This project is on the design and development of an inventory management system which is part of the supply-chain Management. This system will attempt to solve issues with current inventory management systems in order to give businesses a better competitive edge.
The literature review will provide a detailed overview about Inventory management; why business need to manage their inventory, benefits and objectives of inventory management and best practice in inventory management. It will go on to further discuss what inventory management system is all about, a detailed explanation of the benefits, future of inventory management systems and talk about success of inventory management system.
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In the review, various factors for implementing efficient inventory management systems were listed in order to understand fully how to design and develop a software solution for a company that would provide the best services and effective solution to their current problems. The report also discussed some challenges faced by most inventory management system in providing businesses with an effective solution.
As part of the literature review, a case study was carried out on Sahad Stores, a distribution company in Nigeria and a detailed investigation into their existing system was accomplished highlighting the problems of the current system. Based on knowledge gained from the literature review, a proposed solution was presented to resolve the issues with the company’s current system of inventory management.
An inventory is basically a detailed list of all the items in stock. Inventory consists of raw materials, work-in-process and finished goods. In today’s highly competitive market, businesses need to maintain an appropriate level of stock to meet the customer demands at any time. Inventory management is part of the supply chain management.
Over the past years, the concept of supply chain management SCM has been given a considerable attention. This is an approach to view the supply chain as a whole rather than as a set of separate processes (Weele, 2002). Mentzer, Dewitt, Keebler, Min, Nix, Smith and Zacharia defined Supply chain management SCM “as the systematic and strategic coordination of the traditional business operations”. The main aim of supply chain management SCM is to improve the long term performance of each firm as well as the whole supply chain (Mentzer, Dewitt, Keebler, Min, Nix, Smith and Zacharia, 2001).
Inventory management involves “system and processes of maintaining the appropriate level of stock in a warehouse” (Barcodes, 2010). These activities includes identifying necessary inventory requirements, and creating replenishment processes, tracking and monitoring the usage of items/stock, reconciling inventory balances as well as reporting inventory status.(Barcodes , 2010). It is basically the process of efficiently controlling the amount of stock in order to avoid excess inventory. Reliable inventory management will therefore minimise the cost associated with inventory (Barcodes, 2010).
Inventory management involves a wide scope of processes ranging from inventory forecasting , replenishment, demand forecasting as well as quality management (Wikipedia, 2009).
Objectives and benefits of inventory management
According to Stylus Systems, The 3 main objectives in inventory management are (Stylus, 2008):
- To reduce inventory investment or cost which is one of the most important goals of any business. Balancing the cost of keeping inventory with the benefits gained from it is vital to the successes of an organisation
- To provide improved customer satisfaction
- To increase sales and profits realised from effective inventory management which therefore improve overall business productivity
Benefits of inventory management
In a report by Stylus, he highlighted the following as some of the benefits of inventory management (Stylus, 2008):
- Inventory management systems can help reduce the time to respond to changing market demand of products and can help control excess stock
- IMS provide a means for business to effectively manage or control their inventory
- IMS helps businesses to constantly analyse their business processes such as sales and purchasing in order to make efficient inventory decisions
- Stylus systems also reported that inventory management systems IMS can provide total insight on stock transactions
- Stylus systems also stated that IMS can provide hands on knowledge on inventory which might lead to increased sales and efficient customer services.
Development in inventory management
Presently, there are two major approaches to inventory management
- Materials requirement planning (MRP): MRP is simply a management system in which sales are converted into loads by sub-unit and time. In this system, orders are “scheduled more closely thereby reducing inventory and making delivery times shorter and more predictable” (Hedrick, 2003). MPR review order quantities periodically and as such allow ordering only what is currently needed. This helps keep inventory levels very low.
- Just-in-Time (JIT): JIT approach ensures that a business should only keep inventory in the right quantity at the right time with the right quality (David, 2004) .Most organizations adapt to this system to integrate inventory management for a more competitive advantage (Kaynak, 2005). It eliminates inventories rather than optimize them.
Why keep Inventory
Inventory refers to a detailed list of all the items in store or warehouse. According to Inman, Inventory refers to the items that are stored in warehouses or distribution centres in excess of what the store needs (Inman, 2010).
The following are the reason why business keeps more inventory than they currently need (Inventory Management, 2010).
- Meet Demand: this ensures that customers get the product or item that they want when they want it.
- Keep Operations running: When for example manufacturers run out of stock to manufacture certain product, the whole production process or operations will be halted and thus manufacture of the finished product. In order to prevent this, most manufacturers purchase excess inventory.
