Inventory Planning and Control. How Much to Order and When to Order. 4 Approaches to Volume-Timing Inventory decision.

July 28, 2009 by kutenk · Leave a Comment
Filed under: Inventory Management 

Why is There a Need for Inventory Planning and Control?

The first need arises because of fluctuations in demand. If there is a sudden surge in demand and you have no inventory, you will not be able to keep up with this demand. Conversely, if there is a drop in demand, you may have more inventory than you can effectively store. In both cases, you are losing revenue because you are either not selling as much as you could or not selling as much as you thought you could.




The second need arises out of the first. Inventory is a cost issue. The following costs are relevant in this regard:
    Storage costs-it costs money to store goods, money for lighting, energy, equipment, employees, space and rent (if applicable). The more inventory you have, the more it costs.
    Obsolescence costs-most stored goods have a shelf-life. If they are stored too long, they may perish (for example food products) or go out of date (for example fashion items).
    Capital costs-these arise because of the lag between buying supplies and selling products. The longer the gap, the more you are living on savings or borrowings.




So, inventory planning and control can improve your revenue and reduce your costs. Organisations need some inventory as a buffer, or safety valve, against sudden surges in demand, but too much can be costly. Judging this fine line is the key to good inventory planning and control.

How Much to Order and When to Order
The crucial planning decision for the stock purchaser is how much to order and when to order-the volume—timing continuum. Order too much and you face inventory costs if you cannot sell. On the other hand, you may get a price discount from the supplier if you order in bulk. Order too little and you lose your price discount and may not have enough supplies to meet demand. Order too early, and you may have too much inventory for a short period. Order too late and you run out of supplies for a short period.
There are a number of approaches to the volume-timing decision such as:
    order the same amount on a regular basis
    order the same amount on a irregular basis
    order different amounts on a regular basis
    order different amounts on an irregular basis.




There are advantages and disadvantages to each, but the sophistication of planning and control increases as you go down the list. For example, ordering the same amount on a regular basis is an easy system to implement, but there is a danger of unnecessary, wasteful inventory; ordering different amounts on an irregular basis involves continuous forecasting, detailed organisation and a sophisticated supplier information network, but the potential advantages are an inventory which closely matches supply and demand and eliminates wastage.

Another factor in the volume-timing decision is to balance the costs of holding inventory (storage, obsolescence and capital) against the costs of making an order (price discounts and delivery costs). There are various mathematical models which attempt to do this, such as the economic order quantity (EOQ) formula and the economic batch quantity (EBQ) model.
Generally, the more you buy, the more your holding costs and the less your order costs-and vice versa.

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Inventory Management Practice. MANAGING THE COMPUTER-CONTROLLED INVENTORY SYSTEM. How to Achieve Inventory Accuracy.

June 26, 2009 by kutenk · Leave a Comment
Filed under: Inventory Management 

Inventory Accuracy

What are the signs that inventory inaccuracy is an issue in a plant? Inventory inaccuracy may cause excessive downtime in a plant due to lack of materials.
Many companies schedule monthly physical inventories because they do not trust the perpetual numbers. These physical inventories are a waste of company time and money and prove that no one understands how to manage materials.
Numerous factors can directly influence the inventory accuracy. The most important practice that a materials team can adopt is developing verification systems to ensure that all data in and out of the materials requirement planning (MRP) system is correct. Although double-checking takes time, it is worth the effort to keep the inventory as accurate as possible.
Inventory inaccuracy may result from software issues, data input/output errors, transaction errors, cycle-count errors, and unreported scrap.




The software maker or the company’s information systems department should resolve software issues that create problems with inventory management. Most software issues occur with the transfer of data from one software package to another or in daily updates where numerous programs interface with each other and one has crashed. An overloaded hardware system is usually the root cause of system crashes.
If a plant and/or company is plagued with constant shortages due to incorrect perpetual inventories on the computer system, there needs to be an extensive review of how the inventory is managed. The number-one cause of firefighting is the inability to control the computer system inventory (perpetual).
Once people lose faith in the accuracy of the data in the computer system, they usually establish methods to circumvent the system, such as using expediters and stock chasers.
Many planners revert to managing the inventory with spreadsheets. The danger with using spreadsheets is the fact that they could contain errors that allow the generation of inaccurate releases.





MANAGING THE COMPUTER-CONTROLLED INVENTORY SYSTEM
Efforts to correct the inventory on the system may be in vain due to a host of reasons, both within and beyond the control of the materials group. Even when a new perpetual inventory is posted to the system from a physical inventory, if the reasons for the inaccuracies are not corrected, the information quickly becomes inaccurate.
The problem of maintaining an accurate perpetual inventory can be compounded by efforts to correct the system with arbitrary inventory adjustments.
Compounding errors result from failure to identify the root causes for the inventory inaccuracy and take corrective action. However, due to time pressure and inability to understand the root causes, quick adjustments may be the materials group’s only way to adjust the inventory.
The lack of time to research the root causes stems from having an overwhelming number of cycle-count adjustments and not enough people to manage the situation.
Errors can be compounded by inaccurately correcting a problem that is corrected later by the proper transaction, such as by finally entering a missing receipt into the system. Entering the missing receipt actually doubles the amount of the inventory when a cycle count was used earlier to correct the system.
Errors are compounded when one cycle count reduces the inventory and the next cycle count increases it. Such changes render the inventory extremely inaccurate without a double-check verification.
Inventory inaccuracy is a symptom of system failures, lack of discipline, and lack of knowledge to implement proper system controls. If an overwhelming number of cycle-count adjustments are made monthly, the materials group generally is in an endless firefighting mode. A concerted effort is required to get back to the basics.
Inventory accuracy depends on the plant’s ability to control receiving accuracy, proper storage, scrap reporting, rework, vendor count, bills of materials, cycle counting, shipping accuracy, finished product reporting, and data input/output control.
With so many direct inputs into the system that can affect inventory accuracy, it is difficult to ensure that all transactions are correct. Any system that relies on human input is bound to contain errors. Those who understand how to minimize the errors will have the advantage.
If inventory control was on par with accounting practices, perhaps the view of controlling materials in the plant would change. Accountants are simply not allowed to adjust the ledger in order to balance the month. Accountants also have double-check systems that allow them to reconcile the ledger. Why should inventory control be any different from controlling the company’s cash? After all, inventory is money.
The level of inventory accuracy usually depends on the plant’s ability to formulate corrective action plans from a root cause analysis of a problem. If no corrective action plan is formulated to resolve accuracy issues, the inventory inaccuracy problem continues to compound to a point where every physical inventory results in an unacceptable loss.
Even when the physical inventory does balance within reason in dollars, a part number review may reveal a different result. This may happen when the counts for the highest dollar items in a plant are more accurate than for the rest of the components. For example, if there were 1,000 parts of X, at a cost of $800 each, the inventory would be $800,000. If the balance of 2,500 part numbers totaled $100,000, it would be possible to balance within reason on the ledger during a physical inventory. The materials group’s understanding of the dollar structure of the components used would most likely ensure that part X is always correct.

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