Inventory Management Review: Today's Inventory Management

Traditionally, the focus on inventory management has always been about not running out of finished goods. Manufacturers would stockpile excessive amounts of raw materials, work in process, and finished goods with regard not for holding costs but only for protecting against a stock-out. 

If demand was higher than expected or a supplier missed a shipment, inventory would bail the manager out. As long as outbound shipments were satisfied, so were the operations managers.

Even today, I see this policy in everyday situations. Recently, I came into contact with a mailing room manager whose inventory policy was simple; buy as many supplies as he can fit in the office. 

As I was eating my lunch, I saw the same policy when I looked into the kitchen – a two-year supply of baked beans. So what’s the problem with this policy?  The problem is holding costs and traditionally, because of a lack of technology, most managers have ignored them.

Holding costs can be defined as the annual costs that are incurred by holding onto inventory (includes RM, WIP, and FG). The dollar amount for holding costs typically ranges between 20-40% of annual average inventories. 

For example, if a firm has average inventories of $100,00, the firm would have an annual holding cost at least $20,000. Common factors that drive up holding costs include opportunity costs, increased rent required for the space of the inventory, higher premiums to insure the inventory, and cost of obsolete goods.

Opportunity costs are frequently the highest cost. For example, if a firm has an average inventory level resulting in $100 million worth of goods, the firm effectively has $100 million tied up in inventory. 

Assuming these funds are not being loaned to the firm (which immediately results in interest expenses), then these are funds that should be used in other investments.

In the case of the mailing room and the baked beans, perhaps I was over-analyzing the holding costs during my lunch break. After all, even 40% annually for the restaurant’s $300 supply of baked beans doesn’t amount to much. 

It certainly doesn’t amount to the costs involved to put inventory optimization software into place, but think about the firm in the example. Isn’t it worth a second look at unneeded inventory for a firm with $100 million in inventory?  

How about if the firm’s inventory decreased substantially in value from day to day?  Or a firm whose inventory isn’t as small as baked beans. It is worth a second look and that second look is achieving incredible results.

Using today’s technology, manufacturers and retailers are achieving inventory turns that are as astonishing as the supply chains that produce them. Take for example Dell. Dell has achieved a system that at times leaves them with average inventories for long enough to last only three days. Instead of incurring holding costs, Dell doesn’t order until the demand is in place.

The framework Dell has accomplished is alluded to as a Just In Time (JIT) framework. JIT is intended to keep inventories however low as conceivable by delivering just what seems to be required and when it is required. 

The innovation included permits clients to put in a request on Dell's site and get their PC in no time. Dell's site is associated with their electronic information exchange (EDI) framework which permits providers to perceive which parts Dell needs when the client arranges the PC. 

The providers, who make various shipments to Dell day by day, supply Dell with the parts they need when, and just when, they require them. Albeit the product is exorbitant, for Dell, and some numerous different firms, the outcome is reserve funds that give upper hand.

Notwithstanding, JIT is an incredibly troublesome framework to set up that requires long stretches of training and very agreeable providers to consummate. For some organizations, this isn't an alternative. Specifically, this framework isn't intended for items that have an enormous raincheck cost. 

Raincheck costs are the expenses related with neglecting to fulfill need. Perhaps the item is a ware and the expense is just lost income, however perhaps the delay purchase brings about awful informal exchange that drives the expense much higher than the lost income. 

It is significant for a firm to decide the surmised costs attached to delay purchases. At the point when this is accomplished, chiefs can contrast holding costs with delay purchases to help figure out what ideal stock levels are. 

Shockingly, delay purchase expenses and holding costs aren't the solitary factors engaged with ideal stock levels. Different expenses like requesting (costs related with requesting. 

Incorporates desk work, stock tallies, and so forth) , provider lead times (how long it requires among requesting and accepting materials), and supply lead time and request varieties are likewise significant factors that can't be overlooked. These factors can make ideal stock levels extremely hard for administrators to decide. 

Today, programming business arrangements help to both facilitate the responsibility and drive down costs (specifically, requesting costs). 

Innovation is bringing stock administration to places never however conceivable. Radio Frequency Identification Tags convey radio waves that permit supervisors to follow inventories without actual tallies. 

EDI orders supplies naturally. Programming is equipped for delivering bookkeeping pages that perform complex improvements. Innovation is showing us what ought to be done; administrators need to get it going. 

Showcasing chiefs need to make precise figures. Relations should be worked with providers. Get together specialists need to work at proficient levels. These are the obligations of the present stock supervisor.

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