Inventory Management - One Size Does Not Fit All

If there is one great myth in inventory management it is that one single technique will solve all inventory problems. Not that people believe that one technique will solve all problems in all situations but that in any given company one approach is all that is required to manage all inventory.

For the inventory manager this is very attractive as it means that there is only one approach to manage. For the software vendor, consultant or advisor it means only one solution to sell.

There is a wide range of techniques and approaches that people use to manage inventory. These include JIT, MRP, DRP, SCM, Risk Management, safety stock and EOQ?s Sometimes they are used on a stand alone basis and sometimes in conjunction with each other. All are worthwhile techniques when used appropriately.

Problems arise however when the approach to identifying the appropriate solution starts by looking at the solution rather than the inventory. This approach starts from the assumption that because solution x works at company y it must be good. Or because the software suits our enterprise wide planning system it is appropriate. In fact it is often assumed that inventory software packages are much of a muchness. Have you ever heard someone say ?and it has an inventory module?!

The fact is that not all inventory is the same and consequently not all inventory requires the same approach to management. Without trying to be exhaustive it is easy to identify that some inventory is made to order, some is made to stock, some is perishable, some have characteristics that change with time, some are part of assemblies and sub-assemblies and some are stand alone items. These, and many other variables, lead to a huge number of different requirements for inventory management.

While the differences between inventories in different industries are well documented (for example, the requirements for managing inventory at a large retailer will be different to managing in-process inventory at a petro-chemical plant) what is not widely recognised is that the requirements for inventory management across a single business can vary significantly.

The single biggest error made in inventory management today is to select an inventory management technique and apply it universally across a business. The ?one size fits all? approach can lead to significant inefficiencies in the results of inventory management. This might not be an ?out of stock? as that situation is always dealt with urgently. More likely the result will be the holding of excess inventory and tying up valuable funds unnecessarily.

A better approach to inventory management is to start by looking at the inventory rather than the solution and identifying the characteristics of each type of inventory being held. When this is done, an approach that is appropriate to the demand, supply and cost characteristics of the inventory can be selected and the inventory holding optimized for its characteristics.

Consider a manufacturer that has a total inventory made up from raw materials, work in progress, finished goods, a distribution network and engineering spares. Applying a universal mindset or solution across all of these inventory types is unlikely to deliver an optimal result. For example, dealings involving suppliers (as for raw materials and engineering spares) provide a different range of opportunities compared to internal supply situations (WIP) and even finished goods. The ability to forecast, the ability to control the supply chain, the ability to source on consignment, the requirements for buffer stock, the impact of a stock out all vary. Unless you allow the flexibility to pursue opportunities related to different inventory types your business is likely to be over investing in inventory.

Inventory management is about more than just logistics and getting the right thing in the right place at the right time. It is also about the efficient and effective use of capital. Taking a singular approach to managing all types of inventory without fully considering the different characteristics and opportunities of that inventory leads to overstocking and obsolescence and the waste of capital resources that might be better directed elsewhere.

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICR?06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com

Better Practice Inventory Management

People are always searching for ?best practice?, somehow believing that there is a silver bullet solution that will cure their inventory problems. The problem, of course, is that what is best practice in one country/industry/business might not be best practice in another. In any case, the exalted ?best? practice might just be too much of a jump for many people to take or indeed may not be economically viable.

Interestingly, though, in my work, the question that I am most often asked is, ?what do I do with all of this excess inventory?? My answer, of course, depends upon the nature of that inventory, what it is, how old it is etc. But obviously the best thing to do is create less of the inventory in the first place!

Some might think that this requires best practice and is therefore difficult to achieve but I would argue that this really is more achievable than people think. Putting in place the right processes, polices, measures and reporting in order to limit inventory purchases to those items that are most likely to be used/sold and in the right quantity, is as important or perhaps a more important task than clearing out the old stock. This can be achieved by understanding what works well for others rather than what is best practice. I think of this as better practice.

