Supplychainmanagement Unit3
Informationsystem functionality
TheemergenceofICT and how they impactorganisationsaresubjectof research in information systems (IS).IS research notonly investigates technologicalaspectsofICT,butalsostudiesbehavioursofindividualsand organisationsindealingwithevolution,implementation,andadoptionofICT.
Supply chain management (SCM) relies heavily on information and communication technologies (ICT)for handling transactions,performing communications, developing management insight, and exchanging information.Therefore,the concept of SCM gained attention and was highlightedbyresearchersonlyaftertheintroductionofICTtools.UseofICT toolsin SCM started in the1960swith theintroduction ofelectronicdata interchange(EDI)systems,followedbymaterialrequirementsplanning(MRP) solutionsinthe1970s,manufacturingresourceplanning(MRPII)inthe1980s, andenterpriseresourceplanning(ERP)inthe1990s.NumerousICTtoolswere developed and adopted throughout the past decades to support the increasinglycomplexsupplychains.
ICTinSCM
TheprimarygoalsoftheSCtechnologiesareinformationexchangeswithin and/or between managing supply chain related data and activities.SC connects the key players of the transport and logistics business and informationtechnology,representsthemeansfortheircooperationandthe filethatbindsthem together.
OverviewofcurrentSCM technologies
SCtechnologiescanbedividedintotwomaingroups:
1.Integrativetechnologies 2.Functionaltechnologies
1.Integrativetechnologiescoordinateand integrateinformation flow and activitieswithin and/orbetween companies,such asenterprise resource planningsystemsandsupplychainplanningsystems.
2.Functionaltechnologies,includesystemsthatareused to accomplish a particular function such as warehouse and transportation management systems.
IntegrativeTechnologies
Integrative technologiesare information systemsused to co-ordinate and integrate information flowsand activitieswithin and between company boundariestoallow thecompanytoeffectivelymanageprocurementactivities torapidlymeetcustomerneeds.Twowidelyknownsupplychainintegrative technologiesare enterprise resource planning systemsand supply chain planningsystems.
ERPsystemsofferacentralisedinformationcontrolsystem tointegrateall companydepartmentsandfunctionsandprovideintegrationforsupplychain management.TheinventorymanagementmoduleinERPhelpsincalculating thesafetystockandindeterminingthereorderpointforeachitem.
FunctionalTechnologies
Someofthefunctiontechnologiesare
customerrelationshipmanagementsystems
electronicCommercetechnology
electronicdatainterchange
internet-basedlogisticssystems
theinternetandothernetworktechnologies
transportationmanagementsystems
warehousemanagementsystems
WhataretheUsesofERP?
Enterpriseresourceplanning(ERP)systemsareusedbyorganizationslooking tomanagetheirbusinessfunctionswithinacentralizedandintegratedsystem.
ERPiscommonlyusedbycompaniesworkingwithinthesupplychaintohelp keeptrackofallthemovingpartsofmanufacturinganddistribution.However, ERPcanbeutilizedbyanumberofdifferentindustriesincludingthosein healthcare,non-profitgroups,construction and hospitality.Organization needingtomanagetheirstaff,customersandinventorycanallrelyonERP benefits.
ERPstoresallentereddataintoasingledatabase,allowingalldepartmentsto workwiththesameinformation.Additionally,allthisdatacanbeorganized, analyzedandmadeintoreports.ERPbringstogethercustomermanagement, humanresources,businessintelligence,financialmanagement,inventoryand supplychaincapabilitiesintoonesystem.
WhyUseERP?
Enterprise resource planning software is used to manage a number of businessfunctions,buthow isitanybetterthanothersolutions?Eventhough ERPmayhavesimilargoalstoothersolutions,itsuniquefeaturesmakeita distinctivecompetitorinthesoftwaremarket.Herearetheeightreasonswhy the importance ofenterprise resource planning (ERP)systemsshould be consideredbyanyorganization:
1.MoreMoneySaved
Althoughmanyvendorshaveintroducedflexiblepricinginrecentyears,ERP packagesarestillabiginvestment.Formany,thelargecostsalonecanmakeit seem unlikelythattheprogram wouldendupsavingyourorganizationany moneyatall.Butonceyougetpastthestickershock,it’seasiertoseehow ERP canprovideanexcellentROI.
First,ERPunifiesmanyofthesystemsthatmaycurrentlybefragmentedin yourorganization.From productdevelopmenttoaccountspayable,yourstaff willbeabletoaccessallthenecessarytoolsfortheirjobfrom onecentralized system.
Byunifyingsystems,youhelpyourstaffutilizetheirtimemoreefficiently.
