Info Business

Overview

Despite major advances in industrial management in areas such as JIT, Flow Manufacturing, Lean Manufacturing, MRP / MRPII, ERP and Supply Chain Management, and now, electronic commerce, management of inventory investment remains a major challenge for many organizations. Install the latest software and pronouncing words of the most popular way is not a guarantee of good inventory management. Like virtually all the best practices, is the effective use of available tools by persons properly trained and educated to create the desired result.

This article explains how to create and maintain a comprehensive inventory control investment and better management of operations. This is a macro, “top-down approach that complements” micro “SKU (part number) at the level of management techniques.

Definition, Goal and Objectives

• APICS Dictionary definition defines the general inventory management “to establish the overall level of desired inventory and implement controls to ensure that individual decisions to achieve this recovery.”
Includes:
• How to assess the overall levels of investment and objectives.
• How to determine the level of inventory investment “pilot” and help control
• How to link inventory management general “macro” strategy “micro” inspections and develop accountability
• Performance measures
• Specific techniques such as ABC analysis, control parameters, maps of the inventory buildup, and the entry-exit control.
• Meta-Helps manage assets and make money.
• Inventory levels Optimizing Objective-within the parameters of service, costs, logistics, processes and investment objectives and constraints. Inventory management must be exercised to maintain the lowest level of inventories in line with objectives. Too much inventory reduces the return on investment and return on assets (lower profits). It also tends to increase expenditures in the form of interest payments, handling and storage, management, damage, loss, obsolescence, supervision, taxes, insurance, etc.
Although most managers, accountants and prosecutors in the inventory as an asset, are treated as such for operational purposes may create obligations. You’ve probably heard of the factories working to “keep people busy” or maximize the “efficiency” and similar nonsense. If they do not need inventory now, are often a waste if money. If you work just to keep busy people are still using equipment, energy and other resources that can not make sufficient profits. They can use resources that could be better used to meet the most immediate and cost effective. If the inventory is correctly implemented, can create liabilities. A client of one of our clients had branch managers would be a “treasure” of their products in remote locations so that “not exhausted.” This has created a surplus of material in the wrong places.

How to assess needs in inventory investment

Research

First, understand the market needs and customer expectations of services to their business needs, expectations, processes, skills and attitudes provider of industry standards and the mentality of world class best practices.

From there, you should learn quickly and reliable customers expect their shipments, which is involved in obtaining raw materials and production, that the best of the industry is doing and intends to do, and what could be possible. For example, if all competitors are of transmission of values, then you must either duplicate this feat, or determine how to make fast, or convince customers that their product is so great and so cheap, so it is in their interest to wait while you apply. Or, you can understand how to improve or make better, letting you make less inventory.

The result of this step is to establish what levels of inventory in the industry might be and what is possible. Make sure you have an “apples to apples’ comparison, can be significant differences between societies. For example, a company can inventory of finished product, someone can sell it to another division or distributor.

Measure current levels of inventory and historical performance

Measuring current inventory levels and historical and companies, not just the overall statistics, but divided into levels of responsibility, commodity, size, type (raw materials, work in progress, finished goods, shipping and handling) and market. To do this, to help isolate the figures of the levels of responsibility and show the performance of investments in stocks by the market process or product line. You may find that their systems are not able to do so, which means it’s time to make changes in them, either to replace, modify or implement inventory tracking system and separate control (recommended as a last resort).

The result of this step is to determine how the company does and has done with the inventory management.

Performance Indicators in place

Establish performance indicators – Inventory is usually measured in monetary value, such as U.S. Dollars (USD $). Another way is to measure the extra speed. For example, can be measured in “tour”, which refers to the number of times it moves or “turns” per year. For example, if there was an average of $ 100 in inventory last year and the annual cost of sales for last year was $ 2,000, which is calculated as cost of sales ($ 2,000) / Average inventories ($ 100) = 20 laps.

More towers (or “turnover”) is generally good, provided that the cost, service or quality are not much affected. If so, the answer is not only increase shares, but to try to improve the underlying “drivers” that influence their location if possible and profitable. There are variations of turnover (this term should not be confused with the European Union “turnover,” which usually refers to the total sales during a period) formulation, particularly in the fight against the way of calculating the average cost of sales and inventory.

At times were calculated by comparing the total value of sales with an average cost of inventory against sales or value. To maintain comparability figures show all the questions during the “burden” costs, overhead using industry standards / load calculations, unless this is contrary to the rules of your industry or locality. Hopefully future practice accounting standards in the world can help reduce confusion in this area.

