES DOES NOT NECESSARILY HAVE TO REFLECT THE ACTUAL FLOW OF GOODS. THE METHOD CHOSEN WILL

BE USED FOR TAX AND ACCOUNTING BENEFITS AND WILL RARELY BE BASED IN REALITY.

INVENTORY MANAGEMENT SYSTEMS

BY VIBHASH

LOOK AT ANY LARGE SUCCESSFUL RETAILER TODAY AND YOU WILL BE ASTOUNDED AT THE SHEER NUMBERS INVOLVED. WAL-MART ALONE

CARRIES ITEMS MANUFACTURED IN OVER 70 COUNTRIES. THE LOGISTICS OF MANAGING SUCH AN INVENTORY IS ASTOUNDING. OTHER

DISCOUNT RETAILERS LIKE WAL-MART ARE ABLE TO MAINTAIN LOW PRICES BY USING INVENTORY MANAGEMENT SYSTEMS AND SHARING

THE INFORMATION WITH STORE MANAGERS.

THE GOAL OF INVENTORY MANAGEMENT SYSTEMS IS TO ENSURE THERE IS ALWAYS ENOUGH SUPPLY TO MEET DEMAND WHILE KEEPING AS

LITTLE STOCK AS POSSIBLE. SELLING OUT OF A PRODUCT CAUSES DAMAGED CUSTOMER RELATIONS AND LOST SALES. LARGE RETAILERS CAN

OFFSET THESE PROBLEMS BY OFFERING LOW COSTS TO CONSUMERS, WHO WILL KEEP COMING BACK EVEN WHEN A STORE IS SOMETIMES

OUT OF STOCK ON ITEMS THEY REGULARLY BUY. SMALLER BUSINESSES WILL HAVE LESS SUCCESS WITH THIS STRATEGY AS THEY ARE SIMPLY

NOT CAPABLE OF SECURING THE SAME BULK DISCOUNTS ON GOODS THAT LARGER RETAILERS BENEFIT FROM.


TRACKING IN INVENTORY MANAGEMENT

INVENTORY IS MANAGED PRIMARILY THROUGH TRACKING. SYSTEMS ARE PUT IN PLACE THAT MONITOR SALES, AVAILABLE SUPPLY, DEMAND

AND MARKET FORECASTS. BUSINESSES MUST BE ABLE TO COMMUNICATE QUICKLY AND EFFICIENTLY WITH SUPPLIERS AND CENTRAL OFFICES

TO KEEP UP WITH THE EVERY CHANGING DEMAND AND AVAILABILITY OF GOODS.

THE HUMAN ELEMENT

A GOOD SYSTEM DOES NOT MAKE PURCHASING DECISIONS DIRECTLY, BUT ALLOWS EMPLOYEES TO MAKE GOOD DECISIONS BASED ON

INFORMATION PROVIDED BY THE SYSTEM. THIS ALSO LEAVES MORE ROOM FOR HUMAN INTUITION IN THE PURCHASING PROCESS. SUCH

SYSTEMS PROVIDE INFORMATION SUCH AS DEMAND FORECASTING, AND WAREHOUSE SUPPLY INFORMATION. IT WILL LINK EMPLOYEES TO

SUPPLIERS QUICKLY AND SEAMLESSLY. OTHER BENEFITS TO AN INVENTORY MANAGEMENT SYSTEM ALLOW FOR STRATEGIC PLANNING,

PROVIDING SALES FORECASTS AND PROCURING INFORMATION ON RAW MATERIALS AND FINISHED GOODS.

SOME RETAILERS AVOID THE NEED TO MANAGE INVENTORY ALTOGETHER BY EMPLOYING VENDORS TO DO THE WORK. PRODUCT VENDORS

VISIT A RETAIL LOCATION, STOCKING AND PLACING PRODUCTS. STORE MANAGERS AND VENDORS SHARE INFORMATION TO MAXIMIZE

SALES. THIS RECIPROCAL ARRANGEMENT IS OFTEN IDEAL FOR BOTH PARTIES IN THAT THE RETAILER HAS NO DUTY TO TRACK INVENTORY

AND THE VENDOR RECEIVES IMPORTANT FEEDBACK TO USE IN MARKETING AND PRODUCT DEVELOPMENT.

BAR CODES AND SCANNERS

MOST BUSINESSES MANAGE INVENTORY THROUGH THE USE OF BAR CODES AND LASER SCANNERS. THE BARCODES REPRESENT A PRODUCT

IDENTIFICATION THAT A COMPUTER RECOGNIZES WHEN SCANNING THE CODE. IN THIS WAY, COMPANIES CAN COUNT ITEMS AS THEY COME

INTO THE WAREHOUSE, ARE SHIPPED OFF TO THE RETAILER AND FINALLY SOLD TO A CUSTOMER. THIS ALLOWS THE RETAILER TO KNOW

HOW MUCH HAS COME INTO THE STORE, HOW MUCH HAS BEEN SOLD, AND BY EXTENSION, HOW MUCH SHOULD REMAIN ON THE SHELVES.

THIS TELLS RETAILERS WHICH ITEMS ARE SELLING WELL AND ALSO ALERTS THEM WHEN PRODUCTS NEED TO BE REORDERED.

THE TRADE OFF

WHETHER THE BIG DISCOUNT RETAILERS HAVE FOUND THE BEST INVENTORY STRATEGY OR NOT REMAINS TO BE SEEN. THERE ARE STILL

SEVERAL GOOD REASONS FOR CARRYING SAFETY STOCK. PRIMARILY, MAINTAINING A BACKUP SUPPLY OF GOODS ENSURES YOU CAN

ALWAYS PROVIDE ITEMS TO CUSTOMERS WHEN THEY ARE DESIRED, RESULTING IN HIGH CUSTOMER SATISFACTION.

TIME IS SAVED AS WELL. LAGS CAN OCCUR AT EVERY POINT ALONG THE SUPPLY CHAIN. SAFETY STOCK COMPENSATES FOR THESE DELAYS BY

PREVENTING DISRUPTIONS IN THE FLOW OF PRODUCTS FROM WAREHOUSE TO RETAILER.

SAFETY STOCK ALSO GIVES BUSINESSES MORE CERTAINTY IN PLANNING. AS DEMAND FLUCTUATES, THEY CAN BE SURE A SUPPLY REMAINS

ON HAND. THERE ARE ALSO COST SAVINGS IN BUYING LARGE LOTS, SO BUSINESSES ARE WELL SERVED TO PURCHASE EXTRA INVENTORY TO

KEEP AS SAFETY STOCK.


UPCOMING TECHNOLOGIES IN INVENTORY MANAGEMENT

IN COMING YEARS, EXPECT TO SEE MORE AUTOMATION IN RESPECT TO PRODUCT TRACKING THROUGH THE USE OF RFID, OR RADIO

FREQUENCY IDENTIFICATION. THIS METHOD USES A MICROCHIP TO TRANSMIT THE INFORMATION ABOUT A PRODUCT TO A DATA

COLLECTION SOURCE. BECAUSE RADIO WAVES TRAVEL IN ALL DIRECTIONS, THERE IS NO NEED FOR A SPECIFIC SCANNING POINT. THIS MEANS

A BUSINESS CAN RECEIVE INFORMATION ABOUT EACH ITEM IN A LARGE SHIPMENT WITHOUT EVER OPENING THE CONTAINER. THIS WILL

ALLOW FOR GREATER FLEXIBILITY IN ORDER CONSOLIDATION AND SHIPPING FOR RESELLERS. IN ADDITION, WORKERS WILL NO LONGER NEED

TO CLIMB UP ON HIGH SHELVES OR USE A LIFT TO REACH ITEMS STORED HIGH IN WAREHOUSES. THE METHOD CAN ALSO GIVE SPECIFIC

LOCATION INFORMATION TO A STORE MANAGER, ALLOWING BETTER THEFT PROTECTION FOR HIGH-TICKET ITEMS.

ON THE DOWN SIDE, RFID SIGNALS ARE GENERALLY FROWNED UPON BY CONSUMER ADVOCATES WHO COMPLAIN THAT THE LEVEL OF DATA

TRANSMITTED INFRINGES ON THEIR PRIVACY. THERE ARE CONCERNS THAT THE DATA WILL BE MISUSED OR SOLD TO OTHER RETAILERS FOR

MARKETING PURPOSES ON RELATED PRODUCTS.

BUSINESSES CAN RUN INTO PROBLEMS WITH RFID SIGNALS, WHICH CAN INTERFERE WITH EACH OTHER AND CREATE INACCURATE

READINGS. STILL, RFID IS GENERALLY BECOMING ACCEPTED AS SUPERIOR TO BAR CODES. SUCH DEVICES ALLOW FOR MORE EFFICIENCY,

MORE COMPACT STORAGE OF MERCHANDISE, AND SWIFTER MOVEMENT OF INVENTORIES THROUGH THE BUSINESS. ALL THIS DRIVES DOWN

COSTS FOR EVERYONE, BOTH BUSINESS AND CONSUMER ALIKE.

HEAVY RELIANCE ON TECHNOLOGY HAS ITS SHARE OF HEADACHES. THERE ARE PROBLEMS WITH COMPUTER CRASHES AND SOFTWARE

FAILURES THAT CAN SEVERELY DISRUPT A COMPANY’S ABILITY TO DO BUSINESS. MANY LARGE DISCOUNT RETAILERS ARE CAUGHT OFF

GUARD BY UNPREDICTED SURGES IN SALES BECAUSE THEY RELY TOO HEAVILY ON INVENTORY MANAGEMENT SYSTEMS INSTEAD OF KEEPING

SAFETY STOCK. THIS RESULTS IN LOST SALES.

INVENTORY ACCOUNTING

IT IS ALSO IMPORTANT TO LOOK AT THE ROLE OF INVENTORY MANAGEMENT SYSTEMS IN INVENTORY ACCOUNTING. THOSE WHO DO NOT

KEEP SAFETY STOCK HAVE FEWER ASSETS ON THE BOOKS, LIMITING CASH FLOW IN THE BUSINESS. CONSIDER, HOWEVER, THAT THIS IS

OFFSET TO SOME EXTENT BY TAX SAVINGS. THEREFORE, THE BIG RETAILERS WHO RELY HEAVILY ON TECHNOLOGY TO MANAGE INVENTORY

JUSTIFY THE LOST SALES WITH THE SAVINGS IN TAXES.

THE LEVEL OF RELIANCE ON TECHNOLOGY IN INVENTORY MANAGEMENT SYSTEMS DEPENDS ON THE BUSINESS. IT IS NOTABLE THAT THIS

METHODOLOGY IS NOT WIDELY USED. WHILE LARGER RETAILERS HAVE TRENDED TOWARDS REDUCING OR ELIMINATING SAFETY STOCK,

OTHER BUSINESSES HAVE NOT ADOPTED THIS MODEL. THEY INSTEAD RELY MORE ON TRADITIONAL METHODS OF INVENTORY MANAGEMENT

WHICH INCLUDE KEEPING A BUFFER STOCK ON HAND. THIS ALLOWS SUCH COMPANIES TO LEVERAGE THE BUFFER STOCK AS AN ASSET IN

SECURING LOANS TO INCREASE CASH FLOW.


WHAT IS DISTRESSED INVENTORY?

BY VIBHASH

DISTRESSED INVENTORY IS COMPRISED OF THOSE GOODS OR MATERIALS THAT HAVE SPOILED, BECOME RUINED, OR ARE OTHERWISE

IMPOSSIBLE TO SELL ON THE STANDARD MARKET. IT CAN ALSO BE ITEMS IN GOOD CONDITION THAT HAVE REMAINED ON THE SHELF TOO

LONG, TAKING UP VALUABLE RESOURCES THAT COULD BE USED TOWARDS MORE PROFITABLE MERCHANDISE. SOMETIMES DISTRESSED

INVENTORY COMES ABOUT DUE TO OVERSTOCK; OTHER TIMES, DEMAND SIMPLY DRIES UP. DISTRESSED INVENTORY IS A SERIOUS THREAT

TO THE LIVELIHOOD OF ANY BUSINESS.

THE COST OF DISTRESSED INVENTORY

FOR MANY BUSINESSES, THE COST TO BUY GOODS FOR SALE OR MANUFACTURE ECLIPSES EVEN THE COST OF LABOR. WHEN INVENTORY

LEVELS ARE ALLOWED TO GROW BEYOND SALES FORECASTS, MARGINS ARE REDUCED BECAUSE EXCESS STOCK MUST BE SOLD AT DISCOUNTED

RATES, RESULTING IN LOWER MARGINS. STAGNANT INVENTORY IS A SOURCE OF MONEY A BUSINESS CANNOT ACCESS WHEN IT MAY BE

MOST NEEDED. THIS SLOWS DOWN A COMPANY’S ABILITY TO MANEUVER IN A COMPETITIVE MARKET. THE MONEY WOULD BE PUT TO

BETTER USE IN PURCHASING THE NEXT HIGH-MARGIN PRODUCT OF THE DAY.

BEYOND TYING UP DOLLARS, UNSOLD INVENTORY DECLINES IN VALUE OVER TIME, CREATING A DOUBLE JEOPARDY. NOT ONLY IS THE

BUSINESS LOSING PROFITS IT COULD BE SECURING, IT IS ALSO LOSING MONETARY VALUE ON THE PRODUCT ITSELF. THIS MAKES IT HARDER

TO SELL, FORCING DEEPER DISCOUNTS AND LOWER MARGINS. THIS IS ESPECIALLY DAMAGING IF THE INVENTORY WAS PURCHASED WITH A

LOAN. NOW IT IS ALSO COSTING TO COMPANY MONEY IN INTEREST FEES.