With that in mind I recently had the opportunity to interview more than 30 people, across a dozen companies, in all Australian states and New Zealand, who were all associated with inventory creation in one way or another. There were General Managers who make the occasional big decisions that create inventory. There were inventory managers who take the day-to-day actions. There were purchasing people who order the stuff and sales people who provide forecasts. Each of these people has a role to play in the creation of inventory but interestingly only the inventory managers acknowledged that role explicitly. The result of those interviews does not constitute best practice but I think that they give some insight into better practices.

These interviews were conducted on behalf of a client so I am unable to give you all of the detail or the quantitative results. But I do have permission to tell you what we deduced in a qualitative fashion.

During the interviews we identified the following similar practices that were consistent between the companies that performed well.

1. Inventory decisions (range and quantity) were made at a local level. The locals were considered best placed to understand local conditions and requirements and therefore better able to get the inventory mix right. They had a better handle on forecasting because they were closer to the customer or demand. Centralized systems often missed the subtle changes or inside knowledge that helped stop the ordering of items (for example) when usage had changed but had not yet been flagged in the system.

2. Requisition systems were used to order items through centralized purchasing. This approach creates efficiencies in procurement and provides greater control over terms of business and logistics. The purchasing people were concerned with all the purchasing issues not just the availability.

3. Inventory items and codes were created centrally. This was used as a means of controlling the SKU count. Companies that did not do this experienced the ?death by a thousand cuts? associated with managing a long tail of low value SKUs

4. The better companies had moved to central ordering after trying local ordering. They found that this change had a positive impact on their inventory investment. The point is that they tried it one way and made a change and that this experience was consistent.

5. Inventory management systems and practices were standardized. Each location or department followed exactly the same process. They used the same rules for determining what they should and shouldn?t buy and had the same authorities, responsibilities and accountabilities at similar levels. Kind of like McDonald?s only not involving hamburgers! This didn?t remove individual decision making or initiative it just meant that the rules were consistent.

6. Most of the better companies had an inventory process ?champion? to work on continuos improvement and maintaining standardization. This person did not manage the inventory or ?own? it any way. This person ?owned? the process. I liken this to having a Quality Manager; they don?t own the production just the process used to control quality. This was not necessarily a full time role

7. Inventory was reported at a local level using local balance sheets. Local reporting and highlighting of inventory was seen as an important way to create visibility and therefore ownership.

8. The better companies were quite aggressive in inventory management, setting and achieving aggressive targets rather than ?achievable? targets. The better companies did not just want to manage availability they saw managing the cash investment as equally important and therefore set targets aimed at minimizing the cash investment without jeopardizing availability.

9. Internal interest charges were included in departmental P&L reports as a means of providing immediate feedback on the impact of additional inventory (these items were reversed before any corporate reporting). This helped make the cash investment important at the senior levels that had to report on their P&L Statement on a monthly basis. Companies that didn?t do this found that reporting a good profit was used to justify an over investment in inventory (that is an investment that did not really contribute to the profit). This approach forced them to mange both cash and profits.

10. Slow stock was identified at a higher stock turn level in the aggressive companies than it was in the others. This was seen as a way of highlighting the approaching ?cliff? of obsolescence and was used as a way to force action before accounting rules required items to commenced being written down.

11. Virtual warehousing was used to separate stock purchased for different purposes. This is where a different warehouse code might be used although the material was in the same warehouse as other stock. This was particularly useful when stock was bought in especially for one off projects or events such as capital works or shutdowns. This approach enabled a heightened level of visibility of who had bought what and prevented mistakes being hidden in the general inventory.

Obviously the sample for this survey was small so the results are open to interpretation. However, the actions listed are not so radical that they cannot be implemented by almost everyone that is seeking ways to improve their inventory management. The 11 actions listed above were consistent across a number of the companies that were ?doing well? and were noticeably absent in the others.

So, assuming that you want to improve your inventory results the only thing stopping you from adopting some or all of these actions is the fear of either change or loss of control. Of course you could just keep looking for ?best practice? but now that can only be seen as an excuse to do nothing!