With ERP,usersdon’thaveto huntdown a pieceofinformation across multiplesystems.Withthecentraldatabase,informationismucheasierto retrieve.Moreover,yourorganizationsavesmoneywithERPbyeliminating theneedforuserstobetrainedonseveralsystems.Thisnotonlyreducesthe amountofmoney spenton trainingbutalso reducesthelogisticaleffort involved.Insteadofschedulingseveraltrainingsessionswithseveraldifferent vendors,youonlyneedtocommunicatewithone.
2.ImprovedCollaboration
ThefeaturesofERPapplicationscanvaryslightlydependingontheprogram youareusing,butgenerally,allsystemsimprovecollaborationinsomeway.
Asmentioned before,thecentralized databaseisan integralpartofwhat makesanERPunique.Withthisdatabase,youprovideyourcompanywitha singlesourceoftruthtoworkfrom.Thisreducesanyerrorsbroughtonby workingwiththeincorrectdata,furtherreducingcosts.
Moreover,acentraldatabasereducesanyhesitationorstallingduringprojects, sinceallteam membershaveaccesstothecompany-widedatatheyneed.
Additionally,there’snoneedtomergeinformationacrossvarioussystemsor sources.Becauseallofthedataiscompiled,stored,shared and accessed throughasinglesystem,thereisnoconcernabouthow accurate,completeor securethedatafilesare.
Thisisn’taseasytosayifperhapsyourteam isenteringthesameclient informationoverandoveragainintoseveraldifferentsystems.Withoutan ERP,you invitehuman errorintoyourprocesseswhen itcould easilybe avoided.
3.BetterAnalytics
Acentraldatabaseofinformationalsoaidsinimprovingyouranalyticsand reporting.SinceanERPrecordsandstoresallthedatausersinput,itmakesfor anexcellentbusinessintelligencetool.Aslongasyourvendorprovidesstrong functionality,ERP software makesiteasierand fasterforyourteam to generate variousreports.Reportsthatcould take daysofresearch and compilationwithoutanERPtakesjustminutes.
MostERPsolutionsprovideacustomizabledashboardsoexecutivescansee reportswhen they firstlog into the system.These reportsmay include everythingfrom incomeandexpensestatementstocustom KPIsthatoffer insightinto certain functions.Theability to haveaccessto thesereports quicklyenablesyouandyourteam tomakebetterdecisionsmorequickly.You nolongerneedtorelyonyourITstafftogeneratethereportsthatyouneed.
Lastly,reportstypicallycomewithaccesslevels,ensuringonlyrelevantstaff seevaluablecompanydata.
4.ImprovedProductivity
Withtraditionalmethods,tedioustasksarecompletelyunavoidable.Taskslike generating reports,monitoring inventory levels,timesheettracking and processingordershavehistoricallytakenemployeeshourstoaccomplish.In additiontotakinguptime,theseprocessesloweremployeemoraleandopen yourselfuptohumanerror.Aftertheumpteenthhourofenteringthesame lineofdataintodifferentforms,eventhebeststaffmembersareboundto makeamistake.
Ifyouchoosetherightsolution,anERPcanautomateyourmosttedioustasks.
ThedatabasewithinERPsoftwareeliminatesredundanttaskssuchasdata entryandallowsthesystem toperform advancedcalculationswithinminutes.
This frees up your team members’time to do more thoughtfulwork, increasingyourROIwhenitcomestolabor.From this,ERPincreasesyour organization’sproductivity,efficiencyandprofitability.
5.HappierCustomers
Managingyourcustomershasneverbeensoimportant.Inourdigitalage, moreandmorepeopleareturningtotheinternettoreceiveadviceonwhat clothestowear,whatfoodtoeatandhow tolivetheirlives.Andwith 84 percentofconsumerstrustingonlinereviewsasmuchastheywouldafriend, previouscustomeropinionsaremoreimpactfulthanever.
Thebestwaytoimprovecustomersatisfactionistoprovideclient-centered goodsandservices.ERPprovidesthisinafew differentways.First,mostERP areequippedwithacustomerrelationshipmanagement(CRM)toolorcanbe easilyintegratedwithone.WithanERP,yourCRM hasaccesstodataacross businessfunctions.
Alongwithcontactinformation,anintegratedCRM canshow youdetailssuch asorderhistoryandbillinginformation.Thisenablesyourteam toseeyour clientsmoreholisticallytogain abetterunderstandingoftheirwantsand needs.The increased customervisibility helpsyou formulate yoursales strategyforimprovedleadgeneration.
6.SimplifiedComplianceandRiskManagement
Ascompaniesgrow anddobusinessindifferentcountries,itcanbedifficultto keeptrackofallthedifferentregulationsimposedonyourbusiness.Evenlocal companiesneedtoworryaboutvariousenvironmental,informationsecurity andhumanresourcesregulations.