PRODUCT LIFE CYCLES

EVERY PRODUCT STOCKED BY A COMPANY HAS A LIFE CYCLE. THERE WILL BE INCREASING DEMAND UNTIL A PEAK IS REACHED AND THEN

THE DEMAND WILL SUBSIDE. THESE TRENDS MAY RUN ALONG SEASONAL LINES OR SIMPLY BE A ONE-TIME FAD EVENT. ONCE DEMAND

BEGINS TO EBB, HUGE MARK DOWNS ARE NEEDED TO KEEP SALES GOING. THE VALUE OF THE MERCHANDISE CAN GO DOWN AS MUCH AS

50% ANNUALLY WHILE IT SITS ON THE SHELVES TAKING UP THE SPACE OF CASH THAT COULD BE USED TO GROW THE BUSINESS.

WHY DOES OVERSTOCKING OCCUR?

OVERSTOCKING COMES FROM SEVERAL SOURCES, MOST OF WHICH ARE FORCES FROM WITHIN THE COMPANY. THIS MEANS THE BUSINESS

CAN CONTROL OVERSTOCKING THROUGH PROPER MANAGEMENT. MARKET FORCES ARE ONLY THE CAUSE OF OVERSTOCKING IN A SMALL

PERCENTAGE OF CASES.

INTERNAL CAUSES OF OVERSTOCKING

VARIOUS MANAGERS ARE ENCOURAGED TO MAXIMIZE INVENTORY INVESTMENTS TO PAINT A ROSIER PICTURE ON BALANCE SHEETS. IN

ADDITION, BUYERS LOOK AT THE COST PER UNIT, RATHER THAN PAYING ATTENTION TO THE BULK OF THE INVENTORY. THE MORE THEY BUY,

THE CHEAPER THEY GET IT, MAKING THEM LOOK GOOD AT REVIEW TIME. OPERATIONS MANAGERS LIKE TO OVER-BUY SO THAT THE


PRODUCTION LINE WILL NOT COME TO A STALL BECAUSE THE SUPPLY OF A PART HAS BEEN DEPLETED. SALESMEN ARE EVER-OPTIMISTIC AND

WILL OVER-BUY IN ANTICIPATION OF GAINS IN SALES AND FEARS OF RUNNING OUT OF STOCK JUST WHEN A BIG SALE IS BEING CLOSED. THE

VARIOUS MOTIVATIONS OF THESE WORKERS ARE WELL-INTENTIONED, BUT THEY LOSE SIGHT OF THE EFFECTS OVER-BUYING HAS ON THE

COMPANY’S BOTTOM LINE.

TRYING NEW ITEMS

MARKET FORCES CAN ALSO CONTRIBUTE TO OVER STOCKING AND DEAD INVENTORY. THE BIGGEST CULPRIT IS OFTEN A NEW PRODUCT THAT

THE BUSINESS TRIES IN AN EFFORT TO FIND NEW SOURCES OF PROFIT.

TOO OFTEN WHOLESALERS TRY OUT NEW ITEMS BASED ON A VENDOR’S RECOMMENDATIONS WITHOUT GETTING ANY ASSURANCES ABOUT

WHAT WILL HAPPEN TO ITEMS THAT DO NOT SELL. WHEN AGREEING TO TRY A NEW PRODUCT, WHOLESALERS SHOULD NEGOTIATE TERMS

FOR THE VENDOR TO TAKE BACK UNSOLD MERCHANDISE AT OR NEAR COST, WITHIN A SPECIFIC TIME FRAME. A GOOD TARGET DATE IS SIX

TO NINE MONTHS AFTER THE WHOLESALER RECEIVES SHIPMENT OF THE STOCK.

MARKET SURVEYS SHOW THAT ONLY A SMALL PERCENTAGE OF CUSTOMERS WHO SAID THEY WOULD TRY A NEW PRODUCT ACTUALLY COME

THROUGH WITH A PURCHASE. THIS MEANS THAT THE MARKET RESEARCH DONE BY THE VENDOR IS SKEWED TO PRESENT HIGHER SALES

FORECASTS THAN CAN REALLY BE EXPECTED.

ANOTHER WAY TO REDUCE THE RISK OF DEAD INVENTORY ON NEW PRODUCTS IS TO SEARCH THE MARKET FOR SMALLER QUANTITIES OF THE

ITEM THAT CAN BE TESTED TO SEE HOW THE SALES WILL BE. EVEN IF THE COST PER UNIT IS HIGHER, THE REDUCTION IN DEAD INVENTORY

WILL BE WELL WORTH THE EXTRA COST.

WHAT TO DO ABOUT DEAD INVENTORY

DISTRESSED OR “DEAD” INVENTORY IS A PROBLEM FOR ANY COMPANY IN THE DISTRIBUTION BUSINESS. WHILE SOONER OR LATER EVERY

COMPANY MUST DEAL WITH THIS PROBLEM, ANY BUSINESS CAUGHT IN A CYCLE OF OVER-BUYING MUST TAKE MEASURE TO BREAK THE

TREND. THIS MEANS RIDDING THE BUSINESS OF DISTRESSED INVENTORY, FREEING UP CASH TO PURCHASE GOODS THAT WILL SELL QUICKLY

AND MONITORING STOCK MORE CLOSELY IN THE FUTURE. MANAGERS MUST BE LEVEL-HEADED AND SOBER IN ASSESSING THE STEPS NEEDED

TO LIQUIDATE THE INVENTORY.

MARK DOWNS

THE MOST POPULAR METHOD FOR RIDDING THE BUSINESS OF DISTRESSED INVENTORY IS TO MARK THE GOODS DOWN FOR QUICK SALE. IT IS

COMMON FOR BUSINESSES TO KEEP A REGULAR PRACTICE OF SCHEDULED MARK DOWNS AS LONG AS PARTICULAR PRODUCTS REMAIN IN

INVENTORY. MANAGERS MUST BE MERCILESS IN DISCOUNTING MERCHANDISE TO MAKE IT MOVE QUICKLY. WHILE MARKING ITEMS DOWN

AS MUCH AS 75% CAN BE PAINFUL, THE COST OF KEEPING THE GOODS IS EVEN MORE SO.


RETURNS

IN SOME CASES, THE COMPANY CAN COMMUNICATE WITH DISTRIBUTORS TO REQUEST THAT THEY TAKE BACK EXCESS INVENTORY.

PROPOSALS SHOULD BE STRUCTURED IN A WAY THAT BENEFITS THE DISTRIBUTOR, SUCH AS OFFERING THE MERCHANDISE IN EXCHANGE FOR

OTHER MERCHANDISE THAT MAY SELL BETTER.

CHARITABLE DONATIONS

IF ALL ELSE FAILS, CHARITABLE DONATIONS ARE ALWAYS AN OPTION. IF GOODS HAVE BEEN DRASTICALLY REDUCED AND STILL REMAIN ON

THE SHELVES, A CHARITABLE DONATION ALLOWS THE BUSINESS TO WRITE THE DONATION OFF ON TAXES.

MONITORING STOCK

CLOSE MONITORING OF INVENTORY LEVELS IS NEEDED TO KEEP THEM AT HEALTHY LIMITS. CYCLE COUNTING SHOULD BE DONE TO

MAINTAIN CONTROL OF STOCK ON A REGULAR BASIS. THIS ALLOWS THE BUSINESS TO SPOT PROBLEMS BEFORE THEY CAUSE SERIOUS

FINANCIAL CONCERNS. IN ADDITION, STRONG INVENTORY MANAGEMENT SYSTEMS SHOULD BE KEPT IN PLACE THAT BASE PURCHASE

DECISIONS ON MARKET FORECASTS AND STOCK LEVELS, NOT ON THE INFLUENCE OF SALESPEOPLE OR OPERATIONS MANAGERS.

STOCK MANAGEMENT

BY VIBHASH

INVENTORY FOR A BUSINESS IS MORE THAN JUST MATERIALS AND GOODS THAT ARE KEPT IN A WAREHOUSE. INVENTORY PLAYS A

SIGNIFICANT ROLE IN A COMPANY’S PHYSICAL ASSETS. IT REPRESENTS A FINANCIAL INVESTMENT THAT IF NOT USED PROPERLY, CAN REALLY

DRAIN A COMPANY’S CASH FLOW. TO MAKE SURE THAT THEY DO NOT JUST THROW THEIR MONEY AWAY ON STOCK, A COMPANY SPENDS

QUITE A BIT OF MANPOWER AND RESOURCES ON MONITORING THEIR STOCK. THE PROCESS OF MONITORING INVENTORY IS KNOWN AS

STOCK MANAGEMENT.

STOCK MANAGEMENT IS BASICALLY A SERIES OF PROCESSES FOR KEEPING UP WITH ROTATING STOCK. THIS INCLUDES TRACKING,

SHIPMENTS, HANDLING OF GOODS, AND ORDERING TO RESUPPLY THE CURRENT LEVELS OF INVENTORY. SUCCESSFUL STOCK MANAGEMENT

CAN MAKE OR BREAK A COMPANY. IF NOT IMPLEMENTED CORRECTLY, A COMPANY CAN WASTE A LOT OF MONEY ON EXCESS INVENTORY OR

THEY COULD BE SHORT ON SUPPLIES WHICH SLOW DOWN PRODUCTION.

WHAT IS STOCK MANAGEMENT?

A COMPANY’S INVENTORY IS MADE UP OF A NUMBER OF DIFFERENT PRODUCTS AND MATERIALS. HAVING A GOOD METHOD OF STOCK

MANAGEMENT IS IN UNDERSTANDING THE DIFFERENT LEVELS OF STOCK AND ITS DYNAMICS. FOR INSTANCE, HOW MUCH OF ONE

PARTICULAR INVENTORY ITEM DOES A COMPANY USE? DO THEY USE ONE ITEM MORE THAN OTHERS? WHEN SHOULD ADDITIONAL

INVENTORY BE REORDERED?


THERE ARE SEVERAL FACTORS THAT PLAY A ROLE IN STOCK MANAGEMENT AND THE AMOUNT OF STOCK THAT IS USED. INFLUENCES ON

INVENTORY DEMAND ARE EITHER INTERNAL OR EXTERNAL. PURCHASE ORDERS ARE DESIGNED TO KEEP ALL THE CHAOS THAT IS INVENTORY

IN GOOD WORKING ORDER.

STOCK MANAGEMENT IS MOSTLY GOVERNED BY INVENTORY SOFTWARE. THE COMPUTER KEEPS TRACK OF WHAT COMES IN AND GOES OUT

OF THE INVENTORY. THERE ARE NUMEROUS THIRD PARTY COMPANIES THAT PROVIDE STOCK MANAGEMENT SOFTWARE FOR A VARIETY OF

BUSINESSES. THE BEST SYSTEMS ARE THOSE THAT ARE COMPATIBLE AND CAPABLE OF MONITORING MULTIPLE STOCKS IN SEVERAL

LOCATIONS ALONG WITH SEVERAL USERS.

COMMON METHODS OF STOCK MANAGEMENT

WITH THE CHANGING WORLD ECONOMY, BUSINESSES ARE PAYING MORE ATTENTION TO THEIR INVENTORY LEVELS. THEY ARE LOOKING

INTO BETTER WAYS TO MANAGE STOCK.

A STRUCTURED METHOD IS NEEDED TO MAKE SURE THAT INVENTORY LEVELS ARE OPTIMIZED FOR PRODUCTION AND COST. AN AUTOMATED

METHOD IS PREFERRED OVER THE OLD FASHIONED MANUAL METHOD WHICH CONSISTS OF SEVERAL DISADVANTAGES SUCH AS HIGHER COSTS

AND INVENTORY ERROR.

A SUCCESSFUL SYSTEM FOR STOCK MANAGEMENT ENSURES THAT A COMPANY HAS ENOUGH SUPPLIES OF RAW MATERIALS FOR THEIR

PRODUCTION. A FAULTY OR INADEQUATE MANAGEMENT SYSTEM CAN SLOW DOWN PRODUCTION IF NOT ENOUGH RAW MATERIALS ARE

KEPT ON HAND. IF PRODUCTION SLOWS THEN THERE IS A SHORTAGE OF FINISHED PRODUCTS WHICH MEANS LOWER SALES. WHEN A

COMPANY RUNS COMPLETELY OUT OF STOCK, IT IS CALLED A STOCKOUT. STOCKOUT CAN HURT CUSTOMER SERVICE AND COMPANY IMAGE.

A COMPANY THAT CONTINUALLY EXPERIENCES STOCKOUT WILL LOSE CUSTOMERS TO THE COMPETITION.

THE SAME IS ALSO TRUE OF HAVING TOO MUCH STOCK. AN INADEQUATE STOCK MANAGEMENT SYSTEM CAN ORDER TOO MUCH RAW

MATERIALS WHICH RESULTS IN OVERSTOCK. THIS IS STOCK THAT WILL JUST SIT THERE, TAKING UP SPACE, AND WAITING UNTIL IT CAN BE

USED. IF THE STOCK HAS AN EXPIRATION DATE, IT MAY GO BAD BEFORE IT CAN BE USED IN PRODUCTION.

TO PREVENT TOO MUCH STOCK OR NOT ENOUGH, STOCK MANAGEMENT SYSTEMS USE ONE OF TWO DIFFERENT METHODS TO AVOID THESE

BLUNDERS. THEY ARE BUFFER STOCK AND JUST-IN-TIME STOCK.

