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Written by Cecilia Chee, Singapore   
Tuesday, 04 October 2011 17:20

 

 

Business inventory


The reasons for keeping stock

There are three basic reasons for keeping an inventory:

  1. Time - The time lags present in the supply chain, from supplier to user at every stage, requires that you maintain certain amounts of inventory to use in this "lead time." However, in practice, inventory is to be maintained for consumption during 'variations in lead time'. Lead time itself can be addressed by ordering that many days in advance.
  2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in demand, supply and movements of goods.
  3. Economies of scale - Ideal condition of "one unit at a time at a place where a user needs it, when he needs it" principle tends to incur lots of costs in terms of logistics. So bulk buying, movement and storing brings in economies of scale, thus inventory.

All these stock reasons can apply to any owner or product


Special terms used in dealing with inventory

  • Stock Keeping Unit (SKU) is a unique combination of all the components that are assembled into the purchasable item. Therefore, any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory.
  • Stockout means running out of the inventory of an SKU.
  • "New old stock" (sometimes abbreviated NOS) is a term used in business to refer to merchandise being offered for sale that was manufactured long ago but that has never been used. Such merchandise may not be produced anymore, and the new old stock may represent the only market source of a particular item at the present time.


Typology

  1. Buffer/safety stock
  2. Cycle stock (Used in batch processes, it is the available inventory, excluding buffer stock)
  3. De-coupling (Buffer stock held between the machines in a single process which serves as a buffer for the next one allowing smooth flow of work instead of waiting the previous or next machine in the same process)
  4. Anticipation stock (Building up extra stock for periods of increased demand - e.g. ice cream for summer)
  5. Pipeline stock (Goods still in transit or in the process of distribution - have left the factory but not arrived at the customer yet)


Inventory examples

While accountants often discuss inventory in terms of goods for sale, organizations - manufacturersservice-providers and not-for-profits - also have inventories (fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers', distributors', and wholesalers' inventory tends to cluster in warehousesRetailers' inventory may exist in a warehouse or in a shop or store accessible to customers. Inventories not intended for sale to customers or to clients may be held in any premises an organization uses. Stock ties up cash and, if uncontrolled, it will be impossible to know the actual level of stocks and therefore impossible to control them.

While the reasons for holding stock were covered earlier, most manufacturing organizations usually divide their "goods for sale" inventory into:

  • Raw materials - materials and components scheduled for use in making a product.
  • Work in process, WIP - materials and components that have begun their transformation to finished goods.
  • Finished goods - goods ready for sale to customers.
  • Goods for resale - returned goods that are salable.

For example:


Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form the foods to be canned, empty cans and their lids (or coils of steel or aluminum for constructing those components), labels, and anything else (solder, glue, ...) that will form part of a finished can. The firm's work in process includes those materials from the time of release to the work floor until they become complete and ready for sale to wholesale or retail customers. This may be vats of prepared food, filled cans not yet labeled or sub-assemblies of food components. It may also include finished cans that are not yet packaged into cartons or pallets. Its finished good inventory consists of all the filled and labeled cans of food in its warehouse that it has manufactured and wishes to sell to food distributors (wholesalers), to grocery stores (retailers), and even perhaps to consumers through arrangements like factory stores and outlet centers.

Examples of case studies are very revealing, and consistently show that the improvement of inventory management has two parts: the capability of the organisation to manage inventory, and the way in which it chooses to do so. For example, a company may wish to install a complex inventory system, but unless there is a good understanding of the role of inventory and its parameters, and an effective business process to support that, the system cannot bring the necessary benefits to the organisation in isolation.

Typical Inventory Management techniques include Pareto Curve ABC Classification and Economic Order Quantity Management. A more sophisticated method takes these two techniques further, combining certain aspects of each to create The K Curve Methodology. A case study of k-curve benefits to one company shows a successful implementation.

Unnecessary inventory adds enormously to the working capital tied up in the business, as well as the complexity of the supply chain. Reduction and elimination of these inventory 'wait' states is a key concept in Lean. Too big an inventory reduction too quickly can cause a business to be anorexic. There are well-proven processes and techniques to assist in inventory planning and strategy, both at the business overview and part number level. Many of the big MRP/and ERP systems do not offer the necessary inventory planning tools within their integrated planning applications.

Last Updated on Wednesday, 05 October 2011 13:33
 
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