Luckily,manyERPofferingsarebuiltwiththeseregulationsinmindtohelp you maintain complianceateverystage.Moreover,ERPsoftwareprovides built-inauditingtoolstoassistwithdocumentingthingslikechemicaluseand taxprovisions.Thismakesitincrediblyeasytoformulatereportsandsend them overtotherelevantgoverningbody.
Additionally,ERPoftenprovidestoolstomanagerisk.Thissolution’senhanced reliabilityandaccuracyimproveoverallfinancialmanagementsincethere’s lesschanceforerrorsduringaccounting.Forecastingtoolsalsoallow usersto predictevents when itcomes to demand,labor and budget.With this information in hand,you can createmoresecurebudgets,schedulesand productdevelopmentplans.
7.ImprovedInventoryMonitoring
A majorchallengeforgrowingcompaniesistrackingandmonitoringtheir expanding inventory levels.ERP utilizesbarcoding,RFID tagsand serial numberstokeeptabson yourinventoryateverystageduringthesupply
chain.These tools help you keep track ofinventory levels atdifferent warehouses,whichitemsareintransportationandwhichitemsareonthe shelvesreadyforconsumers.Theincreasedwarehousevisibilityoptimizesthe pick,packandshipprocessgreatly,removingalltheguesswork.
Inventorymonitoringalsobolstersreporting,astrackingtechnologiesprovide more accurate numbers.Userscan configure custom KPIsto see which productsmovethefastest— showinggreaterdemand— andwhichincrease carrying costs.With the greater precision provided by ERP,warehouse managerscangetreal-timedataontheirinventorytomakemoreaccurate businessdecisions.
8.ImprovedProductionPlanningandResourceManagement
Alongwithmanagingyourinventory,ERPalsomanagesmanufacturing.ERP providesinsightintoallmanufacturingoperationsincludingtheshopfloor.
Thisenablesuserstooptimizeproductionschedules,equipmentandlaborto maximizecapacity.
Additionally,ERPmanagesyourBillofMaterials(BOM)andfixedassets.With thissoftware,userscaneasilycreateandeditBOMsalongwithkeeptrackof allprevious changes.Fixed assetmanagementallowsusers to schedule equipmentmaintenanceto reduceunexpected downtime,improvingyour profitabilityandsupplychainrelationships.
ERPSYSTEM DESIGN
Whenthetimecomestoimplementanew ERP(EnterpriseResourcePlanning) system,therewillbediscussionsaboutthedesign ofthesystem thatwill requiremanydecisions.Havingtherightinputtohelpyoumakethebest decisionswillsetthestageforasuccessfulproject.
Duringthesystem designphase,theimplementationteam willrecommend howtheERPsystem willbeconfiguredtosupportthebusinessprocessesofthe organization.IfthereareprocessesthattheERPsystem doesnotsupportout ofthebox,theywillsuggestcustomizationsorthirdpartysolutions.
System designrecommendations
Thevalueofanimplementationteam comesfrom theexperiencethatthey bringto yourERP project.A greatteam bringsdepth ofknowledgeand experiencetodesignasystem thatfitsyourbusinessandyourpeople.
Thoroughrequirementsanalysis — Workingwithusersandmanagement, ananalysisofthecurrentbusinessprocessesanddesiredimprovements shouldbecompleteandfullydocumentedasthefoundationofthesystem design.
Alignmentwith organizationalgoals — The design documentshould clearlyaddresshow thebusinessmanagementsystemswillhelptoachieve theprimaryobjectivesoftheorganization.
Bestpracticeguidance — Anexperiencedimplementationteam willmake recommendationsbasedonbestpracticesthattheyhavelearnedovertime.
From reporting advice to add on productsuggestions;leverage their expertisetoimprovesystem efficiency.
Expertfunctionalreview — EachERPsystem hasfunctionalstrengthsand weaknesses.Yourimplementationteam shouldhavedeepexpertisewith yourERP’sfunctionalitytoidentifypotentialissuesthatcanbeovercome withcustomizations.
Experttechnicalreview — Inadditiontofunctionalexpertise,youneed theadviceofatechnicalexpertwhounderstandsyourcurrentsystemsand applicationsaswellastheabilitiesofyourITstaff.
TraditionalERPdesign
AsoldtechnologytrendssupportedERPdesign,architecture,andframework, therefore,TraditionalERPdesignswereimplementedandmadeaconceptual frameworkfornext-generationandfutureERPsystems.
Two-tier(client/server)architecture
ERParchitecturedesignwasbasedonclient/Serverprocessingwhichmeans thatprocessedworkwillbedividedbetweentwocomputersClientandServer.
ClientisthepresentationlogicforuserswhileServeristheprocessingand storagelogic.