BUFFER STOCK

BUFFER STOCK IS AN ADDITIONAL AMOUNT OF STOCK THAT IS HELD IN RESERVE DURING TIMES OF RE-ORDERING. IT WORKS LIKE THIS.

NORMALLY, STOCK IS HELD AT CERTAIN LEVELS. WHEN IT DROPS BELOW THOSE LEVELS, THE MANAGEMENT RE-ORDERS MORE STOCK TO

BRING IT BACK UP TO THAT DESIRED LEVEL. HOWEVER, THERE IS A WAITING PERIOD BETWEEN THE TIME STOCK IS ORDERED AND WHEN IT IS

ACTUALLY DELIVERED. MEANWHILE, STOCK IS STILL BEING USED. BUFFER STOCK IS KEPT IN CASE THE DELIVERY TAKES LONGER AND

SUPPLIES GET LOW. BUFFER STOCK KEEPS A COMPANY FROM RUNNING OUT OF STOCK WHILE THEY WAIT FOR A DELIVERY.

THE BENEFIT OF BUFFER STOCK IS THAT PROFITS WILL INCREASE AS THE PRICE RISES. STOCK THAT WAS PURCHASED AT A LOWER PRICE CAN

BE SOLD AT CURRENT MARKET LEVELS THAT HAVE RISEN. BUFFER STOCK ALSO ENSURES THE COMPANY HAS AN INVENTORY OF SUPPLIES IN

CASE OF EMERGENCIES.


JUST-IN-TIME STOCK

JUST IN TIME STOCK WAS DEVELOPED BY THE JAPANESE IN ORDER TO MINIMIZE HOLDINGS OF STOCK. HOW THIS WORKS IS DISTRIBUTORS

DELIVER THE NEEDED SUPPLIES AT THE EXACT TIME THE STOCK IS REQUIRED. FINISHED PRODUCTS ARE COMPLETED ONLY SO FAR AS THE

NEXT PHASE OF PRODUCTION. THE DELIVERIES ARRIVE AT SUCH REGULAR TIMES THAT A COMPANY DOES NOT HAVE TO DEAL WITH STORAGE

OF PRODUCTION SUPPLIES. ALSO, A COMPANY DOES NOT HAVE A BUILD-UP OF FINISHED PRODUCTS TO DISTRIBUTE AND TRY TO SELL. THEY

ARE ONLY PRODUCED AS THEY ARE NEEDED.

THE BENEFIT OF JUST IN TIME STOCK IS THAT THERE IS LESS RISK OF STOCK BECOMING OBSOLETE OR GOING PAST ITS EXPIRATION DATE.

ALSO, MORE SPACE IS AVAILABLE BECAUSE THERE ISN’T A LARGE AMOUNT OF STOCK TAKING UP VALUABLE SPACE. THIS ALSO PROVIDES A

LOWER MAINTENANCE COST. THE METHOD PROMOTES FLEXIBILITY IN A COMPANY’S WORKFORCE. THIS FLEXIBILITY IS ESSENTIAL IS

PROBLEM-SOLVING AND INCREASING PRODUCT QUALITY.

A SUCCESSFUL STOCK MANAGEMENT SYSTEM CAN BE ACHIEVED FROM SEVERAL APPROACHES. THE FIRST IS THE MANUAL METHOD. THIS IS

WHERE ALL OF A COMPANY’S STOCK IS MANUALLY INSPECTED AND COUNTED. MOSTY COMPANIES DO THEIR INVENTORIES ONCE A YEAR.

THERE ARE EVEN THIRD PARTIES WHO CAN COME IN AND CALCULATE STOCK FOR THE COMPANY. WHILE THE MANUAL METHOD WORKS

WELL FOR MANY SMALL BUSINESSES, IT IS QUITE IMPRACTICAL FOR LARGE COMPANIES.

ANOTHER ELEMENT TO SUCCESSFUL STOCK MANAGEMENT IS STOCK ROTATION. THIS IS THE PRACTICE OF USING UP OLDER STOCK FIRST.

THIS IS ESPECIALLY IMPORTANT FOR STOCK THAT HAS AN EXPIRATION DATE SUCH AS PRODUCE AND GROCERIES. THE OLDER STOCK IS

MOVED TO THE FRONT SO THAT IT MAY BE USED NEXT. THE NEWER STOCK IS PLACED AT THE REAR OF THE CHAIN. THIS IS AN ONGOING

PROCESS.

A COMPUTERIZED SYSTEM IS THE MOST ACCURATE METHOD OF KEEPING UP WITH STOCK. FOR LARGER COMPANIES, IT IS ALSO THE MOST

PRACTICAL. IT WOULD BE FAR TOO COSTLY IN MANPOWER AND RESOURCES TO TRY TO MANUALLY KEEP UP WITH THOUSANDS OF

DIFFERENT ITEMS WHEN A COMPUTER CAN DO IT FASTER, CHEAPER, AND MORE EFFICIENTLY. THE USE OF A BAR CODE MAKES A

COMPUTERIZED SYSTEM MUCH EASIER THAN ANY OTHER METHOD.

CONSIGNMENT STOCK

BY VIBHASH

CONSIGNMENT STOCK IS GOODS WHICH ARE STORED AT ONE LOCATION, SUCH AS A BUSINESS OR A WAREHOUSE, BUT ARE LEGALLY OWNED

BY A DIFFERENT COMPANY SUCH AS A SUPPLIER. CONSIGNMENT INVENTORY IS VERY COMMON IN MANUFACTURING, SUCH AS THE AUTO

INDUSTRY. STOCK REMAINS UNDER OWNERSHIP OF THE SUPPLIER UNTIL THE CUSTOMER IS READY TO USE IT. THE CUSTOMER IS NOT

OBLIGED TO PAY FOR THESE SUPPLIED GOODS UNTIL THEY REMOVE THEM FROM THEIR CONSIGNMENT STOCK. IT IS AT THIS POINT THAT

THEY TECHNICALLY BUY THE STOCK. IF THE STOCK DOES NOT SELL OR THE CUSTOMER DECIDES THAT IT NO LONGER NEEDS IT, THEN THE

ITEMS THAT ARE LEFT OVER ARE RETURNED TO THE LEGAL OWNER.

CONSIGNMENT STOCK IS CLOSELY RELATED TO VENDOR MANAGED INVENTORY (OR VMI). SINCE THE INVENTORY IS STILL UNDER

OWNERSHIP OF THE SUPPLIER, AN IMMEDIATE INVOICE IS NOT NEEDED WHEN THE STOCK ARRIVES AT ITS LOCATION. ONLY WHEN THE


STOCK IS SOLD WILL THE CUSTOMER CREATE AN ACCOUNTS PAYABLE. THE SUPPLIER IS RESPONSIBLE FOR CREDITING A CUSTOMER’S

INVENTORY AND DEBITING THEIR STOCK.

WHY USE CONSIGNMENT STOCK?

IN TODAY’S FAST-MOVING BUSINESS WORLD, THE RELATIONSHIP BETWEEN CUSTOMERS AND THEIR SUPPLIERS CAN MAKE ALL THE

DIFFERENCE IN A SUCCESSFUL BUSINESS PLAN. IN ORDER TO STAY COMPETITIVE, CUSTOMERS MUST WORK WITH THEIR SUPPLIERS FOR AN

ARRANGEMENT THAT BEST SUITS THE CUSTOMER’S NEEDS. THAT IS THE MAIN REASON FOR THE CONSIGNMENT STOCK METHOD.

CONSIGNMENT STOCK IS OFTEN USED TO MAKE IT MORE CONVENIENT FOR THE CUSTOMER TO HAVE THEIR SUPPLIES AND RAW MATERIALS

CLOSE TO WHERE THEY MANUFACTURE THEIR PRODUCTS. IT IS ALSO USED TO REDUCE A CUSTOMER’S TOTAL WORKING CAPITAL. BY HAVING

CONSIGNMENT STOCK ON HAND, EITHER IN A STOCK ROOM OR NEARBY WAREHOUSE, A CUSTOMER CAN CONTINUE WITH THEIR

MANUFACTURING WITHOUT INTERRUPTION.

FUNCTIONS OF CONSIGNMENT STOCK

IN VENDOR MANAGED INVENTORY, THE SUPPLIER OVERSEES A COMPANY’S INVENTORY ITEMS. BUT IN CONSIGNMENT STOCK, IT IS THE

CUSTOMER’S RESPONSIBLE TO MANAGE IT. THE CUSTOMER IS IN CHARGE OR MOVING STOCK FROM STORAGE TO PRODUCTION. THEY ARE

ALSO IN CHARGE OF KEEPING UP WITH QUANTITIES AND IN CONTACTING THE SUPPLIER WHEN STOCK RUNS LOW. THEY ARE ALSO

RESPONSIBLE TO COMMUNICATING WITH THE SUPPLIER ABOUT MOVING THE STOCK AROUND, SINCE THE SUPPLIER STILL LEGALLY OWNS THE

ITEMS.

THE SUPPLIER NORMALLY INSPECTS THE STOCK QUARTERLY OR EVERY HALF-YEAR. IF THERE ARE ANY ERRORS IN INVOICING AND MORE

CONSIGNMENT STOCK HAS BEEN USED THAN RECORDED, THE CUSTOMER IS BILLED FOR THE USAGE.

WHEN SETTING UP A CONTRACT FOR CONSIGNMENT STOCK, THE SUPPLIER AND CUSTOMER WILL AGREE ON THE TERMS SUCH AS HOW LONG

THE CONTRACT WILL LAST AND WHAT TO DO WITH LEFT-OVER CONSIGNMENT. DETAILS ARE RECORDED ON ESTIMATED USAGE AND

REORDER QUANTITIES. CONSIGNMENT STOCK CONTRACTS CAN VARY IN SEVERAL WAYS.

ADVANTAGES OF CONSIGNMENT STOCK

DEALING WITH CONSIGNMENT STOCK HAS MANY ADVANTAGES. FOR INSTANCE, THE CUSTOMER KNOWS THAT RAW MATERIALS WILL

ALWAYS BE READILY AVAILABLE. THEY DO NOT HAVE TO WORRY ABOUT HUNTING FOR NEW SUPPLIERS EVERY FEW MONTHS. CONSIGNMENT

STOCK ALSO SAVES ON MONEY THAT WOULD NORMALLY BE INVESTED IN UNUSED INVENTORY. THIS HELPS KEEP UP A POSITIVE CASH FLOW

FOR THE CUSTOMER.

ANOTHER ADVANTAGE IS THAT THE PURCHASING OF INVENTORY IS NOT TIED INTO RE-SUPPLYING AND WAITING FOR THE NEW STOCK TO

ARRIVE. PURCHASING IS AUTOMATIC WHEN THE ITEMS ARE USED. THIS SAVES ON TIME.

ONE OF THE MAIN BENEFITS OF CONSIGNMENT STOCK IS THAT CUSTOMERS STORE THE CONSIGNMENT GOODS AT THEIR OWN WAREHOUSES.

THEY CAN ACCESS THE GOODS IN THE CONSIGNMENT WAREHOUSE AT ANY TIME WHICH MAKES IT MUCH MORE CONVENIENT FOR THE

CUSTOMER.


CUSTOMERS DO NOT GET BILLED UP FRONT FOR THE ENTIRE STOCK. THEY ARE ONLY BILLED FOR THE GOODS WHEN THEY ARE REMOVED

FROM THE WAREHOUSE AND ONLY FOR THE ACTUAL QUANTITY TAKEN. CAPITAL IS INCREASED BECAUSE THERE IS LESS MONEY TIED UP IN

NON-USED INVENTORY.

RE-SUPPLY OF THE CONSIGNMENT CAN BE MADE AT CONVENIENT AND REGULAR TIMES. THIS KEEPS PRODUCTION RUNNING SMOOTHLY AND

WITHOUT HAVING TO STOP.

DEALING IN CONSIGNMENT STOCK PREVENTS CUSTOMERS FROM BEING SUSCEPTIBLE TO WHAT IS KNOWN AS PANIC BUYING. THIS IS WHEN

THERE IS A CHANGE IN THE MARKET AND THE CUSTOMER PANICS TRYING TO BUY (OR SELL) STOCK IN ORDER TO ADAPT WITH THE CHANGE.

RISKS OF CONSIGNMENT STOCK

ALTHOUGH THERE ARE ADVANTAGES TO CONSIGNMENT STOCK, THERE ARE SOME RISKS AND DISADVANTAGES AS WELL. ONE

DISADVANTAGE IS THAT THE SUPPLIER DOES NOT GET PAID UNTIL THE STOCK IS USED. IF CUSTOMER PRODUCTION IS SLOW, THEN THIS WILL

BE REFLECTED IN THE SUPPLIER’S CASH FLOW.

ALTHOUGH THE CUSTOMER IS SAVING MONEY BY NOT BUYING THE STOCK UNTIL IT IS USED, IT STILL TAKES UP PHYSICAL SPACE. THIS IS

SPACE THAT COULD BE PUT TO BETTER USE STORING SUPPLIES THE CUSTOMER ACTUALLY OWNS.

HAVING A WELL SUPPLIED CONSIGNMENT STOCK IS NOT NECESSARILY A GOOD THING. STOCK INVENTORY MAY INCREASE DUE TO

DUPLICATING INVENTORIES AND TO THE SUPPLIERS NEGOTIATING INFLATED STOCKHOLDINGS.

