Inventory Management History

History of Inventory Management

• Early inventory management relied on merchants' intuition and handwritten notes
• The Industrial Revolution transformed production, increasing efficiency and lowering costs

The Machine Readable Punch Card

• Herman Hollerith invented the punch card in 1889 for data recording
• Hollerith's work inspired the modern checkout in the 1930s

Barcode

• The precursor to the modern barcode was created in the late 1940s and early 1950s
• Retailers developed the modern barcode in the 1960s to track inventory with lasers
• On June 26, 1974, a 10-pack of Juicy Fruit gum was the first item scanned using a barcode at a Marsh Supermarket in Troy, Ohio

Software Improves Tracking

• Technology advancements in the 1980s and 1990s improved inventory tracking efficiency
• In the early 2000s, inventory software eliminated the need for manual data input

RFID in Barcode Technology

• RFID was first patented in the 1970s
• RFID uses a microchip to transmit product information

Types of Inventory

• Perpetual Inventory
• ABC Analysis
• Economic Order Quantity
• Periodic Inventory
• LIFO and FIFO

GAAP Perspective

• According to GAAP, inventory is a current asset
• Inventory represents tangible personal property held for sale

The Supply Chain Management Efficiency Perspective

• Operations should be efficient
• Inventory is often seen as a liability to efficient supply chain management
• Inventory should be kept at a bare minimum
• Streamlining inventories across the supply chain to be as low as possible is the overall goal
• Excess idle inventory ties up money
• Inventory affects metrics/return on assets as it is in the asset category on the balance sheet

Risk Management Perspective

• Safety stock helps manage risks, prevent stock outs and missed opportunities

Balance Sheets

• Inventory is categorized as an asset
• Balancing inventory levels to maintain smooth production and merchandising while minimizing inventory is very important
• The optimal balance is key

Supply Chain Management

• Inventory cost is measured in dollars
• Inventory Costs include:
• Space
• Labor
• Deterioration
• Damage
• Theft
• Ordering and inventory costs include purchasing and expediting

Supply Chain Relationships

• Managing customer and vendor relationships relies on a collaborative concept
• Inventory movement and storage are central to these relationships
• Inventory plays a critical role and is a salient focus of the supply chain
• Supply and demand must stay balanced

Metrics

• Metrics reveal some root causes of supply chain inefficiency

The Purpose of Inventory

• Inventory is considered waste
• Important reasons for holding inventory:
• Predictability: to control raw material and part processing
• Fluctuations in Demand: on-hand inventory is a form of protection when demand isn't fully known
• Unreliability of Suppliers: protects from unreliable suppliers or scarce items
• Whenever Possible: unreliable suppliers should be replaced
• Price Protection: buying at appropriate times
• Quantity Discounts: bulk discounts are available for large quantities
• Lower Ordering Cost: buying larger quantities less frequently lowers the ordering cost

Types of Stocks

• Raw Materials
• Finished Products
• Work in Process
• Consumables
• Service, Repair, Replacement, and Spare Items
• Buffer Safety Inventory
• Anticipation Stock
• Transit Inventory

Electronic Data Interchange

• Routine business transactions are sent over standard communication lines

UPS Direct Approach

• Also known as direct distribution
• Offers a balance between fulfillment speed and logistic cost
• The Internet has enabled better coordination and collaboration between supply chain partners
• Inventory order cycle can be decreased
• Increase the accuracy of forecasts

Models

• Single-Period Model: used for one-time purchases
• Fixed-Order Quantity Model: used to maintain stock by replenishing with a fixed number of units
• Fixed-Order Period Model: items in stock and ready to use

Definition of Inventory

• Inventory: stock of any item or resource used in business
• Inventory System: set of policies and controls

Inventory Cost

• Holding Cost: total cost of storing unsold inventory
• Set-up Cost: cost of preparing for a new process, starting a new operation, or starting a production run
• Ordering Cost: managerial and clerical cost to prepare the purchase or production order
• Shortage Cost: expenses as a company incurs when it runs out of inventory
• Inventory levels must be monitored
• In Distribution: classified as in transit
• Retail Sites: carry inventory for immediate sale to customers
• In Service: refers to the tangible goods to be sold

Purpose of Inventory

• To maintain independence of operations by supplying materials allowing flexibility
• Meet variation in product demand
• To allow flexibility in production scheduling
• To provide a safeguard for variation in raw material delivery time
• To take advantage of economic purchase order size, which includes labor, phone calls, and postage
• Many other domain specific reasons inventory needs to be carried

Independent vs Dependent

• Tradeoffs involved in using different types of inventory control logic must be understood.
• Traditional Cost: dependent on the level of integration and automation incorporated in the system.
• Two-Bin Logic: reduces transaction costs
• Risk of Obsolescence must be considered
• Independent Demand: demand for a finished product directly from customers.
• Dependent Demand: demand for raw materials or components needed to produce a finished product.

Inventory Systems

• Provides the organization structure and the operating policies for maintaining and controlling goods to be stocked.
• The system is responsible for ordering and receipt of goods, timing the order placement and keeping track.
• Inventory Systems fall into one of two categories
• Single-period systems
• Safety stock.
• The previous model demand is constant and known in the majority of cases, though demand is not constant, it varies from day to day.
• To provide protection against stock outs,
• multiple period systems.