- Lead time: When a shop or a factory places an order for a particular item, the period of time between the order placements and when the order is received is known as lead time. Business therefore should have hands on inventory during the lead time in order to keep its operations running.
- Hedge: This involves keeping inventory against inflation in price of products. This allows the buyer to buy at a lower price than when the price increases.
- Quantity Discount: Quantity discount refers to reduction in price of an item when purchasing in bulk. This always influences most businesses to buy more than it needs which might lead to excess inventory.
- Smoothing Requirements: businesses sometimes acquire access inventory for products that have unpredictable demands in order to meet demand.
According to Edwars Silver (Silver, 2008), inventory management involves knowing the following Questions:
- The size of replenishment order that will be required
- The time this order will be placed
- And finally how frequent inventory records should be analysed
Best practice in inventory management
In an effort to maximise their return on investment (ROI) and avoid excess inventory, many businesses invest a fortune in inventory management systems.
In a report by Philip Slater (Slater, 2009), he stated that most of these systems fails to render expected services and rather result in excess inventory. This is because software can only optimise the values it has and not what it could be and as a result, it neglects some important external influences like changes in the management process. He stated that “World’s best practice inventory management demands that the inventory management system is optimised not just the inventory”. Inventory management therefore goes beyond software system and as stated by Philip Slater (Slater, 2009) inventory management involves combination of ‘know-how, process and reporting’ that collectively provide a means of maximizing availability while minimizing cash investment. In the report, he stated five level of world’s best practice inventory management that when fully implemented, can enable businesses to reduce their inventory investment or cost. These levels are:
- Ad Hoc: this level require less control as inventory is expensed when purchased on an ‘as needed’ basis and used immediately.
- Storage: this level involves the storage of items for use and not strictly controlled. Here, inventory is expensed when purchased. This approach tends to increase total expenditure as items are purchased in ‘economic quantities’ and discourage review and development due to lack of control
- Capitalisation: This approach entails the use of software solution to control inventory and provide good availability. Unfortunately, most businesses use their software mostly for counting and accounting.
- Software Optimisation: at this level, inventory is capitalised and the levels of stock are optimised based on a risk/return algorithm. Software solution can automatically adjust stock levels based on the history of demand and supply but these level are not trusted by most business because they believe the supply and demand may not represent actual usage
- System Optimisation: At this level, all factors influencing inventory investment are reviewed periodically. The main purpose of inventory management is to minimise overall cash investment without increasing risk. This according to Philip Slater is the world’s best practice in inventory management (Slater, 2009).
Capitalisation and system optimisation goes hand-in-hand. For an effective system, the management is therefore required to possess the “know-how”, measures, policy development, and reporting required to take the business to level 5 (System Optimization) and not just the software alone(Slater, 2009).
According to business link in an article, an organisation has an efficient inventory control only when they have the “right amount of stock in the right place and at the right time” (Business link, 2006). Inefficient Inventory control can leads slower sales and disappointed customers.
Inventory control basically deals with reducing the total cost of inventory. Inventory control is very relevant for businesses, especially businesses dealing with a large variety of products. As site by Hossein Arsham, Inventory management or control can be used to streamline warehouse processes in order to track orders and shipment (Arsham, 2006). Other important applications of inventory management systems are in manufacturing, shipping, and receiving. As stated by Arsham, there are three main factors in inventory control decision making process (Arsham, 2006).
- The cost of holding the stock: this is the cost associated carrying inventory over time and involves having items in storage. This includes interest, taxes, insurance, spoilage, breakage and warehousing cost like light, rent.
- The cost of placing an order: this is the cost of ordering and receiving inventory which include shipping cost, preparing invoices, determine how much is needed and moving goods.
- The cost of shortage: this cost involves what is lost if the stock is insufficient to meet all demand. This normally happens when demand exceeds the supply of inventory on hand.
MerchantOS argued that “the easiest way to manage inventory is with a computer inventory management s
ystem” (Merchant, 2010). The systems below help to reduce the time spent in managing inventory:
- Point-of-sale terminals: this system updates stock level automatically and provide a more error free sales transaction
- Barcodes and barcode readers which proved a way to effectively input inventory and “stock takes” faster into the system
- Job costing and inventory systems which are systems that also automatically update stock counts as orders are being made.
- Electronic Supplier product catalogs: allows the use of electronic devices like CD/DVDs to record inventory data.