THERE IS NOT AS MUCH PRESSURE TO REDUCE INVENTORY BECAUSE THE CUSTOMER DOES NOT HAVE MONEY TIED UP IN IT. WHILE

BENEFICIAL FOR THE CUSTOMER, IT IS A DISADVANTAGE FOR THE SUPPLIER.

CUSTOMERS MAY NOT BE PROPERLY MOTIVATED TO COME UP WITH AN OPTIMAL BUSINESS PLAN. THIS IS AGAIN DUE TO THE FACT THAT

THEY DO NOT HAVE ANY MONEY SITTING IN STOCK THAT IS NOT BEING USED.

ONE MAJOR DISADVANTAGE FOR CUSTOMERS IS THAT ANY DISCREPANCY IN CONSIGNMENT STOCK THAT IS SHORT IS THE FINANCIAL

RESPONSIBILITY OF THE CUSTOMER. SO THEY COULD END UP PAYING FOR STOCK THAT WAS MISPLACED AND NEVER USED.

MOST OF CONSIGNMENT STOCK’S RECORD-KEEPING IS DESIGNED TO BE DONE BY COMPUTER BUT USUALLY ENDS UP BEING DONE

MANUALLY. BECAUSE ACCURACY IS KEY, RECORD-KEEPING MUST BE OF THE HIGHEST QUALITY. THIS CAN LEAD TO THE POSSIBILITY OF

HUMAN ERROR.

INVENTORY CREDIT

BY VIBHASH

ALL TOO OFTEN A COMPANY NEEDS IMMEDIATE CASH FOR VARIOUS NEEDS AND THEY JUST DON’T HAVE IT. SOME INDUSTRIES REQUIRE A

DISTRIBUTOR TO PAY FOR A PRODUCT BEFORE THEY CAN SELL IT, REQUIRING THEM TO HAVE CASH ON HAND FOR THEIR SUPPLIERS.

ALTHOUGH THE COMPANY WILL RECOUP THEIR MONEY PLUS A PROFIT, IT CAN BE DIFFICULT HAVING TO PAY THAT MUCH CASH UP FRONT.


OF COURSE, IF THEY DON’T HAVE THE PRODUCT, THEN THEY CAN’T RESELL IT AND THEY WILL BE OUT OF BUSINESS. SO WHAT DOES A

COMPANY DO FOR CASH UP FRONT? ONE COMMON SOLUTION IS INVENTORY CREDIT.

WHAT IS INVENTORY CREDIT

INVENTORY CREDIT IS THE BUSINESS PRACTICE OF USING A COMPANY’S STOCK OR INVENTORY AS COLLATERAL FOR A LOAN. OST BANKS,

ESPECIALLY IN TODAY’S ECONOMY, ARE RELUCTANT TO ISSUE UNSECURED LOANS, EVEN TO ESTABLISHED COMPANIES WITH GOOD CREDIT.

BUT INVENTORY REPRESENTS A COMPANY’S PHYSICAL ASSETS AND HAS CASH VALUE IF LIQUIDATED.

INVENTORY CREDIT HAS BEEN USED FOR CENTURIES. THE CONCEPT GOT ITS START IN ANCIENT ROME WITH AGRICULTURE AND MERCHANT

GOODS. THE PRACTICE IS USED WORLDWIDE, ESPECIALLY IN THIRD WORLD COUNTRIES WHERE OWNERSHIP OF LAND TITLES (NORMALLY

USED FOR LOANS) CAN BE SOMEWHAT DUBIOUS. ONE COMMON PRODUCT THAT USES INVENTORY CREDIT FOR FINANCING AND CAN BE

FOUND IN ANY GROCERY STORE IS PARMESAN CHEESE FROM ITALY. INVENTORY CREDIT IS ALSO USED FOR AGRICULTURAL BUSINESSES IN

LATIN AMERICAN AND AFRICA, MANUFACTURING, AND AUTOMOBILE DEALERS WITH A LOT OF MONEY TIED INTO THEIR INVENTORY.

HOW INVENTORY CREDIT WORKS

BEFORE YOU CAN GET A LOAN USING INVENTORY CREDIT, YOU NEED A FEW THINGS. YOUR BUSINESS NEEDS TO HAVE A GOOD CREDIT

RATING. THIS MEAN SIT NEEDS TO BE CURRENT WITH ALL BILLS AND NO OUTSTANDING ACCOUNTS. THE SECOND THING NEEDED TO MAKE A

LIST, ALONG WITH ESTIMATED VALUE, OF THE INVENTORY TO BE USED. YOU ALSO NEED TO HAVE A BUSINESS PLAN WORKED OUT TO PITCH

TO THE BANK FOR THE LOAN.

INVENTORY VALUES CAN FLUCTUATE DEPENDING ON THE ECONOMY AND THE PARTICULAR INDUSTRY OF THE COMPANY. TO MAKE SURE

THEY DO NOT LOSE MONEY SHOULD INVENTORY VALUES PLUMMET, BANKS USUALLY ONLY LEND UP TO 60 PERCENT OF THE TOTAL VALUE

OF THE INVENTORY BEING USED. PLUS, PHYSICAL INVENTORY CAN BE LIQUIDATED BUT YOU WOULD NOT GET THE FULL VALUE FOR IT.

THE BANK WILL INSPECT ANY INVENTORY BEFORE THEY APPROVE A LOAN. THEY WILL WANT TO KNOW EXACTLY WHAT THEY ARE LOANING

THE MONEY FOR AND WHAT KIND OF CONDITION THE COLLATERAL IS IN. IF THE LOAN IS APPROVED, THE BANK HAS THE RIGHT TO INSPECT

THE INVENTORY AT ANY TIME.

WHEN INVENTORY IS SOLD, IT IS UP TO THE OWNER TO KEEP TRACK OF IT. A PORTION OF THE PROFITS WILL NEED TO GO TOWARDS PAYING

OFF THE LOAN. BANKS TEND TO FROWN ON COMPANIES THAT BORROW MONEY BASED ON INVENTORY CREDIT AND THEN SELL THE

INVENTORY WITHOUT PAYING OFF THE LOAN.

IN AGRICULTURE, INVENTORY CREDIT WORKS A LITTLE DIFFERENT. THE PRODUCE THAT IS USED FOR THE LOAN HAS TO BE STORED IN A

RELIABLE AND BONDED WAREHOUSE BY A THIRD PARTY. IN AGRICULTURE, INVENTORY CREDIT IS USED FOR IMPORTED PRODUCE, PRODUCE

READY TO BE EXPORTED, AND DOMESTIC PRODUCTS. THE WAREHOUSE OWNER THAT STORES THE PRODUCE HAS TO ENSURE THAT IT

REMAINS IN GOOD CONDITION AND IS SECURE. THE AGRICULTURAL COMPANY THAT BORROWS THE MONEY IS CHARGED A FEE FOR THE

STORAGE OF THE PRODUCE AND TO INSURE IT AGAINST DAMAGE. THIS INVENTORY CREDIT PROCESS IS USED WIDELY IN AFRICA AND PARTS

OF ASIA


WHEN SHOULD YOU USE INVENTORY CREDIT?

INVENTORY CREDIT IS NOT A PRACTICAL MEANS OF FINANCING FOR EVERY BUSINESS. IT LARGELY DEPENDS ON THE TYPE OF INDUSTRY YOU

ARE IN AS WELL AS THE CURRENT STATE OF THE ECONOMY. BUSINESSES THAT SHOULD NOT USE INVENTORY CREDIT ARE THOSE WILL A LOW

TURNOVER RATE FOR THEIR INVENTORY. THIS MEANS THAT IF YOUR INVENTORY SITS THERE FOR A LONG TIME AND CASH FLOW FROM IT IS

SLOW, YOU WOULD BE BETTER OFF FINDING AN ALTERNATIVE MEANS OF FINANCING. OTHERWISE, YOU MAY HAVE A DIFFICULT TIME

PAYING BACK THE LOAN. THIS IS ALSO TRUE FOR INVENTORY THAT IS OUT OF DATE, EXPIRED, OR OBSOLETE.

BUSINESSES THAT WOULD BENEFIT FROM AN INVENTORY CREDIT LOAN WOULD BE THOSE WHO HAVE A HIGH TURNOVER RATE FOR THEIR

INVENTORY. IF BUSINESS IS GOOD AND YOUR COMPANY IS MOVING A LOT OF INVENTORY PRODUCT BUT YOU STILL NEED MORE MONEY IN

ORDER TO KEEP UP WITH DEMAND, THEN YOU SHOULD CHECK OUT AN INVENTORY CREDIT LOAN.

FIFO VERSUS LIFO ACCOUNTING

BY VIBHASH

INVENTORY ACCOUNTING IS AN IMPORTANT PART OF ANY BUSINESS. INVENTORY PLAYS A BIG PART IN A COMPANY’S CASH FLOW. BUT

INFLATION AND TAXES CAN AFFECT INVENTORY VALUES. DEPENDING ON WHAT ACCOUNTING METHOD YOU USE, YOUR COMPANY COULD

REPORT WHAT IS CALLED ‘ILLUSIONARY PROFITS’. THESE ARE PROFITS THAT ARE REPORTED ON FINANCIAL STATEMENTS BUT AFTER TAXES,

THE ACTUAL PROFITS ARE LESS. WHEN IT COMES TO INVENTORY ACCOUNTING, THERE ARE TWO MAIN ACCOUNTING METHODS THAT ARE

USED: FIFO AND LIFO.

FIFO AND LIFO ACCOUNTING METHODS MANAGE THE FINANCIAL END OF A COMPANY’S INVENTORY. EACH ONE HAS ITS OWN BENEFITS

AND DISADVANTAGES AND ONE OF THEM IS ACTUALLY PREFERRED OVER THE OTHER BY MOST BUSINESSES. SO WHAT ARE SOME OF THE

DIFFERENCES IN THE TWO METHODS? WHY IS INVENTORY SO IMPORTANT? IF YOU ARE A BUSINESS OWNER, YOU NEED TO KNOW THESE

ACCOUNTING METHODS IN ORDER TO FIGURE OUT WHICH ONE WILL BENEFIT YOU THE MOST.

WHY IS INVENTORY IMPORTANT?

INVENTORY IS THE PHYSICAL ASSETS OF A COMPANY THAT IS INTENDED FOR SALE OR FOR THE MANUFACTURE OF PRODUCTS FOR SALE.

INVENTORY IS CONSTANTLY CHANGING AS QUANTITIES ARE SOLD AND REPLENISHED. A COMPANY’S INVENTORY IS IMPORTANT ON

FINANCIAL STATEMENTS BECAUSE IT REPRESENTS A LARGE AMOUNT OF THE COMPANY’S ASSETS. THAT VALUE IS DETERMINED BY WHICH

ACCOUNTING METHOD THE COMPANY USES.

WHY ARE THERE DIFFERENT INVENTORY ACCOUNTING METHODS INSTEAD OF JUST ONE? BECAUSE THE COST AND VALUE OF INVENTORY IS

INFLUENCED BY THE COST OF INFLATION. OVER TIME, PRICES TEND TO RISE DUE TO INFLATION IN THE ECONOMY. INVENTORY THAT WAS

PURCHASED AT ONE PRICE MAY GAIN IN VALUE DUE TO INFLATION. TO RECTIFY THIS, DIFFERENT ACCOUNTING METHODS ARE USED.

OTHERWISE, INVENTORY MAY BE APPRAISED INCORRECTLY WHICH COULD CAUSE A PROBLEM WITH A COMPANY’S PROFITS. IN A PERFECT

WORLD, THERE WOULD BE NO INFLATION AND THUS NO NEED FOR SEPARATE ACCOUNTING METHODS.


DIFFERENT ACCOUNTING METHODS CAN HAVE AN IMPACT ON THE COST OF INVENTORY, MONTHLY STATEMENTS, AND CASH FLOW. LIFO

AND FIFO BOTH HAVE THEIR ADVANTAGES AND CAN CHANGE THE VALUE OF INVENTORY TO FIT A COMPANY’S NEEDS.

WHAT IS FIFO?

FIFO STANDS FOR FIRST-IN, FIRST-OUT. WHAT THIS MEANS IS THAT THE FIRST ITEM THAT COMES INTO A WAREHOUSE (AND THE OLDEST)

WILL BE THE FIRST ITEM SHIPPED OUT. FIFO IS A MORE ACCURATE REPRESENTATION OF THE FLOW OF PHYSICAL ITEMS IN AND OUT

THROUGH A DISTRIBUTION CENTER. IT IS A COMMON ACCOUNTING METHOD WHERE THERE ARE MANY IDENTICAL ITEMS BEING SHIPPED.

COMPANIES GENERALLY SHIP THE OLDEST STOCK IN INVENTORY TO PREVENT THE ITEMS FROM DETERIORATING OR EXPIRING (SUCH AS WITH

PERISHABLE GOODS). THIS ALLOWS THE INVENTORY TO BE CONTINUALLY ROLLED OR TURNED-OVER WHICH KEEPS THE OLDEST READY TO BE

SHIPPED.

FIFO IS A BETTER ACCOUNTING METHOD TO USE IN TIMES WHEN THE ECONOMY HAS STABLE PRICES. HOWEVER, WHEN INFLATION IS HIGH,

USING FIFO RESULTS IN WHAT IS CALLED “INVENTORY PROFITS”. THESE ARE PROFITS THAT COME JUST FROM HOLDING ONTO INVENTORY

AND INCREASING PHYSICAL ASSETS. BUT IT DOES NOT PROVIDE THE BEST RESULTS FOR MATCHING COSTS AND REVENUES.