Single - Period System

• A method for determining how much of a product to order when it has a limited shelf life

Single-Period Inventory Model

• Overbooking of airline flights
• Ordering of fashion items
• Any type of one-time purchase order

Multi - Period Inventory System

• Fixed - order quantity models
• Fixed - time models

EOQ

• ANNUAL DEMAND (D): Number of units you sell each year
• ORDER COST PER PURCHASE ORDER (S) known as set up cost
• ANNUAL HOLDING COST (H)- how much your business spends per unit, per a year, on carrying inventory.

ABC Inventory Planning

• Maintaining inventory through;
• Counting
• Placing orders
• Receiving stocks
• A method for categorizing inventory items based on their; -Value
• Importance

ABC Categorization

• Pareto's Law
• Vilfredo Pareto, an Italian sociologist wrote his beliefs about the distribution of wealth in Italy in 1907
• 80-85% of Italy's money was held by 15-20% of the country's population
• “Vital Few” “Trivial Many” known as 80-20 rule.

Accounting for Inventory

• FIFO
• First good purchases are the first to be sold regardless of the actual timing of their sale.

Inventories

• Raw Materials
• WIP Inventory
• Finished goods Inventory

FIFO PROS

• Improved inventory planning and ordering
• Organized warehouse
• Improved productivity and efficiency
• Increased consumer satisfaction

FIFO - When to Use?

• Perishable goods
• retail and food industries
• inventory rotation

FIFO - When NOT to Use?

• stable prices
• high value non perishables good

LIFO

• most recent purchase goods are the first to be sold regardless of their sale.

LIFO - When to Use?

• rising prices
• similar items
• non-perishable goods

LIFO - When NOT to Use?

• Perishable goods
• high inflation
• international operations

Average Cost Method

• the value of inventory and cost of goods sold by calculating an average unit cost for all goods available for sale during a given period of time.

Specific Cost Method

• the ability to allow you to charge the actual cost of a given item to production or sales.

Standard Cost Method

• Often used by manufacturing companies
• To give all of their departments a uniform value for an item throughout a given year
• "Best guess" approach based on - known costs and expenses such as;
• historical costs
• any anticipated changes coming up in the foreseeable future.

Obsolete Stock

• had to repeatedly move really slow or outright dead.

Problems with Convincing Decision Makers that “Its Gotta Go"

• Impact a write off - anything that appears as an asset on the balance sheet has an accounting value.

Organization's Capital Structure

• Cash flow doesn't always keep up with an organization's needs

How To Recapture Space

1. Measure the space
2. Determine cost per square foot
3. Multiply the two
4. Present the Numbers

Why is it A Problem?

• Opportunity cost - space could store profitable goods instead of idle stocks.
• Cash flow issues - spending money on rent while dead stocks generate 0 revenue.
• Depreciation Risk - Inventory that sits for too long may become obsolete, outdated, or even deteriorate.
• Hidden Cost - storing excess stock also increases cost for security, insurance, and utilities.

Reduction of Carrying Cost

• Carrying Cost
• Represents the cost of holding an item in stock for a day.
• Safety Stock
• Used in the formula for calculating safety stock
• It is used to protect against supply and demand variations.

Common Locator System

• used by one person or small group of staff that know where inventory belongs within the warehouse.
• create procedures that allow you to track product movement.

Types of Location

1. Memory System

• Solely dependent on human recall

2. Fixed Location System

• Every item has a home and nothing else can live there.

3. Honeycombing

• Storage space is available but not fully utilized.

4. Zoning System

• Centered around an item's characteristics like a fixed system.

5. Random Location Systems

• Pure random location allows for the maximization of space since no item has a fixed home.

6. Combination Location System

• Enable you to assign specific locations to those items requiring special consideration.

7. Family Grouping

• Approach to item placement position items with similar characteristics together.

Automated Methods in Identifying Inventory

• Technology OCR: converts text from images or documents into machine-readable text
• Machine Vision: uses cameras and image recognition software to manage inventory
• Magnetic Stripe: strip on a product with encoded data
• SAW (Surface Acoustic Wave): small electronic components with interdigitated transducers (IDTs)
• RFID Tag: attached to an item and uses radio waves for automatic identification and tracking

Elements of Barcode

• A barcode "symbology" is very similar because it has a fixed alphabet made up of various patterns or dark bars.
• Quiet Zone: can be read from left to right
• Start and Stop Characters
• Data Characters: the actual message
• X dimension: the narrowest bar or space in a barcode

Types of Barcode

• Common one - dimensional
• Common two - dimensional
• Code 39: most widely used barcode in non retail applications
• Code 128: introduced in 1981, for most new barcode applications

Acronyms

• ERP - Enterprise Resource Planning
• UPC - Universal Product Code
• RFID - Radio - Frequency Identification
• EOQ - Economic Order Quantity
• FIFO - First in, First Out
• LIFO - Last in, Last Out
• GAAP - Generally Accepted Accounting Principles
• SKU - Stock Keeping Unit
• WIP - Work in Process
• EDI - Electronic Data Interchange
• OCR - Optical Character Recognition
• SAW - Surface Acoustic Wave
• IDTs - Interdigitated Transducers