These systems ensure accurate inventory records through the use of electronic and wireless technologies that provide error free data. These systems are very efficient in that they:
- Keep only up-to-date records of items and remove all sold items from the system
- It is possible to Review stock reports periodically to check the products status and identify low demand products.
- Periodically check record to ensure the level of accuracy of the system and to check against physical stock quantities.
Methods of Inventory Control
There are several method of inventory control which include (Hedrick, 2010):
- Visual control: this is used to determine if additional inventory is required through visual examination. This method is mostly used in small businesses and may not require any records.
- Tickler control: this is the physical counting of small portion of the inventory on a regular basis.
- Click Sheet Control: this involves the recording of items as they are used on a sheet of paper and used for reorder purposes
- Stub control: mostly used by retailers and allow managers have certain control of prices.
Today, the growth of businesses has provided a necessity to develop a more complicated and highly analytical form of inventory management. The above inventory management systems became difficult and inefficient. As a result, computer systems to control inventory was introduced. These systems include:
- Point-of-sale terminals: this stores information of each item that is used or sold.
- Off-line point-of-sale terminals: this transmits sales information directly to the supplier’s computer system. The supplier then uses this information to ship necessary items automatically to the retailers
The last method for inventory control is carried out by an external agency. As sited by Floyd Hedrick, it involves removal of unwanted products from stock which can be returned to the manufacture. This however has to occur after an agreement and frequent scheduled visit by the manufacturer’s representative to the large retailer in order to record stock count and writes the reorder (Hedrick, 2010).
The main aim of the above systems was to provide a more efficient system that will be able to identify the cost of each inventory (Hedrick, 2010). According to the report, two main control values are used:
- The Economic order quantity (EOQ) that is the size of the order
- The reorder point which is the lowest quantity that a stock or an item can be before more quantity is ordered.
The Economic Order Quantity (EOQ) is a formula that is used mainly for calculating the annual cost for ordering an item. It is widely used by most businesses and involves the actual cost of placing an order, the cost of carrying inventory as well as the annual sales rate. (Hedrick, 2010).
INVENTORY MANAGEMENT SYSTEMS
An Inventory management system is a system that automates all the processes involved in inventory management. These system are a vital part of any successful business and is basically used to efficiently track inventory using both hardware and software tools. The types of inventory tracked with an inventory management system includes almost any type of quantifiable products like clothing, household products, food, as well as equipment (Barcodes inc, 2010 ). These inventory management systems can influence the overall efficiency of a company’s performance resulting in profits. An overview of the whole system is as shown in the diagram below:
The diagram above show an over view of the whole inventory management system indication how numerous branches. It shows how the inventory management system manages inventory, sales as well as Employee information.
Through the end of 1980’s, sales and accounting related modules were the main focus of majority of software solution for retailer, manufacturers, and wholesalers. During the early 1990’s, many distributors began to notice the relevance of an effective way of controlling and managing their largest investment of corporate assets which is inventory. This lead to the development of comprehensive inventory management modules and systems by several software companies (Schreibfeder, 2009).
Presently, many businesses rely on modern inventory management systems to automate and integrate all aspects their business operations from order management, shipping management, billing systems, to inventory control all in one software package (Schreibfeder, 2009).
Tim Cosby reported that, inventory management systems must have ability to “track sales and availability, communicate with suppliers in near real-time and receive and incorporate other data like seasonal demand” (Cosby, 2007). This means that the system must tell the storeowner for example when its stock level is low so as to reorder and how much to purchase.
Information technology provided a way to convert sales and purchasing into a strategic business operation. Businesses now are faced with the challenge of finding out how to use these technologies to gain value and competitive advantage. Inventory management system can deliver these advantages (Stylus Systems, 2008).
Modern inventory management systems now depend on barcodes, and potentially RFID systems to enable automatic identification of objects. According to a case study at Wal-Mart, for products selling between 1 and 15 units a day, RFID was able to reduced Out of Stocks by up to 30% (Mathieu, 2007).
In order to record an inventory transaction accurately, “the inventory management system uses abarcode scanneror RFID reader to identify products automatically, and then collects additional information on the specific product from the operators via fixedwireless terminals, or mobile computers” (Mathieu, 2007). Mathieu defined RFID (RadioFrequencyIdentification) as” a data collection technology that uses electronic tags also known as electronic label to store data and can be used to identify items just like bar codes”.
The main difference between RFID and bar codes is that RFID uses wireless technology to transmit information into the system and can be inserted within packages and does not have to be close to the scanner. On the other hand, barcodes require line of sight and closure to the scanner for information to be read.