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICR?06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com

Why Your Current Approach To Inventory Management Is Not Good Practice And Is Costing You Money

Businesses around the world spend millions of dollars on software and inventory management systems in an effort to maximise their return on investment (ROI) from inventory. Until now even the most sophisticated of these systems left businesses way short of best practice. In fact most of these systems institutionalise excess inventory.

The problem is that most software relies on optimisation and this limits the opportunity to reduce inventory because it ignores external influences. Software can only optimise the values it has, not what could be.

World's best practice inventory management demands that the ?management system? is optimised not just the inventory. Most inventory software takes today?s data and runs an algorithm to optimise holdings. What they miss are the changes in the management system that could further reduce the total level of investment. This flaw makes software systems self-limiting in their results.

Inventory management is much more than just the software system. Inventory management is the combination of know-how, process, measures and reporting that together provide the opportunity for maximizing availability while minimizing cash investment.

The five reasons why your inventory management is not best practice and is costing you money are:

1. The Responsibilities Are Misaligned

The people that make the day-to-day decisions will typically not be responsible for the working capital outcomes; they will be responsible for availability. The problem is that if you run out of stock all hell breaks loose but if you overstock there is no repercussion. This is especially the case with indirect inventory that is not subject to the usual planning scrutiny. Given this, what do you think most people do? That?s right, they over stock!

2. The Optimization Is Incomplete

Sophisticated software can track all sorts of data and in many cases the software can make optimization decisions based on that data. This can reduce your inventory but it is self-limiting. The problem is that software optimizes only on known data and ignores process and behavioural changes that can impact that data. This is software optimization not system optimization. The software should only be a tool within a bigger process of optimization.

3. It Is Managed Reactively

Inventory is often seen as ?set and forget?, that is, once the item is optimized for the current situation the requirements are not systematically revisited. It is often only when there is a ?cash crunch? or some other emergency that action is taken. Yet, even indirect inventory can represent millions of dollars of investment and deserves frequent attention. When action is taken it usually addresses the highly visible items rather than the real ?cash burners?.

4. There Is A Significant Time Lapse Before Problems Emerge

The number one question asked about inventory is ?what do I do with slow moving or obsolete stock?? Depending upon the accounting policies in your company this stock has taken 3?5 years to reach the point where that question is asked. By this time it often seems irrelevant to revisit the original decision or processes that produced this result. No one would accept this approach to quality management! No one ever asks ?how do I prevent the accumulation of slow moving or obsolete stock??

5. It Is Painful To Fix And Easy To Ignore

In most cases the removal of obsolete inventory will result in a ?hit? to the profit and loss account. However, if a reason can be found to justify it for another year then few will argue. Eventually someone is going to have to make a decision and it will be painful. For this reason, obsolete inventory decisions are often driven by the opportunism of results reporting rather than good management principles.

To truly achieve best practice your organisation must review these issues and develop systems that will minimize their impact or eliminate them altogether.

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICRTM06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com

World's Best Practice Inventory Management

In almost every endeavour it is difficult to determine what constitutes ?best practice?. Businesses around the world spend millions of dollars on software and advisory services and often don?t know whether they are ?best practice? or just somewhere in the pack.

Many companies will say, ?why does it matter just as long as you keep getting better?? The stark reality is that inventory requires the investment of cash. The items need to be purchased and stored and this ties up cash. This working capital can be a significant burden for many companies and if freed up can provide significant cash resources that can be used for other more productive purposes.

For many companies the key issue is availability and so long as they have an item when it is required they care little about the cash investment. However, this approach will not maximise your ROI and, in almost all cases, cannot be financially justified on any level. This is because the excess inventory investment that this approach generates provides little or no value to your business. The excess is invested in inventory that does not move or becomes obsolete.

World?s best practice inventory management demands that the ?management system? is optimised not just the inventory. It is in this field that best practice can be both easily identified and readily achieved.

Each level on the ladder to world?s best practice provides a greater degree of control and management but is only at Level 5 ? System Optimization that the management system is optimised. By reaching this level companies can reduce their inventory investment, freeing up cash, AND achieve their desired availability levels.