Three-Tierarchitecture
Three-tierERP architecturewasintroduced asasolution fortwo-tierERP problems.ItconsistsofthreelayerssuchasPresentationlayer(GraphicalUser Interface(GUI)),Applicationlayer,anddatabaselayer.PresentationLayeris where data ispresented forclients.Application layerisresponsible for distributingrequestsacrossdifferentapplicationsserversandforbusiness logic execution.Furthermore,Application layeractsasan interface that facilitate communication between Database layer and User interface (presentationlayer).Databaselayerisresponsibleofdatastorage,edit,add, anddelete.
Web-basedarchitecture
Withentranceofinternetwidelyintechnologyworld,ERPsystem developer improvedERPsystem tocoopwithinternetandwebchanges.WebbasedERP designfocusedonnew technologyarisesandonmigrationfrom Client/server architecturetoweb-based client/serverarchitecture.Itisconsistsofthree layersuserinterface(webbrowser),webserver,andapplication/dataserver.
Userinterfacelayermovedfrom GUIinterfacetowebbrowserinterface.Web serverisresponsibleforHTML,andASPtransactionsandactasagateway
between Application/data serverand userinterface (web browser).Web application/data server is responsible for application distribution and databasestorage.
NewERPdesigns:
Rapid developmentofinformation technologysupported themovementof ERP to nextgeneration and implementation ofnew designs.ERP help enterprisesystemstochangetheirtraditionalmanagementmethodsandoffer them more benefitsand profitsforthe enterprise.MostTraditionalERP systemswerebased on Client/serverorbrowse/servermodelarchitecture whichisthree-tierarchitecturedesign.
Six-tierERP
Asthree-tierERParchitecturehadlotsofdeficiencies,six-tierarchitecture designcombinesthree-tierarchitecturedesignandaddeditsownnew models.
Six-tierarchitectureconsistsofsixwhichare:dataaccesslayer(DAL),business logic layer (BLL),data service layer (DSL),data mapping layer (DML), componentslayer(CL),andapplicationlayer(AL).
CloudERP
ERPsystem playsanimportantroleinanyorganizationaldevelopment.This developmentwillbemorereachablewhenERPsystemsareup-to-datewith latesttechnology.Cloud computing entrance made a complete change in enterprisesororganizationsusingERP systems.ERP moved to cloud ERP becauseofitsimprovements,benefits,andflexiblesystem features.CloudERP isan approach toenterpriseresourceplanningthatusecloud computing platformsandservicestomakebusinessprocesstransformationmoreflexible.
Inthisapproachtherearethreeimportantlayersthatdocloudserviceswhich areInfrastructureasaservice(IaaS),Platform asaservice(PaaS),Softwareas
aservice(SaaS),andHardwareasaservice(HaaS). MobileERP
Mobilecomputingtechnologyhastransformedthewaytoday'sbusinessesare done.Itmadebusinessesmeettheirrequirements,strategicadvantages,and reachcustomersatisfaction.Inmanyreallifecasesquickaccesstodataand information's facilitated organizations or enterprises work and implementation.Mobilecomputinghasbecomemorepopularareawhere mostERPdevelopersandvendorsmovedtouseit.Themaingoalofmobile ERPistomakeallERPfunctionalitiesavailableonvariousmobilephonesand wirelessdevices.A MobileERPmajortechnicalrequirementisinformation presentationinmultipleformats.Thisisbecausemobileandwirelessdevices areestablished to supportdifferentbrowsersthatsupportvariousmedia formats.
MeaningofInventory:
Inventorymeansallthematerials(mayberaw orfinishedparts/components, inprocessorfinishedproducts,castingsandconsumabletools,electrodesetc.) recordedontheledgers/booksoftheorganizationandkeptinitsstocks(inthe storeorwarehouses)forsomeperiodoftime.
Soinventoryisanessentialpartofanorganization.Everyenterprise/business or manufacturer concern however big or smallhas to maintain some inventory.
Some definitions explaining the various aspects ofinventory are as follows:
(a)Inventoriesarereferredtorawmaterialsandfinishedgoodslyinginstores.
(b)Allitems,parts/components,materials,in processorfinished products recordedinthebooksoftheorganizationandkeptinthestoresarecalled
inventories.
(c)Inventoryislistofnames,withcompletespecifications,quantitiesand/or moneyvaluesofusableitems.
(d)Inventory isdefined asa descriptive listoritems/goodswhich gives quantityandmoneyvalueofeachitem.Inventoryincludesraw materials, semi-finished products or work in process inventories, finished parts/componentsandfinishedfinalproductsetc.heldinstorageawaitinguse ormarketing.