As stated by Mathieu, RFID tagged cartons rolling on a conveyer belt can be read many times faster than bar-coded boxes (Mathieu, 2007).
Large software companies like IBM, Microsoft, SAP, and Oracle have already designed effective inventory management systems for large businesses. These software solutions cost thousands to millions of dollars. They have now turned to focus on smaller businesses. Some of the popular inventory (supply chain) management systems produced by Microsoft include Great Plains and Solomon, which are now joined together and called Microsoft Dynamics GP (Quittner, 2008).
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Implementing effective inventory management systems
Inventory management is very relevant for today’s businesses in order to ensure quality control in businesses which presently is centred mostly on customer satisfaction. Inefficient inventory control or management can therefore cause customer dissatisfaction when they run out of stock of an item the customer needs. In order to avoid this, most businesses are willing to invest large amount of money in acquiring an effective and efficient inventory management systems.
A good inventory management system will be able to alert the retailer when it is time to reorder. It is also an important way automatically tracking moving inventory.
An efficient inventory management system helps to minimize the risk of error. For example, if a business orders large quantity of goods, and say 10,000 are missing. Manual counting each goods is likely to result in error but these errors can be avoided using an automated inventory management system. In retail stores, an inventory management system can also be used to track theft of retail merchandise, providing valuable information about store activities (Schreibfeder, 2009).
Inventory management systems must be designed to reflect and support company’s strategic plan as well as adapt to market changes due to worldwide marketing or new technology. It should also provide relevant information to efficiently monitor inventory movements, coordinate and integrate internal processes like accounting or billing, manage people and equipment and communicate with customers.
According to Invatol, inventory management system must be able to integrate the following processes in order to ensure continuity between functions (Invatol, 2003):
- Sales Forecasting: this requires the system to provide necessary information to coordinate business operations effectively and manage equipment and people. It should allow managers to make accurate and real time decisions.
- Sales and Operations planning: inventory management should control or handle fluctuations in market demands and lead time
- Company’s Strategic goals: Alignment with company strategy is an important aspect of the business and necessary for its success and therefore inventory management should be designed to align with the company’s strategic goal and market demand.
- Production and materials requirement planning: inventory system s should provide a balance of demand and supply at a minimised cost, inventory level and work load to achieve customer satisfaction.
These processes however vary from business to business depending on how the businesses carry out its processes, and on the market demand.
Benefits of using Inventory management systems
As cited by David Essex (Essex, 2009), he stated that the following are some of the advantages that businesses achieve while using inventory management software:
- Businesses get faster return on investment (ROI) which is as a result of lower carrying cost.
- Inventory software can provide accurate up-to-date information about inventory thereby improving sales forecasts.
- Replenishment Planning. This means that Inventory management software can notify businesses the safest time to delay order without affecting customer satisfaction and cost.
- It also proved the ability to separate safety stock according to customer satisfaction and profitability.
- Increased sales
- It can also encourage sales staff to promote products without running out of stock by improving inventory visibility (Essex, 2009).
Successful Inventory management systems
For any successful business, inventory management must be a critical aspect of its business. The most important aspect of an efficient inventory management is to achieve accurate data in terms of figures and facts and to implement policies to protect this information (Inventory Management, 2007).
A successful inventory management system will provided businesses with proper inventory control that reduces overall operating cost leading to customer satisfaction as well as give a competitive advantage. As sited by Alan Smith, a well-structured inventory management system should be able to adjust to an existing system (Smith, 2009)
Success in manufacturing industry entails producing the right products, in the right quantities, at the right time, with good quality, and at a price the customer is willing to pay.
Success in the manufacturing industry requires producing the right products, in the right quantities, at the right time, with good quality, and at a price the customer is willing to pay. The flexibility to respond to compliance standards and the ever-changing needs of customers, such as providing real-time visibility into global operations, is also imperative for success. Meeting these demands requires the ability to make quick decisions based on accurate data.
Successful inventory management has to do with balancing the cost of keeping inventory with the benefits gained from inventory. Some of the reasons for inventory management include (Hedrick, 2003):
- Obtaining lower prices by purchasing products in bulk
- Keeping stock low just enough to meet demand and avoid excess inventory
- Maintaining a wide range of stock
- Increasing inventory turnover or return on investment
- Having adequate inventory on hand so as to provide reliable customer services
However, the degree of success in addressing these issues varies within the functionality of inventory as well as the type of business.
A successful inventory management system will accelerate the process of tracking and removing from inventory those items that needed by customer. This process minimises the lead-time for order fulfilment (Merchantos, 2010).