It is increasingly common to measure the performance of stocks in days of coverage, rather than turnover. People seem to relate better.

Inventory and sales can also be measured in terms more favorable to industry, such as t (steel), bushel (corn), housing (construction or real estate) or ounces (gold).

A further refinement is to stratify the inventory for the “quality”, as stated Gary Gossard of IQR International. The idea of classifying stocks as active, slow and obsolete, has been around for a long time. Continuously, trace, identify any changes in inventory quality or condition of a new application for a subject which is in excess or obsolete. Weighted assets “good” inventory does not exceed the coverage of its “white days” divided by the total population, multiplied by 100, equals the value of inventory (IIC) number. 33-40% is typical of the mediocre. 66% is considered very good.

All these figures can be split to show the changes over time due, for example, to provide seasonal changes and demand, or the planned improvements. These can be further applied to agencies, product lines, marketing channels, warehouses, planning groups or other responsible entities, then monitor the results.

The numbers must be capable of being “boring” or down from the level of the entire company to an individual SKU (Stock Keeping Unit “) or the transaction number. Managers or employees should be able to look at the total of their areas of responsibility and easily identify specific problems at lower levels and finally to specific items, policies, orders and decisions which represented for them.

These are typical inventory system of metrology, which must be broken down by responsibility organizations, size, type, commodity, market and product, and time in stages, with real objectives and values:
Coverage • Inventory Turnover or Days
• The value of inventory or other unit of measurement, such as tons
• Inventory of “quality”, including summaries of the IIC and the quantities of each type
• Level of customer service, expressed how the customer perceives

ABC Analysis

Perform an ABC analysis, easy management, common inventory and powerful. It is based on Pareto’s law of “80-20.” The most common approach is to calculate the demand for units, preferably for future periods, and then calculate the value of the total cost of use of each item (total cost of sales multiplied by the units needed) for a future period of time . If future demand data are not available, it is best to use history, but it will not work well for items with large swings in demand over time. The sequence of decreasing value. In general, the statement above points 10-15% 75-85% of the value (“A”), the following account for 20-30% 10-20% of the value (point “B”) and the rest is rest, about 60-70% of the articles, usually about 5% of the total value (“C” items). Your inventory should be less than the percentages of “A” because they are much more controlled and slightly higher in B and C was higher.

Then compare the list of real values in the inventory, more real and planned commitments. The answers often suggest immediate corrective action!

ABC list suggests focusing on what to control most of the investments in shares. They do not tell is that you lose your $ 0.10 screws could prevent the transfer of a radar unit of $ 5,000,000 to ensure that no control system for all items, just check people are very concerned more expensive. Err on the side of caution for the cheapest items, allowing coverage of safety stock or “two” bin “or way to avoid stock-outs, but keep the inventory out of control.

Create a graph of the inventory buildup

Another analysis tool is a good list of inventory accumulation. Using an xy graph. Tracking the cumulative costs over time, by product, at a cost to the “y” (vertical axis) and time in the “x” (horizontal) axis.

Typically, the cost of raw material accumulates over time first, followed by work and implementation costs.

Allow the safety stock, lot size inventory, transportation equipment, defects / rework / scrap, and normal storage and pipeline distribution of finished products. See the impact of logging. Some people also treat accounts receivable as a result of an inventory de facto, until it is paid. Once the painting is completed, the program for shock value. Presented correctly, which will really make people think about the effect of the restrictions and decisions (another form of restraint) in the inventory. Then work to change the rules!
One company took 14 months accumulation curve, which was reduced to four months. At another company, the material of lead longer, represented only 20% of product cost, so the lowest point only, rather than finished products, or instead of merely reacting to orders, its drastically reduced the response time for orders of 70%. She also added the flexibility to use this material to make a number of different end products.

How to identify and inventory control drivers

Inventory drivers are things that tend to stock up or down. identify and give you an idea of why the changes in inventory. their agreement is the beginning of the acquisition. I said things that the inventory of lead, for example: more SKUs. I will refrain from stating the obvious: the opposite would be to reduce inventories.

example, the SKU reduction to reduce inventories.
main engines are covered briefly, as follows:
SKU Number
The other elements you have, the greater its need for inventory, in most cases. If you sell 500 widgets a year of A, then replace A and B 250 250/year, will probably have to carry more inventory. Why: The demand and supply and the variability of the global economic order quantities are more likely to be higher in the two games to one.