IN TIMES OF INFLATION, SMALLER COMPANIES WILL USE FIFO BECAUSE THE VALUE OF THEIR INVENTORY IS HIGHER AND IT MAKES THEIR

FINANCIAL STATEMENTS LOOK BETTER. AS THE FIRST-IN INVENTORY IS SOLD, THE NEWER INVENTORY, WHICH IS MORE EXPENSIVE, REMAINS

ON THE COMPANY’S FINANCIAL RECORDS. A COMPANY CAN USE THIS TO THEIR ADVANTAGE FOR THINGS SUCH AS ATTRACTING MORE

BUSINESS, MERGERS, INCREASING VALUE OF STOCKS, OR ACQUIRING A LOAN.

THE MAIN DISADVANTAGE TO USING FIFO INSTEAD OF LIFO IS THAT AT THE END OF THE YEAR, THE COMPANY WILL HAVE TO PAY MORE

TAXES DUE TO THE ‘PROFITS’ RECORDED ON THEIR STATEMENTS. THIS IS WHY AFTER A COMPANY EXPERIENCES SOME GROWTH, THEY

USUALLY SWITCH TO LIFO.

WHAT IS LIFO?

LIFO STANDS FOR LAST-IN, FIRST-OUT. HOW THIS WORKS IS THAT A COMPANY RECORDS ITS INVENTORY AS THE LAST ITEMS THAT WERE

PURCHASED ARE THE FIRST ITEMS SOLD. OLDER INVENTORY IS LEFT OVER. THIS METHOD IS ALSO SOMETIMES REFERRED TO AS FILO (FIRST-

IN, LAST-OUT). AS INFLATION RAISES PRICES IN THE ECONOMY, THE LIFO METHOD RECORDS THE SALE OF THE MOST EXPENSIVE ITEMS IN

INVENTORY FIRST. THIS IS NOT AN ACCURATE REPRESENTATION OF THE ACTUAL FLOW OF PHYSICAL ITEMS THROUGH INVENTORY. ON PAPER

THIS WILL SHOW A DECREASE IN PROFITS BUT IT ALSO HELPS TO REDUCE TAXES BECAUSE A COMPANY IS NOT RECORDING A FALSE PROFIT

(WHICH IS THE CASE WITH FIFO). IN FACT, LIFO HAS BEEN THE PREFERRED ACCOUNTING METHOD SINCE THE EARLY 1970’S. DURING THAT

DECADE, THE U.S. EXPERIENCED ITS FIRST MAJOR RISE IN INFLATION IN MODERN TIMES WHICH HAS CONTINUED STEADILY FOR ALMOST

FORTY YEARS NOW.

THE THEORY IN USING THIS METHOD IS THAT COSTS WILL EITHER REMAIN THE SAME OR INCREASE. MOST OF THE COMPANIES THAT USE

LIFO EXPERIENCE A RISE IN INVENTORY COSTS EVERY YEAR. LIFO IS A BETTER APPROACH TO MATCHING CURRENT COSTS WITH CURRENT

REVENUES. AS INVENTORY GETS SOLD, IT SHOULD BE REPLACED WITH HIGHER PRICED ITEMS. COMPANIES THAT USE LIFO DO SO MERELY

FOR TAX PURPOSES SO THAT THEY CAN INCREASE CASH FLOW OVER A LONG PERIOD.


THE DRAWBACK TO LIFO IS THAT IT MUST ALSO BE USED ON FINANCIAL STATEMENTS AND REPORTS. THIS MEANS THAT COMPANIES WILL

SHOW LESS NET PROFIT THAN IF THEY USED FIFO. IN TERMS OF BUSINESS, THIS COULD INTERFERE WITH FUTURE LOANS AND ATTRACTING

CLIENTS OR PARTNERS.

LIFO HAS BEEN THE PREFERRED ACCOUNTING METHOD SINCE THE EARLY 1970’S. THE U.S. EXPERIENCED ITS FIRST MAJOR RISE IN

INFLATION DURING MODERN TIMES WHICH HAS CONTINUED STEADILY FOR ALMOST FORTY YEARS NOW.

ONE ASPECT OF USING LIFO IS THAT AS OLDER INVENTORY GETS LEFT BEHIND, IT MUST EVENTUALLY BE LIQUIDATED. SOMETIMES

COMPANIES HAVE TROUBLE REPLACING EXISTING INVENTORY, NEED CASH FLOW, OR MUST MAKE ROOM FOR NEWER INVENTORY. IF PRICES

HAVE CONTINUED TO RISE, THEN THE OLDER INVENTORY WILL HAVE A LOWER VALUE. THE PROBLEM IS THAT IF THE COMPANY LIQUIDATES

THIS OLDER INVENTORY, IT MUST GO ON THEIR FINANCIAL STATEMENTS AS NET PROFITS AND WILL INCREASE THEIR TAXES. THIS IS WHY

SOME COMPANIES HAVE A STOCKPILE OF OLDER INVENTORY SITTING IN WAREHOUSES BECASUDE TO GET RID OF IT WOULD HAVE

UNDESIRABLE RESULTS.

MAIN DIFFERENCES BETWEEN FIFO AND LIFO

WHEN DECIDING WHICH ACCOUNTIGN METHOD TO USE FO RINVENTORY, YOU HAVE TO LOOK AT THE MAJOR DIFFERENCES BETWEEN FIFO

AND LIFO. WITH FIFO, YOU GET A BETTER ESTIMATION OF THE VALUE OF INVENTORY. WHILE IT CAN BE USED TO INCREASE NET PROFITS,

IT WILL ALSO INCREASE THE AMOUTN OF TAXES A COMPANY WILL HAVE TO PAY IN.

LIFO IS NOT A GOOD INDICATOR OF INVENTORY VALUE BECAUSE SOME OF THE INVENTORY MAY BE YEARS OLD, DETERIORATED BEYOND

USE, OR NOT COMPATIBLE WITH NEWER VERSIONS. SO THE VALUE WILL PROBABALY BE LOWER THAN CURRENT PRICES. THIS DECREASES

NET PROFITS WHICH ALSO EFFECTS NET SHARES IN THE COMPANY. BUT USING LIFO ALSO GIVES YOU A BREAK ON TAXES AT THE END OF

THE YEAR.

ERP INVENTORY MANAGEMENT

BY VIBHASH

INVENTORY MANAGEMENT USED TO BE PAPER-BASED AND CONSISTED OF NUMEROUS FILES STORED IN FILING CABINETS THAT MIGHT

STRETCH AS FAR AS THE EYE COULD SEE. EVERY ONCE IN AWHILE THESE FILES HAD TO BE CLEANED OUT AND TRASHED TO MAKE ROOM FOR

MORE FILES. ACCURATE COUNTS OF QUANTITIES TOOK TIME AND WERE NOT ALWAYS IMMEDIATELY AVAILABLE. INVENTORY WAS ALSO

BASED MORE ON GUESSWORK THAN DATA.

ERP INVENTORY MANAGEMENT TAKES CONTROL OF A BUSINESS’ INVENTORY SUCH AS PURCHASING, SHIPPING, AND SELLING. ERP

MANAGEMENT ENABLES A BUSINESS TO HAVE INSTANT AND ACCURATE ACCESS TO THEIR INVENTORY AT ANY TIME IN ORDER TO MEET

CUSTOMER DEMAND. BUT WHAT IS ERP INVENTORY MANAGEMENT? WHAT DOES ERP STAND FOR? HERE IS AN OVERVIEW OF THE

MANAGEMENT SYSTEM THAT HAS BEEN ADOPTED BY NUMEROUS COMPANIES ACROSS THE GLOBE.

WHAT IS ERP?


ERP, OR ENTERPRISE RESOURCE PLANNING, IS A COMPUTER NETWORK SYSTEM THAT USES A DATABASE OF INFORMATION THAT IS

COMPANY-WIDE ACCESSIBLE. ERP IS DESIGNED TO REPLACE PAPER-BASED SYSTEMS BY ANALYZING DATA FROM ALL AREAS OF A

COMPANY’S RESOURCES. ERP COVERS ALL FUNCTIONS OF A BUSINESS SUCH AS PURCHASING, MANUFACTURING, DISTRIBUTION, AND

INVENTORY MANAGEMENT.

BY USING AN ERP MANAGEMENT SYSTEM, A COMPANY’S INVENTORY IS STORED ON A DATABASE THAT IS COMPRISED OF PHYSICAL STOCK,

COSTS, VENDOR ACCOUNTS, AND LEAD-TIMES FOR RE-ORDERING STOCK. ERP MANAGEMENT SYSTEMS CAN IMPROVE COSTS,

PRODUCTIVITY, REDUCE TIME LAG, REDUCE WASTE, AND IMPROVE OVERALL EFFICIENCY. TO FULLY USE AN ERP INVENTORY MANAGEMENT

SYSTEM, A BUSINESS NEEDS TO UNDERSTAND THE RELATIONSHIP OF THEIR COMPANY COMPARED TO THE REST OF THE SUPPLY CHAIN. BY

UNDERSTANDING WHERE THEY FIT IN, A COMPANY CAN IMPROVE DELIVERY OF PRODUCTS AND SERVICES.

WHAT DOES ERP INVENTORY MANAGEMENT DO?

ERP INVENTORY MANAGEMENT HANDLES EVERYTHING FROM ORDERING, PHYSICAL INVENTORY COUNT, SCHEDULING, SHIPPING, RECEIVING,

PURCHASING, AND SUPPLY CHAIN PLANNING. CHANGES IN INVENTORY ARE AUTOMATICALLY UPDATED. IT NO LONGER TAKES HOURS

(SOMETIMES UP TO 24) BEFORE THE CHANGES ARE RECORDED. THIS HELPS INVENTORY MANAGEMENT EMPLOYEES TO BE ABLE TO SEE IF AN

ITEM IS CURRENTLY IN STOCK. FASTER SERVICE MEANS BETTER CUSTOMER SERVICE.

ERP MANAGEMENT USES BAR CODES TO KEEP UP WITH INVENTORY ITEMS. THIS MAKES TRACKING STOCK MUCH EASIER. AS THE BAR-

CODED ITEMS LEAVE INVENTORY, THEY GET SCANNED AND THEIR PRODUCT INFORMATION IS ENTERED INTO THE ERP INVENTORY

MANAGEMENT SYSTEM. PLACING BAR CODE LABELS ON STOCK HELPS COMPANIES SAVE MONEY BECAUSE IT KEEPS THE LIST OF STOCK

UPDATED. EMPLOYEES CAN EASILY SEE WHEN CERTAIN QUANTITIES ARE LOW AND NEED TO BE RE-STOCKED. CUSTOMER SERVICE ALSO

BENEFITS FROM THIS BECAUSE BUSINESSES AND CUSTOMERS CAN SEE WHAT PRODUCTS ARE IMMEDIATELY AVAILABLE.

INSTALLING ERP INVENTORY MANAGEMENT

ERP INVENTORY MANAGEMENT SYSTEMS ARE OFTEN COMPLICATED TO INSTALL USING IN-HOUSE IT. MOST COMPANIES HIRE A THIRD

PARTY CONTRACTOR TO COME IN AND INSTALL THE SOFTWARE AND HARDWARE. THESE INVENTORY MANAGEMENT FIRMS OFFER NOT JUST

INSTALLATION BUT ALSO OFFER CONSULTATION AND CAN CUSTOMIZE THE SYSTEM TO A COMPANY’S NEEDS. HIRING A THIRD PARTY IS

DEFINITELY MORE COST EFFECTIVE AS OPPOSED TO A COMPANY DOING ALL THE WORK THEMSELVES.

THERE ARE NUMEROUS CONSULTING FIRMS THAT INSTALL ERP INVENTORY MANAGEMENT SOFTWARE AND SYSTEMS. ONCE THE SYSTEM IS

INSTALLED, THESE FIRMS CAN HELP TRAIN A COMPANY’S EMPLOYEES IN HOW TO USE THE SOFTWARE. THEY ALSO ACT AS TECH SUPPORT AS

A COMPANY LEARNS THEIR NEW SYSTEM.

INSTALLING AN ERP INVENTORY MANAGEMENT SYSTEM IS NOT A QUICK AND EASY TASK. THE LENGTH OF TIME TO INSTALL THE SYSTEM

DEPENDS ON THE SIZE OF THE COMPANY, CUSTOMIZATION NEEDED, AND SIZE OF THE JOB. SINCE ERP SYSTEMS ARE DIVIDED IN MODULES,

IT IS EASY TO DIVIDE THE INSTALLATION PROCESS INTO SEVERAL STAGES. ON AVERAGE, THE AMOUNT OF TIME TO INSTALL A TYPICAL ERP

SYSTEM TAKES SEVERAL MONTHS TO INSTALL. LARGE PROJECTS CAN TAKE UP TO A YEAR.


ADVANTAGES OF ERP INVENTORY MANAGEMENT

ERP INVENTORY MANAGEMENT HAS MANY ADVANTAGES. THE MAIN ADVANTAGE FOR A COMPANY IS THAT THE ERP SYSTEM IS COMPANY-

WIDE AND INVOLVES ONLY ONE SOFTWARE SYSTEM. COMPANIES THAT DO NOT USE ERP MANAGEMENT WILL SOMETIMES HAVE SEVERAL

DIFFERENT SOFTWARE APPLICATIONS THAT ARE NOT COMPATIBLE WITH ONE ANOTHER.