FunctionsorCharacteristicsofInventory (i)InventoriesServeasCushions:
Againstshocksdue to demand/supply fluctuations,itseparatesdifferent manufacturingoperationsfrom oneanotherandmakesthem independentso thateachoperationcanbeperformedeconomically.
Forexample,anorganizationhastodealwithseveralconsumersandvendors andduetotheirunpredictablebehaviourtherearealwaysfluctuationsin demandorsupplyofgoodswhichdisturbsthescheduleoftheenterprise.
Inventoriesabsorbthesefluctuationsandhelpin maintainingundisturbed productioni.e.,wedecouplethemanufacturingactivitiesfrom theconsumer andvendorsuccessfullybycushionsofstocks.
(ii)Inventory,aNecessaryEvilforAnyEnterprise:
Inventories require valuable space, capital and other overheads for maintaining it.The invested capitalremainsidle tillthe stocksare not consumed.On theotherhand,smooth workingoftheorganization isnot possiblewithoutinventorysoitisanecessity.Furtherithasbeenobserved thatcostsofnothavinginventory(stockoutconditions)areusuallygreater
thancostsofhavingthem.Thusinventoryisanecessaryevil. (iii)InventoryProvidesProductionEconomies:
Purchasein desired quantitiesnullifiestheeffectsofchangein pricesor supply.Stocksbringeconomysopurchaseofvariousinputsduetodiscounts onbulkpurchase.
(iv)MaintenanceofSmoothandEfficientProductionFlow:
Maintains smooth and efficient production flow thus keeps a process continuallyoperating.
(v)CreationofMotivationalEffectinDecisionMaking:
Createsmotivationaleffectindecisionandpolicymakinge.g.apersonmaybe temptedtopurchasemoreifinventoriesaredisplayedinbulk.
TypesofInventory
1.Cl assi f i cati onAccordi ngtoFuncti onorMateri alFl ow:
(i)Productioninventory:
Items/goodsgoing into finalproductsuch asraw materials,components finishedparts/componentssub¬assembliesprocuredfrom marketoroutside source.
(ii)WorkInProcessInventory:
Itemsin semi-finished stage or productsrequired atdifferentstagesof manufacturingoftheproduct.
(iii)FinishedGoodsInventory:
Thesearefinishedgoodsorfinalproductsreadyfordispatchtousersorto distributors.
(iv)OperatingandMaintenanceInventory:
Theseincludetheitemswhichdonotform thepartofthefinalproductbutare eitherconsumablesusedduringthemanufacturingprocessoritemsneeded
requiredforrepairandmaintenancefunctions.
(v)MiscellaneousInventory:
Theitems/goodsotherthanthosementionedabovesuchasobsoleteandun- saleableproductsorscraparisingfrom mainproductionprocess,stationery items used in office,other items required by office,factory and sales departmentetc.
2.Conventi onalCl assi f i cati on:
Inventorymaybeclassifiedaccordingtoconventioninthefollowingway:
(i)DirectInventories:
Theseincludematerialsin anyform and ofanyform afterprocessingor finishedcomponentswhichbecomesanintegralpartofthemain/finalproduct tobedispatched/deliveredtodistributororconsumer.
(ii)IndirectInventories:
Theseincludematerialswhich arenotprocessed and do notbecomean integralpartofthefinalproductbutwithoutwhichthecompletionofthefinal productisnotpossible.Thesemaybecuttingfluids,lubricantsand other consumablesitemsrequiredduringproduction.
(iii)FinishedProductsInventories:
Productsreadyfordispatch tothedistribution system ormarketi.e.final products.
(iv)PurchasedPartsInventories:
Semi-finished,finishedpartspurchasedfrom themarketforutilisationatthe timeofassemblyofthefinalproduct.
ImportanceofInventory:
(i)Goodconsumerservicecanbeprovidedandmaintainedintheorganization.
(ii)Enablessmoothandefficientproductionflowofgoods/items.
(iii)Providesprotectionagainstuncertaintiesregardingdemandandsupplyof materialsandoutput.
(iv)Variousproduction activitiescan be independently and economically
performed,
(v)Ensurebetterutilizationofmen,machinesandmaterials.
(v)Withbulkpurchasesquantitydiscountscanbeavailed.
InventoryCarryingCost
Inventorycarryingcost,orcarryingcosts,isanaccountingterm thatidentifies allbusinessexpensesrelatedtoholdingandstoringunsoldgoods.Thetotal figurewouldincludetherelatedcostsofwarehousing,salaries,transportation and handling,taxes,and insurance as wellas depreciation,shrinkage, and opportunitycosts.
Totalcarryingcostsareoften shown asapercentageofabusiness'total inventoryin aparticulartimeperiod.Thefigureisusedbybusinessesto determinehowmuchincomecanbeearnedbasedoncurrentinventorylevels.