The more a product SKU is more difficult to make matched sets of parts and at the same time. Because there are many elements with multiple suppliers, stored and sent across multiple locations or routes, with more possibilities of delays, defects, etc, more inventory is needed.

Operations there and take more time, tend to have more inventory. No operations: a long supply chain. It can also mean much per transaction sizes and more places for delays and defects occur. simplification of the process reduces the inventory.

Facilities of fixed assets are in and out, more for these quantities, and so they can reach and pass the material in and out of inventory more you tend to have.

The more time passes the inventory control system or organization to another and transfer less efficient, the larger the inventory, which tend to have.

Size of lot by lot /
Set lot size or larger than the delivery of customer orders tend to increase values. If our customers a unique product at a time, but the economy of handling, process and considerations suggest you make 1000 at a time, then you have more inventory available that is consumed by the command, resulting in an accumulation of inventories . If you have to put things in cases, tens, cars, tons or weeks after birth, but they are required downstream in the supply chain in small increments, they tend to accumulate more of the inventory.

More lead time, more shares than they normally have. If something has a duration of 16 weeks instead of 16 days, there is more inventory to cover the process of “channeling” of time. If you belong to you or your provider, you are increasing the costs of someone who will ultimately affect the cost and the cost of his client. More time means more opportunity to run or do something wrong, meanwhile, which generally tries to take additional reserves.

financing cost

These costs of holding inventory. Watch what happens in the inventory “cost of ownership,” often called “cost accounting” and is expressed in terms of cost per cent of the value of the shares per year of ownership. For example, an accountant of 25% of the costs (typical) indicates that costs about $ 0.25 to $ 1.00 for each of the inventories of each year. These costs include:

• The cost of money – The cost of capital for the company or, in some cases, the opportunity cost or performance can be gained in the money by applying productively elsewhere. The cost of money has ranged from 6% to 18% in the United States in the last 25 years. This obviously has an important impact on the investment strategy.

• Obsolescence – The risk that the inventory is not said, or to be adapted to make it usable, you must take into account the cost of inventory property. In theory (and practice), more inventory, more than its conclusion, the most probable technical changes, customer preferences and technological changes that make it unusable inventory. In the garment industry, it is not uncommon for people to depreciate up to 90% when styles change. Some parts of the electronics industry has problems with obsolete inventory very rapidly due to technological changes.

• Removal – Some of the inventory available to the owner for loss, damage, theft or damage. The inventory is gone, and there, what usually happens. Steps to prevent lifting of reimbursement in other areas, such as controlling climate security, better control systems, procurement policy, etc.

• Quality factors – compensation for the performance, attrition, scrap and rework. It’s really more a function of the process that the amount invested in stocks and is linked to a debit card, but is sometimes included as part of general inventory of the transport costs.
Technological obsolescence • Price – The price does not always go up. In fact, in sectors such as electronics, prices often collapse due to the constant improvement of product designs and improvements in process technology. Therefore, it is desirable to minimize the populations in areas of high risk.

• Taxes – There are two dimensions to the following: 1) In some regions, a tax on stocks, so more people, more tax is paid. 2) the inventory is considered an asset by most accounting and tax rules. Therefore, the increase in stock shows “profits” and are generally taxed earnings, usually by multiple government entities.

• Insurance – The cost of building inventory should be considered insurance, and insurance for premises, equipment, personnel and other resources needed for control.

• Space – Storage space and sometimes expensive occupies 25-30% of the total installation, if we consider the storage of raw materials, dams, storage of work in progress, reception, transport, external storage , MRB and waste storage areas. campaigns to reduce inventory can help companies avoid the need to move to large facilities, or allow them to stop or reduce existing facilities.

• Workforce – All inventory of the needs of people to order, receive, inspect, store, move, count, store, retrieve, view, general ledger, etc. People are largest or second largest expense (behind matter) for most manufacturers.

• File systems – software, processes, equipment and paper to use for tracking and inventory control.

• Handling / Storage scales transmission equipment – conveyors, forklifts, bar code, storage and retrieval systems, trucks, cars, containers, shelves, racks should all be owned, leased, maintained and care.

• physical inventories, reconciliations – should be undertaken to ensure that inventories are properly accounted for and maintained.

• Transportation – Must be provided to move the inventory inside and outside the facility, suppliers, within the institution, different work stations and storage areas.

• Energy – heat, light, humidity, air conditioning, refrigeration and fuel must be consumed to make it happen.