SOME OTHER ADVANTAGES INCLUDE:

PROPER COMMUNICATION BETWEEN DIFFERENT AREAS.

TRACKING OF ORDERS FROM THE TIME THE ORDER WAS RECEIVED TO ITS DELIVERY.

KEEPING UP WITH THE REVENUE CYCLE FROM WHEN THE INVOICE IS ISSUE THROUGH WHEN THE PAYMENT IS RECEIVED.

NO LONGER HAVE TO KEEP UP WITH CHANGES IN DIFFERENT SOFTWARE SYSTEMS. THE ONE SYSTEM IS TIED TOGETHER.

PROVIDES A ‘TOP DOWN’ OVERVIEW OF THE WORKINGS OF A COMPANY.

REDUCES THE RISK OF LOSS OF INFORMATION

SETS UP A FORM OF SECURITY TO PROTECT AGAINST THEFT FROM OUTSIDE OR WITHIN A COMPANY.

DISADVANTAGE OF ERP INVENTORY MANAGEMENT

DESPITE THE ADVANTAGES BUSINESSES RECEIVE FROM USING ERP INVENTORY MANAGEMENT, THERE ARE ALSO SOME PROBLEMS WITH IT.

MOST OF THESE DISADVANTAGES STEM FROM INADEQUATELY TRAINED EMPLOYEES AS WELL AS COMPROMISED DATA. BUT THERE ARE

OTHER CONCERNS THAT CAN ARISE FROM THIS TYPE OF SYSTEM.

CUSTOMIZATION OF THE ERP INVENTORY MANAGEMENT SYSTEM IS LIMITED.

REFORMATTING A BUSINESS TO MAKE IT MORE COMPATIBLE WITH AN ERP SYSTEM AND THUS CONFORM IT TO INDUSTRY STANDARDS MAY

CAUSE A LOSS OF ADVANTAGE OVER THE COMPETITION.

ERP INVENTORY MANAGEMENT SYSTEMS ARE NOT CHEAP.

ERPS ARE NOT COMPATIBLE WITH EVERY TYPE OF BUSINESS. THEY HAVE BEEN KNOWN TO IMPEDE DELIVERY OF GOODS AND PRODUCTIVITY

AS THE COMPANY TRIES TO ADAPT.

BY CREATING A COMPANY-WIDE SYSTEM THAT CONNECTS ALL AREAS, IT MAKES IT HARD TO FIGURE OUT ACCOUNTABILITY. PROBLEMS THAT

MAY ARISE IN ONE AREA COULD MISTAKENLY BE BLAMED ON A DIFFERENT AREA.

NOT ALL DEPARTMENTS IN A COMPANY ARE WILLING TO SHARE INFORMATION. THIS WITHHOLDING OF SENSITIVE DATA CAN INTERRUPT

THE WORKFLOW.


ERP INVENTORY MANAGEMENT SYSTEMS MAY TO TOO COMLEX FOR THE NEEDS OF A COMPANY.

COMMON INVENTORY MANAGEMENT PROBLEMS

BY VIBHASH

A SUCCESSFUL BUSINESS RELIES ON MANY FACTORS, ONE OF WHICH IS A RELIABLE INVENTORY MANAGEMENT SYSTEM. INVENTORY

MANAGEMENT CONSISTS OF EVERYTHING FROM ACCURATE RECORD-KEEPING TO SHIPPING AND RECEIVING OF PRODUCTS. INVENTORY

MANAGEMENT THAT IS PROPERLY MAINTAINED CAN KEEP A COMPANY’S SUPPLY CHAIN RUNNING SMOOTHLY AND EFFICIENTLY. HOWEVER,

THERE ARE MANY COMMON INVENTORY MANAGEMENT PROBLEMS THAT CAN OCCUR.

INVENTORY MANAGEMENT PROBLEMS CAN INTERFERE WITH A COMPANY’S PROFITS AND CUSTOMER SERVICE. THEY CAN COST A BUSINESS

MORE MONEY AND CAN LEAD TO AN EXCESS OF INVENTORY OVERSTOCK THAT IS DIFFICULT TO MOVE. MOST OF THESE PROBLEMS ARE

USUALLY DUE TO POOR INVENTORY PROCESSES AND OUT-OF-DATE SYSTEMS.

COMMON INVENTORY MANAGEMENT PROBLEMS

THERE ARE A NUMBER OF PROBLEMS THAT CAN CAUSE HAVOC WITH INVENTORY MANAGEMENT. SOME HAPPEN MORE FREQUENTLY THAN

OTHERS. HERE ARE SOME OF THE MORE COMMON PROBLEMS WITH INVENTORY SYSTEMS.

UNQUALIFIED EMPLOYEES IN CHARGE OF INVENTORY. TOO MANY COMPANIES PUT PEOPLE IN CHARGE OF THEIR INVENTORY DISTRIBUTION

WHO EITHER DON’T HAVE ENOUGH EXPERIENCE, ARE NEGLECTFUL IN THEIR JOB, OR DON’T HAVE ADEQUATE TRAINING. NO MATTER WHAT

KIND OF SYSTEM IS USED, COMPANIES NEED TO PAY CLOSER ATTENTION IN OVERSEEING THEIR INVENTORY MANAGEMENT AND MAKING

SURE EMPLOYEES RECEIVE PROPER TRAINING.

USING A MEASURE OF PERFORMANCE FOR THEIR BUSINESS THAT IS TOO NARROW. ALL TOO OFTEN COMPANIES WILL EVALUATE HOW WELL

THEIR BUSINESS IS DOING. THE PROCESSES THEY USE ARE NOT WIDE ENOUGH AND DO NOT ENCOMPASS ALL THE ASPECTS AND FACTORS IN

THE COMPANY. MANY AREAS GET OVERLOOKED AND CAN LEAD TO EITHER INVENTORY SHORTAGES OR INVENTORY STOCKPILING.

A FLAWED OR UNREALISTIC BUSINESS PLAN FOR A BUSINESS FOR THE FUTURE. TO PREDICT HOW WELL A COMPANY MAY DO IN THE

FUTURE, YOU HAVE TO COLLECT ENOUGH DATA AND ACCURATELY ANALYZE IT. THE DOWNFALL OF MANY COMPANIES STARTING OUT IS

THAT THEY GIVE AN UNREALISTIC ASSESSMENT OF A COMPANY’S GROWTH. THIS AFFECTS INVENTORY MANAGEMENT BECAUSE IF A

COMPANY PREDICTS MORE GROWTH THAN THEY ACTUALLY EXPERIENCE, IT CAN LEAD TO AN OVERSTOCK OF INVENTORY. THE OPPOSITE IS

TRUE IF FORECASTERS DO NOT PREDICT ENOUGH GROWTH AND ARE LEFT WITH NOT ENOUGH INVENTORY.

NOT IDENTIFYING SHORTAGES AHEAD OF TIME. IT HAPPENS ALL THE TIME. A BUSINESS NEEDS A NUMBER OF PRODUCTS OR MATERIALS BUT

DISCOVER THAT THEY DO NOT HAVE ENOUGH IN STOCK AND MUST RE-ORDER. WAITING FOR THE SHIPMENT TO COME IN CAN SLOW DOWN

THE SUPPLY CHAIN PROCESS. NOT HAVING ENOUGH PRODUCT IN STOCK TO MEET CUSTOMER DEMAND CAN LEAD TO BAD CUSTOMER

RELATIONS. A SUPERVISOR IN CHARGE OF INVENTORY MANAGEMENT SHOULD LOOK OVER THEIR INVENTORY ON A REGULAR BASIS TO MAKE

SURE ENOUGH PRODUCT IS IN STOCK.


BOTTLENECKS AND WEAK POINTS CAN INTERFERE WITH ON-TIME PRODUCT DELIVERY. THIS MEANS THAT IF TOO MANY ORDERS COME IN

FOR OUTGOING SHIPMENTS AND DO NOT GET HANDLED IN AN EFFICIENT MANNER, THEY CAN BUILD UP, OR ‘BOTTLENECK’. THIS SLOWS

DOWN DELIVERIES. THE SAME IS TRUE FOR ANY WEAK POINTS IN AN INVENTORY MANAGEMENT SYSTEM. WEAK POINTS SLOW DOWN THE

SYSTEM AND CAN STOP IT ALTOGETHER.

FALLING VICTIM TO THE “BULLWHIP EFFECT”. THIS IS AN OVER-REACTION BY A COMPANY TO CHANGES IN THE MARKET. AS THE DEMAND

OF A MARKET CHANGES, A COMPANY MAY PANIC AND ORDER AN OVERSTOCK OF INVENTORY, THINKING THE NEW MARKET CONDITIONS

WILL MOVE THE INVENTORY. INSTEAD, THE MARKET STABILIZES AND THE BUSINESS IS NOW LEFT WITH A SURPLUS OF PRODUCTS THAT JUST

SIT IN THE WAREHOUSE, TAKING UP SPACE AND NOT MAKING MONEY.

TOO MUCH DISTRESSED STOCK IN INVENTORY. DISTRESSED STOCK IS PRODUCTS OR MATERIALS IN INVENTORY THAT HAS OR WILL SOON

PASS THE POINT WHERE IT CAN BE SOLD AT THE NORMAL PRICE BEFORE IT EXPIRES. THIS HAPPENS ALL THE TIME IN GROCERY STORES. AS A

PARTICULAR FOOD PRODUCT NEARS ITS EXPIRATION DATE, THE BUSINESS WILL DISCOUNT THE ITEM IN ORDER TO MOVE IT QUICKLY BEFORE

IT EXPIRES.

EXCESSIVE INVENTORY IN STOCK AND UNABLE TO MOVE IT QUICKLY ENOUGH. THIS IS PROBABLY THE MOST COMMON PROBLEM FOR MOST

BUSINESSES. CASH-FLOW COMES FROM MOVING INVENTORY. IF A COMPANY BUYS AN AMOUNT OF PRODUCT FOR THEIR INVENTORY AND

THEY DO NOT MOVE IT, THE COMPANY ENDS UP LOSING MONEY.

COMPUTER ASSESSMENT OF INVENTORY ITEMS FOR SALE IS INACCURATE. NOTHING IS MORE FRUSTRATING THAN GOING TO A BUSINESS

THAT SAYS IT HAS A PRODUCT BUT IT TURNS OUT THAT THEY DO NOT. THE QUANTITIES ARE OFF AND THE ACTUAL ITEMS ARE NOT

AVAILABLE. TOO MANY PEOPLE ASSUME THAT THE COMPUTER RECORDS ARE INFALLIBLE. BUT THE RECORDS HAVE TO BE ENTERED BY A

PERSON AND IF THE PERSON RESPONSIBLE DOES NOT KEEP ACCURATE RECORDS, IT CAN TURN INTO A REAL HEADACHE. INACCURATE

INVENTORY RECORDS CAN EASILY RESULT IN LOSS OF MONEY AND STRAINED CUSTOMER SERVICE.

COMPUTER INVENTORY SYSTEMS ARE TOO COMPLICATED. THERE ARE MANY INVENTORY SOFTWARE PROGRAMS AVAILABLE FOR BUSINESS

USE. THE PROBLEM IS THAT MANY OF THESE PROGRAMS ARE NOT USER-FRIENDLY. COMPUTER SOFTWARE DEVELOPERS DO NOT TAKE INTO

ACCOUNT THAT MOST OF THE PEOPLE WHO WILL ACTUALLY BE USING THESE SYSTEMS ARE NOT TECH SAVVY. A COMPANY DOES NOT

ALWAYS HAVE THE TIME AND MONEY TO INVEST IN TRAINING OF PERSONNEL TO USE SOFTWARE EFFECTIVELY.

ITEMS IN-STOCK GET MISPLACED. EVEN IF THE COMPUTER ACCURATELY SHOWS THE ITEM AS IN STOCK, IT MAY HAVE BEEN MISPLACED

SOMEWHERE AT THE WAREHOUSE, OR IN THE WRONG LOCATION WITHIN A STORE. THIS CAN LEAD TO A DECREASE IN PROFITS DUE TO

LOST SALES AND HIGHER INVENTORY COSTS BECAUSE THE ITEM MUST BE RE-ORDERED. PLUS, THE COMPANY MUST SPEND THE TIME

FOR EMPLOYEES TO TRACK DOWN THE MISPLACED ITEM.

NOT KEEPING UP WITH THE RISING PRICE OF RAW MATERIALS. THIS FALLS MORE INTO THE ACCOUNTING END OF INVENTORY

MANAGEMENT. BY NOT KEEPING CURRENT WITH THE RISING PRICE OF RAW MATERIALS, A COMPANY WILL LOSE PROFITS BECAUSE THEY

ARE NOT ADJUSTING THE PRICE OF THEIR FINISHED PRODUCTS. FINISHED ITEMS IN INVENTORY MUST BE RELATIVE TO THE COST OF RAW

GOODS.


SINGLE MINUTE EXCHANGE OF DIE (SMED)

BY VIBHASH

ONE OF THE UNFORTUNATE CHARACTERISTICS OF MANUFACTURING IS WASTE. FROM UNUSED RAW MATERIALS TO FAULTY OR DAMAGED

PRODUCTS, WASTE CAN END UP COSTING A COMPANY QUITE A BIT IN FINANCIAL LOSS. TO REDUCE WASTE, THERE ARE A NUMBER OF

DIFFERENT STRATEGIES COMPANIES CAN USE. ONE OF THE MORE POPULAR STRATEGIES IS SINGLE MINUTE EXCHANGE OF DIE (OR SMED).