Italsohelpsabusinessdetermineifthereisaneedtoproducemoreorlessto maintainafavorableincomestream.
TheIntangibles
Thetangiblecostsofstoringinventorysuchasstorage,handling,andinsuring goodsareobvious.Lessobviousaretheintangiblessuchastheopportunity costofthemoneythatwasusedtopurchasetheinventory,andthecostof deteriorationandobsolescenceofgoodsinstorage.
Opportunitycostisgenerallydefinedasthepriceofforegoingother,possibly moreadvantageoususesformoneythatisbeingtiedupinstoredgoods.
Thecostofobsolescencewillberecordedasa write-off.Perishableortrendy
inventoryhasahighercostofobsolescencethan non-perishableorstaple items.
InventoryPlanning
Everyorganizationthatisengagedinproduction,saleortradingofProducts holds inventory in one or the other form. While production and manufacturingorganizationsholdraw materialinventories,finishedgoods andsparepartsinventories,tradingcompaniesmightholdonlyfinishedgoods inventoriesdependinguponthebusinessmodel.
Whenincaseofraw materialinventorymanagementfunctionisessentially dealingwithtwomajorfunctions.Firstfunctiondealswithinventoryplanning andthesecondbeinginventorytracking.Asinventoryplanners,theirmain jobconsistsinanalyzingdemandanddecidingwhentoorderandhow much to order new inventories.Traditionalinventory management approach consistsofthreemodelsnamely:
EOQ-EconomicOrderQuantity
ContinuousOrdering
PeriodicOrdering
1.EOQ: EconomicOrderQuantitymethoddeterminestheoptimalorder quantitythatwillminimizethetotalinventorycost.EOQ isabasic modeland furthermodelsdeveloped based on thismodelinclude productionQuantityModelandQuantityDiscountModel.
2.ContinuousOrderModel: worksonfixedorderquantitybasiswherea trigger for fixed quantity replenishmentisreleased whenever the inventory levelreachespredetermined safety leveland triggersre ordering.
3.PeriodicSystem Model: Thismodelworksonthebasisofplacingorder
afterafixedperiodoftime
Importanceofinventorymanagement
1.Avoidspoilage
Ifyou’resellingaproductthathasanexpirydate,likefoodormakeup,there’s averyrealchanceitwillgobadifyoudon’tsellitintime.Solidinventory managementhelpsyouavoidunnecessaryspoilage.
2.Avoiddeadstock
Deadstockisstockthatcannolongerbesold,butnotnecessarilybecauseit expired—itcouldhavegoneoutofseason,outofstyle,orotherwisebecome irrelevant.Bymanagingyourinventorybetter,youcanavoiddeadstock.
3.Saveonstoragecosts
Warehousing isoften avariablecost,meaningitfluctuatesbased on how muchproductyou’restoring.Whenyoustoretoomuchproductatonceorend upwithaproductthat’sdifficulttosell,yourstoragecostswillgoup.Avoiding thiswillsaveyoumoney.
ManaginguncertaintyinInventory
One ofthe mostimportantand emerging phenomenon in supply chain managementismanaginguncertaintythatisbelievedtobecomeoneofthe winningfeaturesforanyfirm.Accuracyinpredictinguncertaintiesandthe abilityandpreparednessafirm displaysinmanagingthem willdecidethe competitiveadvantageoforganizationsinfuture.Likeallothermanagement
areas inventory and supply chain decisions also need accounting for uncertainties.Themodernresearchandanalysishasprovedthatthemain objectiveofsupplychain istoidentifyand manageuncertaintiesbecause failingwhichcanleadtoaninefficientmanufacturing,supplyandsaleactivity.
Accordingtoarecent TompkinsSupplyChainConsortium surveyoflogistics executivesfrom avarietyofindustries,businessuncertaintyhashadamajor impactontheirsupplychains.Theeffectsboildowntofour:
1.Addedcost;
2.Increasedinventorylevels;
3.Increasedlead-times;and 4.Reducedspeedtomarket.
Thefollowingpointscanbetakenintoconsiderationtoavoiduncertaintyin Inventory:
•Havefocused,smallteamsoftherightpeopletodriveclosureandminimize therisk;
•Worktobecomeproactiveandagilebyimprovingplanningsystemsand reducecycletimes;
•Trytobalancenetworkdesign,customerdemandvolatility,andcustomer satisfaction;
•Increase focus on planning, operational excellence, technology implementation,andcollaboration;
•Improvetherecognition ofriskprofilesand build contingencyplanning capabilities;
•Develop and implementa risk managementstrategy and monitor the conditionofthesupplychainregularly;
• Work on backup suppliers and freight companies to reduce supply risk/uncertainty;
•Focusonsupplierdevelopment,near-shoringstrategy;leanandpartnership.