Ideally, in order to avoid late re-order times, inventory software should be able to adjust the order quantity and delivery lead time to match that of the supplier’s performance.
Future of Inventory Management Systems
During the late 1990s, there was a large amount of businesses investing in integrated order and inventory system which were basically designed to reduce the amount of inventories as well as manage stock level (replenish stock). There were a wide range of system integration options based on the business needs and financial ability (Gale Group, 2002).
However, these “stand-alone” systems do not integrate well with each other. In 1996, a study by the International Mass Retail Association (IMRA), concluded that stand alone warehouse Management System (WMS) for example which perform only individual business operations will become obsolete because of their lack of integration well with other systems (Gale Group, 2002).
Presently, organisations can no longer compete effectively in isolation of their suppliers and other entities. The future success of many businesses depends on the co-ordination and co-operation of efforts, thereby making supply Chain management important. JIT and VMI are the two of the philosophies that have been used to update supply chain relationships and management (David, 2004).
The trend now in inventory management is to strives to improve not just specific aspect of the supply chain but system-wide (the entire supply chain) efficiency through automatic replenishment programs (ARPs) like the vendor managed inventory (VMI). In this system, the vendors are responsible for inventory replenishment or restocking of inventory for their retailers. They get retailers warehouse or point of sale information and use it to track retailer’s inventory thereby placing the whole responsibility for inventory management of the shoulders of the vendors (Gale Group, 2002). Popular Automatic replenishment programs (ARP) includes continuous replenishment planning (CRP) and vendor managed inventory (VMI). CRP and VMI are similar but differ in the sense that VMI also decides what and when to ship. Another widely used ARP is the efficient consumer response (ECR) used within the grocery industry and quick response (QR) programs which are common in the apparel industry (Daugherty, Myers, Matthew, Autry and Chad, 1999).
Future inventory management systems will be able to integrate all business processes for the whole supply chain. Another future development would be the use of RFID with GPRS to track inventory.
ANALYSING INVENTORY ADJUSTMENTS
Inventory Adjustment as the name implies is implemented as a stock adjuster with the main objective of synchronising the system with the actual stock on hand.
According to Jon Schreibfeder, in a case study with a large food distributor, he stated that the company began a program to achieve effective inventory management. As part of the program, they were cycle counting products and entering inventory adjustments as they find any miss match between the quality of a product in their warehouse and the inventory maintained by their computer system (Schreibfeder, 2009). In his analysis, Schreibfeder stated that the company was able to adopt a system that improved their future inventory accuracy that is methods of handling stock in order to prevent additional stock discrepancies. They did this by carefully analysing the reasons for inventory adjustments (Schreibfeder, 2009). This I believe was because most inventory adjustments are the result of problems encountered in the normal handling of materials.
The reason to make inventory Adjustments are basically the same for most businesses irrespective of the systems and operative methodologies they are using but the way these inventory adjustments are made will affect the inventory cost differently. The main reasons why inventory adjustments are required are (Schreibfeder, 2009):
- Some of the products in inventory are damaged or spoiled and therefore cannot be sold
- Material is missing from inventory
- Product in inventory might be out-dated or cannot be sold because it has been in inventory for too long
- More products available in the inventory than is recorded in the system
- The remaining inventory in stock is less than the quantity a customer will normally buy
Some inventory management system like FoodConnex implement inventory adjustment modules. According to FoodConnex, inventory adjustment can be categorized as follows (Solutions, 2009):
- Stock Quantity Adjustments as a result of spoilage, damage, theft, samples. These are adjustments made when stock in a store or warehouse is removed from the warehouse or store for a known reason (Solutions, 2009).
- Quality Adjustment due to a Receiving Error. The adjustments are made when the quantity entered as received into the system was incorrect. This will result in the re-calculation of the average cost of that item (Solutions, 2009).
- Cost Adjustment due to a Receiving Error: when the cost of an item is entered incorrectly this will require inventory adjustment. This will also cause the average cost of the item to be re-calculated (Solutions, 2009).
Based on the information presented, every inventory adjustment should be considered as an opportunity for businesses to improve which can result to greater corporate profitability.
Challenges of Inventory management systems
Several inventory management systems now include many new features designed to help distributors effectively manage their inventory. However, after implementing such systems, many businesses still continue to face the same challenges they experience with their old system. These challenges include (Schreibfeder, 2000):
- Stock-out and lost sales
- Inaccurate On-hand and available-for-sale quantities in their systems
- Unsatisfactory return on investments from inventory
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