WHAT IS SMED?

ONE OF THE DRAWBACKS TO MANUFACTURING IS SET-UP TIME FOR A PRODUCTION RUN. SMED IS A METHOD THAT ALLOWS SET-UP

OPERATIONS TO BE PERFORMED IN LESS THAN TEN MINUTES. IN OTHER WORDS, SET-UP OPERATIONS SHOULD BE COMPLETED IN A NUMBER

OF MINUTES THAT IS REPRESENTED BY A SINGLE DIGIT: ONE MINUTE TO NINE MINUTES.

THIS PRACTICE HELPS CUT BACK ON WASTE AND TIME SPENT BETWEEN EACH PRODUCTION RUNS. BY USING THE SMED METHOD ALONG

WITH OTHER QUICK CHANGEOVER PRACTICES, IT REDUCED THE AMOUNT OF TIME SPENT TO CHANGE OUT THE MACHINES IN A PRODUCTION

LINE FROM ONE PRODUCT TO THE NEXT. SMED ALSO HELPS REDUCE THE SIZE OF PRODUCTION LOTS AND INVENTORY BECAUSE THERE IS

LESS WASTE, THUS IMPROVING OVERALL PRODUCTION FLOW.

HISTORY OF SMED

THE CONCEPT OF SMED WAS ORIGINALLY ADOPTED AND USED IN JAPAN DURING THE 1950’S. THE METHODS WERE LATER IMPLEMENTED

IN WEST GERMANY IN 1974 AND THEN THE REST OF EUROPE AND THE U.S IN 1976. SMED FINALLY GAINED WORLDWIDE ACCEPTANCE

DURING THE 1980’S.

DURING ITS ORIGINS IN JAPAN, SMED WAS ADOPTED FOR TOYOTA. TOYOTA NEEDED ADDITIONAL SPACE TO STORE ITS MANUFACTURED

CARS. BECAUSE JAPAN IS A SMALL SERIES OF ISLAND, REAL ESTATE IS EXPENSIVE. BECAUSE TOYOTA HAD TO STORE THEIR CARS IN HIGH-

PRICED LOTS, THE COMPANY’S PROFITS WERE LESS THAN OTHER MANUFACTURERS.

TOYOTA COULD DO NOTHING ABOUT THE COSTS OF LAND BUT AN ENGINEER NAMED MR. SHINGO DECIDED THAT IF THE CHANGE-OVER

COSTS COULD BE REDUCED, THE COMPANY WOULD REALIZE HIGHER PROFITS. NORMALLY, THE COST OF CHANGE-OVER ON PRODUCTION

MACHINES WAS OFFSET BY THE VOLUME OF PRODUCT THE MACHINES COULD PRODUCE BEFORE THEY WERE CHANGED. SO THE COST OF

CHANGE-OVER WAS FAILY LOW. BUT THE COSTS FOR LOT STORAGE WAS EXCEEDING WHAT THE COMPANY WAS SAVING.

IT TOOK SEVERAL YUEARS BUT TOYOTA MANAGED TO COME UP WITH A SYSTEM THAT MINIMIZED THE TOOLS AND STEPS SUED IN THE

MANUFACTURING PROCESS. ALSO, BY MAXIMIZING THEIR EXISTING COMPONENTS SO THAT MORE CARS SHARED THE SAME COMPONENTS,

THE COMPANY MANAGED TO CUT BACK ON COSTS AND TO SPEED UP CHANGE-OVER TIME.

HOW DOES SMED WORK?


IN THE MANUFACTURING PROCESS, WHEN THE LAST ITEM IN A PRODUCTION RUN HAS BEEN COMPLETED THE EQUIPMENT AND MACHINERY

IS SHUT DOWN, CLEANED, AND NEW TOOLING IS ADDED AND CHANGED. THIS GETS THE EQUIPMENT READY FOR THE NEXT RUN ON A NEW

ITEM. THIS CHANGE-OVER CAN INVOLVE A NUMBER OF SMALL TO LARGE ADJUSTMENTS, RESUPPLY OF RAW MATERIALS, AND SYSTEM

CHECKS BEFORE THE MACHINES ARE STARTED UP AGAIN. EVEN AFTER THE MACHINES HAVE BEEN STARTED AND MATERIALS USED,

OPERATORS MAY NEED TO CONTINUE THEIR ADJUSTMENTS TO PRODUCE AN ITEM THAT MEETS THE DESIRED REQUIREMENTS.

THE TIME SPENT DURING CHANGE-OVER COSTS THE COMPANY MONEY AS THERE ARE NO FINISHED ITEMS BEING PRODUCED. ALSO, THE

EQUIPMENT PRODUCES WASTE AS ADJUSTMENTS ARE MADE AFTER THE MACHINE STARTS UP THE NEW PRODUCTION. ALL OF THIS CAN BE

REDUCED USING SMED.

THERE ARE TWO TYPES OF SET-UP USING SMED: EXTERNAL AND INTERNAL. EXTERNAL SETUP IS PROCEDURES THAT ARE DONE WHILE THE

MACHINES ARE STILL OPERATING AND BEFORE THEY ARE STOPPED FOR THE CHANGE-OVER. INTERNAL SETUP IS PROCEDURES THAT OCCUR

ONLY AFTER THE MACHINES HAVE BEEN STOPPED FOR CHANGE-OVER.

SMED USES A NUMBER OF DIFFERENT STEPS THAT IMPROVE PRODUCTION AND CUTS BACK ON WASTE. THESE STEPS HELP TO SEPARATE THE

CHANGEOVER PROCESS INTO SEVERAL KEY COMPONENTS. THE STEPS ARE:

1. ELIMINATING NON-ESSENTIAL SET-UP PROCEDURES. THIS INCLUDES ANYTHING THAT IS NOT NECESSARY FOR THE PRODUCTION OF

THE NEW LINE OF ITEMS.

2. GET ALL EXTERNAL PARTS READY FOR SET-UP. THIS INCLUDES MAKING SURE THERE IS PLENTY OF RAW MATERIALS, GATHERING UP

REQUIRED TOOLS AND PARTS, AND HAVING EVERYTHING ON HAND BEFORE THE MACHINES SHUT DOWN.

3. SIMPLIFY INTERNAL SET-UP – USE PINS, CAMS, AND JIGS TO REDUCE ADJUSTMENTS, REPLACE NUTS AND BOLTS WITH HAND

KNOBS, LEVERS AND TOGGLE CLAMPS… REMEMBER THAT NO MATTER HOW LONG THE SCREW OR BOLT ONLY THE LAST TURN

TIGHTENS IT.

4. MAKE SURE THAT ALL MEASUREMENTS ARE ACCURATE. HAVING INCORRECT MEASUREMENTS CAN LEAD TO LONGER CHANGE-OVER

TIMES AND CAN INCREASE WASTE.

BENEFITS OF SMED

PROPER IMPLEMENTING OF SMED CAN REAP SEVERAL BENEFITS FOR A COMPANY. THE MOST COMMON ARE THE REDUCTION OF

DOWNTIME BECAUSE OF THE CHANGEOVER PROCESS AND THE REDUCTION OF WASTE THAT IS INEVITABLY CREATED DURING STARTUP. SOME

ADDITIONAL BENEFITS INCLUDE:

LESS TIME SPENT ON PRODUCTION.

MACHINES HAVE AN INCREASE IN WORK RATES. THIS MEANS YOU ACTUALLY GET MORE WORK OUT OF THE EQUIPMENT.

PRODUCTIVITY SEES AN INCREASE.

REDUCTION IN ERRORS DURING SET-UP AND AFTER THE MACHINES STARTS BACK UP. LESS DEFECTS ARE PRODUCED.

INVENTORY COSTS ARE MINIMALIZED DUE TO LESS RAW MATERIAL NEEDED. ALSO SAVES ON SPACE FOR STORAGE.


LEVEL OF SAFETY IS INCREASED DUE TO FOLLOWING PROPER CHANGE-UP PROCEDURES.

LESS TIME SPENT CLEANING UP AFTER PRODUCTION DUE TO BETTER ORGANIZATION.

OVERALL COSTS OF SET-UP ARE LOWER DUE TO LESS TIME SPENT DURING CHANGE-OVER AND LESS WASTE.

OPERATION OF EQUIPMENT TAKES LESS SKILL AND TRAINING DUE TO SIMPLIFIED PROCESS.

DETERIORATION OF STOCK IS KEPT TO A MINIMUM.

LOT SIZE REDUCTION

REDUCTION IN FINISHED GOODS INVENTORY

PROFITS ARE INCREASED WITHOUT HAVING TO SPEND MORE MONEY ON MORE EQUIPMENT.

STOCK KEEPING UNIT (SKU)

BY VIBHASH

WAREHOUSES ARE FULL OF BOXES AND BOXES OF STOCK. THESE BOXES ARE FULL OF ITEMS THAT MUST BE TRACKED USING SOME SYSTEM

OR METHOD IN ORDER TO KEEP UP WITH THEM. BESIDES WAREHOUSES, STOCK MUST BE TRACKED IN RETAIL STORES, MANUFACTURING,

GROCERY AND SUPERMARKETS, AND ANYWHERE ELSE THAT DEALS IN INVENTORY. ONE OF THE BEST WAYS TO KEEP UP WITH STOCK IS TO

ASSIGN IT A STOCK KEEPING UNIT (OR SKU). AN SKU IS A NUMBER OR CODE THAT IS USED TO IDENTIFY INDIVIDUAL PRODUCTS AND

SERVICES WHICH CAN BE PURCHASED. BUT EXACTLY WHAT IS AN SKU AND HOW DOES IT WORK?

WHAT IS AN SKU?

AN SKU IS A STOCK NUMBER USED BY BUSINESSES AND MERCHANTS THAT ALLOWS THEM TO TRACK INVENTORY AND SERVICES FROM

POINT OF DISTRIBUTION TO POINT OF SALE. SKU IS A TYPE OF DATA MANAGEMENT SYSTEM. EACH INDIVIDUAL ITEM OR PACKAGE IS GIVEN

A CODE EITHER BY THE DISTRIBUTOR OR THE BUSINESS OWNER. THERE IS AN SKU CODE APPLIED TO EVERY PRODUCT, ITEM, OR OTHER

FORMS OF GOODS THAT CAN BE PURCHASED BY A CUSTOMER.

SKU ARE NOT NECESSARILY ASSIGNED TO JUST PHYSICAL PRODUCTS. THEY ALSO ARE USED TO IDENTIFY SERVICES AND FEES. AS SOME

COMPANIES PROVIDE SERVICES, THEY USE SKU’S FOR BILLING. AS AN EXAMPLE, IF A COMPUTER STORE REPAIRS A CUSTOMER’S

COMPUTER, THEY USE AN SKU TO DETERMINE WHAT SERVICES WERE COMPLETED IN ORDER TO FILL OUT A BILL FOR SERVICES RENDERED.

OTHER SAMPLES ARE DELIVERIES, INSTALLATION COSTS, AND WARRANTIES.

ALL SKU TRACKING VARIES FROM BUSINESS TO BUSINESS AND ACCORDING TO REGIONS AND CORPORATE DATA SYSTEMS. SKU ALSO

VARIES FROM OTHER PRODUCT TRACKING SYSTEMS DUE TO MANUFACTURER REGULATIONS OR EVEN GOVERNMENT REGULATIONS. OTHER

EXAMPLES OF TRACKING METHODS ARE UNIVERSAL PRODUCT CODE (UPC), EUROPEAN ARTICLE NUMBER (EAN), AND GLOBAL TRADE

ITEM NUMBER (GTIN).


HOW DOES SKU FUNCTION?

SKU’S ARE TYPICALLY PRINTED AS A BARCODE ON A LABEL SOMEWHERE ON THE PRODUCT. THIS MAKES IT EASY AND QUICK TO FIND THE

PRODUCTS INFORMATION BY SCANNING IT WITH A BARCODE READER.

EVERY ITEM AND VARIANT ITEM HAS ITS OWN SKU. THIS MEANS THAT SLIGHTLY DIFFERENT MODELS HAVE DIFFERENT TRACKING CODES

WHICH MAKES IT EASIER TO KEEP UP WITH THE ITEMS. THE FIRST PART OF A SKU MAY CONTAIN THE CODE FOR THAT TYPE OF PRODUCT

WHILE THE SECOND PART OF THE CODE MAY REPRESENT THE COLOR OR STYLE. NOT ONLY IS THE SKU GIVEN TO AN ITEM, THE SAME

NUMBER IS ALSO USED ON THE PACKAGING. SO IF A BOX CONTAINS 12 WIDGETS THAT ALL HAVE THE SAME SKU, THEN THE BOX WILL ALSO

HAVE THE SAME SKU CODE.

RETAIL STORES GENERALLY TRACK THE INDIVIDUAL ITEMS THROUGH THEIR STORE WHILE WAREHOUSES TRACK THE BOXES. WHILE PRETTY

SELF-EXPLANATORY IN A STORE, THIS CAN GET TRICKY WHEN ORDERING ITEMS ONLINE OR THROUGH CATALOGS. SINCE THE SKU

REPRESENTS THE NUMBER OF UNITS IN THE ITEM, YOU SHOULD READ CAREFULLY TO MAKE SURE YOU ARE ORDERING THE DESIRED

QUANTITY. IN SOME CASES, A QUANTITY OF 1 MAY MEAN ONE BOX FULL OF A DOZEN SEPARATE PRODUCTS. THE PROBLEM ARISES WHEN

YOU ONLY NEED ONE PRODUCT, NOT A DOZEN.