Inventorymanagementpolicies Procurement
Procurementisthepurchasingprocessindividualsmustusetoorderand receive inventory.Companies typically require individuals to have a purchaseorderwithamanager’sauthorizationpriortoorderinginventory.A procurementmanagerisresponsibleforreviewingthepurchaseorderto ensureitincludesauthorizationandotherinformationrelatingtothecostof itemspurchased.Whilelargerorganizationscanhireindividualstoworkin theprocurementdepartment,smallercompaniesoften havethebusiness ownerperform thisfunction.
ValuingInventory
Valuinginventoryisthepolicyinwhichinventorysellsfirstandisremoved from theaccountingledger.Methodsincludefirst-in,first-out(FIFO),last-in, first-out(LIFO)andtheweightedaveragemethod.FIFOrequirescompanies tosellolderinventoryfirst,leavingmoreexpensiveinventoryinthegeneral ledgerandincreasingthecompany’sgrossprofitduringanaccountingperiod.
LIFO istheoppositeofFIFO;thereforeithastheoppositeeffectsin the accountingledger.Theweighted averagemethod doesnotrequireolder inventorytobesoldfirstasinventorycostsarerecalculatedeachtimethe companypurchasesinventory.
InventoryAccountingSystem
Aninventoryaccountingsystem isthespecificproceduresacompanyusesto updateitsaccountingledger.Thetwotypesofsystemsareperiodicand perpetual.Periodicsystemsstartwithanopeningbalanceandonlyrecord purchases,salesoradjustmentsonamonthly,quarterlyorannualbasis.The perpetualsystem startswith theopeninginventorybalanceand updates inventoryaftereach purchase,salesorinventoryadjustment.Companies createtheirpoliciesdependingontheirbusinessmodels.
PhysicalControls
Physicalcontrolsrelatetohow acompanystoresandcountsinventoryitems.
Storage isimportantbecause companiesmustsafeguard theirinventory againstloss,theftand employeeabuse.Thiscan includelimitingaccess, locking up valuable products and using tracking devices on products.
Businessownersandmanagersmustalsouseperiodiccountstoverifythe numberofitemsonhand.Cyclecounts—countingaspecificnumberofitems each day orweek—and annualinventory countsare the mostcommon physicalcountingmethodsinthebusinessenvironinment.
Inventorymanagementpractices
1)CategorizeYourInventoryUsingABCAnal ysis
ABCanalysis isatechniqueforarrangingyourinventoryintoahierarchyofmost importanttoleastimportantitems.
Here’swhatanABCanalysiswouldlooklikeinpractice:
A-items are the best-selling, highest priority stock and require regular reorderingandconstantqualityreview
B-items are valuable, medium-priority stock and usually require monthly reordering
C-items arelow-priority stock and aretypicallycarried in high volumeswith minimalreordering
Organizingyourstockwithinyourwarehouseaccordingtohow theysellandhow muchvaluetheybringyourbusinesswillhelpyouoptimizestoragespaceand streamlineorderfulfillment.
2)OptimizeYourPickandPackProcess
The pickandpackprocess isasetofproceduresandtoolsthatyouremployees usetofulfillcustomerordersquicklyandefficiently.
Typesofpickandpackprocesses:
Discreteorderpicking
Batchpicking
Wavepicking
Zonepicking
Hereare5waystooptimizethepickandpackprocessforeffectiveinventory management:
1.Designyourwarehouseforefficiency byplacingyourtop-sellingitemsnearest thepackingstation
2.Keep your warehouse well-organized by cleaning every area and removing clutter
3.Implementandprogram a warehousemanagementsystem (WMS) sothatthe itemspickedarelistedintheorderthepickerwillfindthem.
4.Doublecheckeachorderforaccuratecounting
5.UsebarcodesorRFIDs oneverypieceofinventoryforeasycounting
3) Establ ish Your Inventory Key performance Indicators
InventoryKPIs measureyourperformancein aparticularareaoveraspecific amountoftimetowardacertaingoal.
Theyhelp to eliminateguesswork bygivingyou clearmilestonesto hitevery week,quarter,oryear.
Withthem,you’llhavethedatayouneedtomakesmart,strategicdecisionsfor yourbusiness.
Hereare6inventoryKPIsyoushouldfocuson:
1.Inventory carryingcosts
2.Inventory write-off and inventory write-down 3.Rateofinventoryturnover
4.CycleTime
5.OrderStatusandTracking 6.FillRate
4)UseBatchTracking
Batch tracking issometimesreferred to aslottracking,and it’sa processfor efficientlytracinggoodsalongthedistributionchainusingbatchnumbers.
A “batch”referstoaparticularsetofgoodsthatwereproduced togetherand whichusedthesamematerials.