• Lot size Inappropriate – In the list of formulas, the cost of inventory management is often expressed as a fixed percentage of the value of inventory, for mathematical convenience, but is a simplification of reality.

For example, consider the cost of handling and storage. The fact that a dollar of inventory is added, does not mean that transportation costs increase, say, $ 0.02. In reality, the costs that normally would not be in direct proportion to the whole world, but only when we have had to pay for additional costs or make the investment for equipment or space to house inventory. So, in fact, most of these costs are step functions, rather than continuous curves.

We urge caution in the use of the economic order quantity (COE) in the planning formulas. Although these guidelines may be useful in some cases, can easily go wrong and hypersensitivity to changes in transportation costs and order, which are usually no more than guesstimates best. We smiled at what is a doctorate or lose the study of the complexities of the calculations of such often ignore the basic realities, such as: the amount of space and money you have, anyway? You can consult the book of Paul, production and inventory management in the technological age, pages 137-139 for a detailed explanation of why this method is much lower and the design should be used with caution.

• Power change concerns the reliability of the supplier to deliver the desired units in the required amount at the right time, at a level of acceptable quality. If this can be done reliably, companies tend to have a buffer (safety) measures to compensate for the supply system.

• changes in demand – refers to the ability to accurately predict what the customer needs (if an internal or external customer). Low reliability tends to encourage buffer (safety) stocks.

• The Trouble-Extra inventory is often performed to allow the release probable. This is just a specialized form of the supply of safety stock and buffer of the application.

• The cost of transport logistics limitations / – Sometimes, this falls under the heading of supply and demand and changes can definitely affect. For example, a customer takes parts by sea at a factory in Portugal, or at least they do if not sent by plane to get there faster. Because the vessels sailing between ports economic run every week, a 20 or 40 feet long is the size of the browsing more convenient. Some time is needed for packaging, transportation to the freight terminal, transportation, unloading, customs and transport to the recipient. These are the very real logistical constraints that must be included in the pipeline, “” part of the inventory model.

Another company sends fresh flowers studied Latin America for the transport of goods from the United States Air is the only possible way to handle shipping because of the life and care. This results in a shorter period “pipeline” and higher transportation costs, which over time, either directly quantified in the inventory, or rolled in his head, or the cost of the final effect of selling yourself.

With the increase in unit costs, so will the inventory, but the towers or days of coverage remain the same.

How to set inventory targets

After reviewing the current situation, drivers, and the external situation, the estimate of inventory levels should be, was endowed with certain situations. It’s amazing tools for modeling the supply chain to help you. Our experience is that the development of a detailed model precise behavior of inventories is a daunting task to create and maintain an important task if we do not normally. Normally, working on projects with limited budgets, we study the past and concentrate on the main engines, trying to change a little with the greatest potential impact to achieve the objectives, a “delta” approach.

Do not talk of sophisticated modeling tools, however. They have their place. Big amounts of money involved and / or limitations difficult to overcome, modeling tools help sometimes. Many of the detailed control methods presented below contain the elements of the model.

Note: The calculation and modeling the behavior of inventory using only the rules and parameters are almost always wrong. Why: If, for example, assumes that the inventory will be an average of one and half times the amount of a higher safety stock, most often wrong. current and the variability of demand will be different. Defective items returned to the client / can lead to accumulation. unprecedented series of shortages of parts due will result in the accumulation. In general, higher than the model provided.

Even the best plans can go off track if something changes unexpectedly, a significant reduction in customer orders, unexpected failure, requiring an ad hoc reaction rather than careful, deliberate planning and advanced.

There are two main lines in the inventory management approach, top down and bottom up. Most companies use a combination of both.
• Top-Down – this is the “macro” approach. Start with a goal, objectives, ABC (Pareto) using estimated or historical knowledge of global processes and deadlines. Setting goals set by companies, at least, preferably at a lower level, so that supervisors or middle managers, work teams or staff of administrative control, may be more responsible. It takes more effort than the control moves to a lower level.

Establish a monitoring system, such as actions against the current target level. Compare the number of actual sales, the forecast. Monitor commitments and production plans to the objectives … hold managers accountable for results and return to the reasons why the targets can be met and the solutions to problems. encourage them to address the underlying problems. Help with problems outside its jurisdiction.

Another monitoring tool is a good control of inputs and outputs. You build a table of time beginning and ending stocks expected, demonstrating the output, input, output and results. Can employees work for the Delta “,” Get up and monitoring of the actual values over time.