SKU CAN ALSO BE USED TO DETERMINE HOW MANY SALES OCCUR AT EACH SEPARATE LOCATION OR WHERE THE INVENTORY IS STORED.

SKU CAN BE USED TO TRACK PRODUCTS THROUGH THE SUPPLY CHAIN AS WELL AS TO USE FOR INSPECTING SALES DATA. SKU CAN TELL IF

CERTAIN PRODUCTS SELL BETTER THAN OTHER PRODUCTS.

SOME SKU’S COME EMBEDDED WITH AN RFID TAG. UPDATES OR CHANGES CAN BE MADE TO THE ITEM BY USING AN RFID READER. HIGH

VOLUME STOCK CAN BE PROCESSED QUICKLY THIS WAY BECAUSE YOU DON’T NEED TO MANUALLY SCAN EACH INDIVIDUAL ITEM BY HAND.

RFID SYSTEM SCANS ARE DONE AUTOMATICALLY. SINCE RFID SCANNERS ACT SIMILAR TO GPS TRACKERS, YOU CAN USE THEM TO FIND

PRODUCTS THAT MIGHT HAVE BEEN MISPLACED IN LARGE WAREHOUSES.

ANOTHER BENEFIT OF USING SKU IS WITH SEASONAL PRODUCTS THAT NEED TO BE UPDATED EVERY YEAR. SOME SKU’S CONTAIN THE YEAR

SOMEWHERE IN THE CODE. IF PRODUCT FROM THE FOLLOWING YEAR IS GOING TO BE USED IN A NEW YEAR, THEN THE YEAR IN THE CODE

CAN BE CHANGED. THIS IS USEFUL FOR PRODUCTS THAT DO NOT CHANGE FROM YEAR TO YEAR.

DISTRIBUTORS AND MERCHANTS NEED TO PAY ATTENTION TO HOW THEY ASSIGN THE CODES USED FOR A PRODUCT’S SKU. THIS IS DUE TO

THE USE OF SPREADSHEETS IN THE SYSTEM. CODES THAT START WITH A ZERO CANNOT BE QUICKLY IMPORTED WHILE CODES WITH A

FORWARD SLASH CAN GET MISINTERPRETED.

WHEN IT COMES TO WAREHOUSE STORAGE AND DISTRIBUTION, ASIGNING SKU CODES TO ALL THE ITEMS IN STOCK CAN BE A

MONUMENTAL FEAT. LUCKILY FOR DISTRIBUTORS, THERE HAVE BEEN ADVANCES IN COMPUTER SOFTWARE AND SYSTEMS THAT MAKE THE

TASK OF GIVING A PRODUCT AN SKU MUCH EASIER. THIS NEW TECHNOLOGY HAS MADE THE TASK EASIER AND MORE CONVENEIENT, NOT

TO MENTION MORE ACCURATE BECAUSE IT IS FREE FROM HUMAN ERROR.


INVENTORY MANAGEMENT

BY VIBHASH

AS THE COST OF LOGISTICS INCREASES RETAILERS AND MANUFACTURERS ARE LOOKING TO INVENTORY MANAGEMENT AS A WAY TO

CONTROL COSTS. INVENTORY IS A TERM USED TO DESCRIBE UNSOLD GOODS HELD FOR SALE OR RAW MATERIALS AWAITING MANUFACTURE.

THESE ITEMS MAY BE ON THE SHELVES OF A STORE, IN THE BACKROOM OR IN A WAREHOUSE MILES AWAY FROM THE POINT OF SALE. IN

THE CASE OF MANUFACTURING, THEY ARE TYPICALLY KEPT AT THE FACTORY. ANY GOODS NEEDED TO KEEP THINGS RUNNING BEYOND THE

NEXT FEW HOURS ARE CONSIDERED INVENTORY.

WHAT IS INVENTORY MANAGEMENT?

INVENTORY MANAGEMENT SIMPLY MEANS THE METHODS YOU USE TO ORGANIZE, STORE AND REPLACE INVENTORY, TO KEEP AN ADEQUATE

SUPPLY OF GOODS WHILE MINIMIZING COSTS. EACH LOCATION WHERE GOODS ARE KEPT WILL REQUIRE DIFFERENT METHODS OF

INVENTORY MANAGEMENT. KEEPING AN INVENTORY, OR STOCK OF GOODS, IS A NECESSITY IN RETAIL. CUSTOMERS OFTEN PREFER TO

PHYSICALLY TOUCH WHAT THEY ARE CONSIDERING PURCHASING, SO YOU MUST HAVE ITEMS ON HAND. IN ADDITION, MOST CUSTOMERS

PREFER TO HAVE IT NOW, RATHER THAN WAIT FOR SOMETHING TO BE ORDERED FROM A DISTRIBUTOR. IN MANUFACTURING, INVENTORY

MANAGEMENT IS EVENT MORE IMPORTANT TO KEEP PRODUCTION RUNNING. EVERY MINUTE THAT IS SPENT DOWN BECAUSE THE SUPPLY OF

RAW MATERIALS WAS INTERRUPTED COSTS THE COMPANY UNPLANNED EXPENSES.

COUNTING CURRENT STOCK

ALL BUSINESSES MUST KNOW WHAT THEY HAVE ON HAND AND EVALUATE STOCK LEVELS WITH RESPECT TO CURRENT AND FORECASTED

DEMANDS. YOU MUST KNOW WHAT YOU HAVE IN STOCK TO ENSURE YOU CAN MEET THE DEMANDS OF CUSTOMERS AND PRODUCTION AND

TO BE SURE YOU ARE ORDERING ENOUGH STOCK IN THE FUTURE. COUNTING IS ALSO IMPORTANT BECAUSE IT IS THE ONLY WAY YOU WILL

KNOW IF THERE IS A PROBLEM WITH THEFT OCCURRING AT SOME POINT IN THE SUPPLY CHAIN. WHEN YOU BECOME AWARE OF SUCH

PROBLEMS YOU CAN TAKE STEPS TO ELIMINATE THEM.

MANAGING SMALL ITEMS

INVENTORY CONTROL IS SIMPLY KNOWING HOW MUCH INVENTORY YOU HAVE. IT IS A MEANS TO CONTROL LOSS OF GOODS. BUSINESSES

THAT USE LARGE QUANTITIES OF SMALL ITEMS OFTEN USE AN “80/20” OR ABC RULE IN WHICH THEY KEEP TRACK OF 20 PERCENT OF THE

LARGEST VALUE INVENTORY ITEMS AND USE IT TO REPRESENT THE WHOLE. “A” ITEMS ARE THE TOP VALUED 20 PERCENT OF THE

COMPANY’S INVENTORY, BOTH IN TERMS OF THE COST OF THE ITEM AND THE NEED FOR THE ITEM IN THE MANUFACTURING OR SALES

PROCESS. CONTROLLING THIS TOP 20 PERCENT WILL CONTROL 80 PERCENT OF THEIR INVENTORY COSTS. “B” ITEMS ARE THOSE OF MID-

RANGE VALUE AND “C” ITEMS ARE CHEAP AND RARELY IN DEMAND.


THE RETAILER OR MANUFACTURER CAN NOW CATEGORIZE ALL ITEMS IN THE INVENTORY INTO ONE OF THESE THREE CLASSES AND THEN

MONITOR THE STOCK ACCORDING TO VALUE. "A" ITEMS WOULD BE COUNTED AND TRACKED REGULARLY, WHILE "B" AND "C" ITEMS

WOULD BE COUNTED ONLY MONTHLY OR QUARTERLY.

CYCLICAL COUNTING

MANY COMPANIES PREFER TO COUNT INVENTORY ON A CYCLICAL BASIS TO AVOID THE NEED FOR SHUTTING DOWN OPERATIONS WHILE

STOCK IS COUNTED. THIS MEANS THAT A PARTICULAR SECTION OF THE WAREHOUSE OR PLANT IS COUNTED AT PARTICULAR TIMES, RATHER

THAN COUNTING ALL INVENTORY AT ONCE. IN THIS WAY, THE COMPANY TAKES A PHYSICAL COUNT OF INVENTORY, BUT NEVER COUNTS THE

ENTIRE INVENTORY AT ONCE. WHILE THIS METHOD MAY BE LESS ACCURATE THAN COUNTING THE WHOLE, IT IS MUCH MORE COST

EFFECTIVE.

CONTROLLING SUPPLY AND DEMAND

WHENEVER POSSIBLE, OBTAIN A COMMITMENT FROM A CUSTOMER FOR A PURCHASE. IN THIS WAY, YOU ENSURE THAT THE ITEMS YOU

ORDER WILL NOT TAKE SPACE IN YOUR INVENTORY FOR LONG. WHEN THIS IS NOT POSSIBLE, YOU MAY BE ABLE TO SHARE RESPONSIBILITY

FOR THE COST OF CARRYING GOODS WITH THE SALESPERSON, TO ENSURE THAT AN ORDER PLACED ACTUALLY RESULTS IN A SALE. YOU CAN

ALSO KEEP A LIST OF GOODS THAT CAN EASILY BE SOLD TO ANOTHER PARTY, SHOULD A CUSTOMER CANCEL. SUCH GOODS CAN BE ORDERED

WITHOUT PRIOR APPROVAL.

APPROVAL PROCEDURES SHOULD BE ARRANGED AROUND SEVERAL FACTORS. YOU SHOULD SET MINIMUM AND MAXIMUM QUANTITIES

WHICH YOUR BUYERS CAN ORDER WITHOUT PRIOR APPROVAL. THIS ENSURES THAT YOU ARE MAXIMIZING ANY VOLUME DISCOUNTS

AVAILABLE THROUGH YOUR VENDORS AND PREVENTING OVER-ORDERING OF STOCK. IT IS ALSO IMPORTANT TO REQUIRE PRE-APPROVAL ON

GOODS WITH A HIGH CARRYING COST.

KEEPING ACCURATE RECORDS

ANY TIME ITEMS ARRIVE AT OR LEAVE A WAREHOUSE, ACCURATE PAPERWORK SHOULD BE KEPT, ITEMIZING THE GOODS. WHEN INVENTORY

ARRIVES, THIS IS WHEN YOU WILL FIND BREAKAGE OR LOSS ON THE GOODS YOU ORDERED. INVENTORY LEAVING YOUR WAREHOUSE MUST

BE COUNTED TO PREVENT LOSS BETWEEN THE WAREHOUSE AND THE POINT OF SALE. EVEN SAMPLES SHOULD BE RECORDED, MAKING THE

SALESPERSON RESPONSIBLE FOR THE GOODS UNTIL THEY ARE RETURNED TO THE STORAGE FACILITY. RECORDS SHOULD BE PROCESSED

QUICKLY, AT LEAST IN THE SAME DAY THAT THE WITHDRAWAL OF STOCK OCCURRED.

MANAGING EMPLOYEES

BUYERS ARE THE EMPLOYEES WHO MAKE STOCK PURCHASES FOR YOUR COMPANY. REWARD SYSTEMS SHOULD BE SET IN PLACE THAT

ENCOURAGE HIGH LEVELS OF CUSTOMER SERVICE AND RETURN ON INVESTMENT FOR THE PRODUCT LINES THE BUYER MANAGES.

WAREHOUSE EMPLOYEES SHOULD BE EDUCATED ON THE COSTS OF IMPROPER INVENTORY MANAGEMENT. BE SURE THEY UNDERSTAND

THAT THE LOWER YOUR PROFIT MARGIN, THE MORE SALES MUST BE GENERATED TO MAKE UP FOR THE LOST GOODS. INCENTIVE PROGRAMS


CAN HELP EMPLOYEES KEEP THIS IN PERSPECTIVE. WHEN THEY SEE A DIFFERENCE IN THEIR PAYCHECKS FROM POOR INVENTORY

MANAGEMENT, THEY ARE MORE LIKELY TO TAKE PRECAUTIONS TO PREVENT SHRINKAGE.

EACH STOCK ITEM IN YOUR WAREHOUSE OR BACK ROOM SHOULD HAVE ITS OWN PROCEDURES FOR REPLENISHING THE SUPPLY. FIND THE

BEST SUPPLIERS AND STORAGE LOCATION FOR EACH AND RECORD THIS INFORMATION IN OFFICIAL PROCEDURES THAT CAN EASILY BE

ACCESSED BY YOUR EMPLOYEES.

INVENTORY MANAGEMENT SHOULD BE A PART OF YOUR OVERALL STRATEGIC BUSINESS PLAN. AS THE BUSINESS CLIMATE EVOLVES

TOWARDS A GREEN ECONOMY, BUSINESSES ARE LOOKING FOR WAYS TO LEVERAGE THIS TREND AS PART OF THE “BIG PICTURE”. THIS CAN

MEAN REEVALUATING YOUR SUPPLY CHAIN AND CHOOSING PRODUCTS THAT ARE ENVIRONMENTALLY SOUND. IT CAN ALSO MEAN PUTTING

IN PLACE RECYCLING PROCEDURES FOR PACKAGING OR OTHER MATERIALS. IN THIS WAY, INVENTORY MANAGEMENT IS MORE THAN A

MEANS TO CONTROL COSTS; IT BECOMES A WAY TO PROMOTE YOUR BUSINESS.

Mrp inventory management

Economy & Finance

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