Useanautomaticbatchtrackingsystem inordertoenterinformationaboutall theproductswithinyourbatch–keepingthatinformationatyourfingertipsif youneedtoaccessitquickly,asinthecaseofaproductrecall.
5)UseanAccurateReorderPointFormul a
A reorderpointformula tellsyou approximatelywhen you should ordermore stock –when you’vereached thelowestamountofinventoryyou can sustain beforeyouneedmore.
You can stop beinga victim to marketspikesand slumpsby usinga proven, mathematicalequationtohelpyouconsistentlyordertherightamountofstock eachmonth.
Thisequationiscalledareorderpointformula.
Here’sareorderpointformulayoucanusetoday:
(AverageDailyUnitSalesxAverageLeadTimeinDays)+SafetyStock=Reorder Point.
6)CarrySafetyStockInventory
Safetystockinventory isasmall,surplusamountofinventoryyoukeeponhand
toguardagainstvariabilityinmarketdemandandleadtimes.
Withoutsafetystockinventoryyoucouldexperience:
Lossofrevenue
Lostcustomers
Andalossinmarketshare
Whatmakessafetystockacriticalinventorymanagementbestpracticeisthat you’llreapallthesebenefitsbyusingit:
Protectionagainstunexpectedspikesindemand
Preventionofstockouts
Compensationforinaccuratemarketforecasts
Abufferforlonger-than-expectedleadtimes
7)OptimizeYourInventoryTurnoverRates
The rateofinventoryturnover isameasurementofthenumberoftimesyour inventoryissoldorusedinagiventimeperiod,usuallyperyear.
Bycalculatingyourrateofinventoryturnover,you’llhaveabettergrasponthe marketdemandforyourproducts,ontheamountofobsoletestockyoumaybe carrying,and whatstepsyou need to take to sellorstock more inventory – dependingonyourturnoverrate.
Here’sasimpleformulaforcalculatingyourinventoryturnoverrate:
CostofGoodsSold (COGS)dividedby AverageInventory.
Hereare4waystoincreaseyourrateofinventoryturnover:
1.Experimentwithpricing 2.Liquidateobsoletestock 3.ForecastCustomerDemand
4.Redistributeyourinventorytootherwarehouses
8)Streaml ineYourStocktake
Streamliningyour stocktakingprocess –thestepsyoutaketocountinventory–
willhelpyoumitigatethepossibilityofyourstaffmakingcostlymistakes.
Awell-structuredstocktakingprocesswillincludeallthestepsrequiredtokeep yourstaffworkingefficientlytouncoverdiscrepanciesandinaccuracieswhile keepingthem engagedandfocused.
Hereareacoupleofwaystostreamlineyourstocktake:
Scheduleyourstocktakestoreduceimpactonbusinessoperations
Cleanandorganizeyourstockroom beforeperformingyourstocktake
Know whatstockyou’recountingandhow you’recountingit
Openandcountabsolutelyeverything–noguessworkallowed
9)ReduceYourInventory
Mostbusinesseshave20-40% oftheir workingcapital tiedupininventory–soif you’reclosertothe40% end,it’sprobablytimetocreateaninventoryreduction strategy.
The goalisto find yourinventory sweetspot –where you have the lowest possibleinventory levelswithoutbeingunderstocked –in orderto maximize growthandprofitabilityforyourbusiness.
Hereare3 inventoryreduction methodsyoucanfollow:
1.Lowerleadtimes bytrackingyourexistingleadtimes,sharingsalesdatawith yoursuppliers,andreducingminimum orderquantities(MOQs)
2.Eliminateobsoleteinventory byreworkingormodifyingyourstock,offeringa discount,ordatingitforataxwrite-off
3.Improve inventory forecasting through real-time tracking and reporting, integratedcommunication,andlargevolumeinventorymanagementtools
10)UseaCl oud- BasedInventoryManagementSystem
Oneofthebestbusiness-changingdecisionsyoucanmakeistostopusing Excel inventorymanagement andstartusing cloud-basedinventorymanagement.
Unlike locally-installed applications, Cloud-based inventory management softwareallowsyoutopayforthefeaturesyouneednow andseamlesslyupgrade whenyouneedtointhefuture.
You’llpayasingle,predictablesubscription feefora“package”thatbestsuits yourparticularfeatureneedsandteam size;then,upgradingisjustafew clicks awaywhenyourbusinessgrowthjustifiesamorepowerfulplatform.
Ontopofstress-freeupgrades,cloudsoftwarecompaniesworkinthebackground tomakesurethingscontinuetorunsmoothly,andshouldyouneedanyquestions answeredorbreaksfixed,they’llhaveasupportteam standingbytoassistyou.