The five levels to world?s best practice inventory management are:

Level 1 ? Ad Hoc: Purchases are made on an ?as needed? basis. At this level there is little control necessary as inventory is expensed when purchased and used immediately. While this may seem to reduce the cash investment it may not reduce the total cash expenditure. This approach can only be viable if the items are available ?instantly? and the cost of a ?stock out? is negligible.

Level 2 ? Storage: Inventory is expensed when purchased and stored for use but not strictly controlled. Similar to above except that items are stored because of the cost of a stock out. This approach appears to solve one problem but it raises two others. Firstly, total expenditure is likely to increase as items are purchased in ?economic quantities?. (See my free e-book ?5 Myths of Inventory Reduction?) Secondly, without controls there is little opportunity for review and development.

Level 3 ? Capitalisation: Inventory is capitalised and subject to some level of control, either manual or software based. This approach is by far the most popular as it appears to provide the required mix of availability and control. Unfortunately, most organizations use their software solely for counting and accounting. There is a strong reliance on human calculation of inventory requirements but often little review of outcomes. The result is likely to be good availability but a significant over investment in inventory and high levels of obsolescence.

Level 4 ? Software Optimisation: Inventory is capitalised and stock levels are optimised based on a risk/return algorithm. This is the basis of most software solutions. Most software packages will incorporate the ability to automatically adjust the required stock levels based on the history of demand and supply. Very few companies actually use this feature because they know that they cannot trust the results. This is not due to a software flaw but because the supply and demand may not represent typical usage. (This is explained further in the book Smart Inventory Solutions.)

Level 5 - System Optimisation: Inventory management minimises the overall cash investment without an increase in risk. This is world?s best practice. At this level, all of the factors that influence the actual inventory investment are reviewed on a regular basis. This review is manageable because it is limited to the ?vital few? items that have a real impact on the level of investment. Inventory levels are adjusted to take account of changing needs and this minimizes the likelihood of obsolete inventory.

Any company that already has the software required for Level 3 can achieve Level 5 ? world?s best practice. What is needed is the know how, policy development, measures and reporting required to take a company to Level 5, not more software. Once these key issues are addressed you are implementing a true management system. Software only goes to level 4, it is the management system that provides the bridge to Level 5.

For more information visit http://www.InitiateAction.com

Phillip Slater is the author of the book Smart Inventory Solutions and the developer of the Inventory Cash ReleaseTM System - ICRTM06, a world?s best practice approach to inventory management and reduction.

For more information visit his website at http://www.InitiateAction.com.

Inventory Management - Good Practices And Benefits

In every kind of business, inventory management or management of the inventory consists of a series of processes on the multiple functions with reference to the tracking, handling and managing of goods and materials that are held in stock.

Efficiency in effective inventory management will always give a competitive edge to the business, regardless of its nature. With effective control and management over inventory stock, as well as accurate visibility and fast efficient fulfillments, comparative pricing can be given on a customer-to-customer basis.

In addition to cutting down on operating costs, it will also bring satisfied customers back for more businesses in the near future. However, modern day management of the inventory is usually not as simple as the contemporary practices of just keeping abreast with inventory standards and expenditures.

Most businesses, especially those in the process and manufacturing industries, will require varied sets of both simplified as well as complex integrated inventory management controls. Such regulations are streamlined for effectiveness in compliance and distribution as well as making provision for further improvement on software and other protocols.

Primarily, the first and most important step to commence in inventory management is to acquire accurate data in terms of facts and figures. Next, a set of rules and regulations is set up to protect and guard the information efficiently. Such information may become a crux factor in the improvement of inbound operations, strategies and productivity.

In addition to the physical monitoring of materials being moved into and out of the stockrooms and drawing up reconciliations of the inventory balances, other tasks involved in inventory management may include tracking and reporting of replenishment techniques, analysis on the actual and projected inventory status as well as setting periodic targets and re-engineering the execution framework.

Although having proper management of the inventory may create a great difference in attaining and retaining a competitive edge in the sales markets for certain products of any businesses, it remains an integral and essential effort of a company to reduce its inventory management costs.

As a result, several computer software companies have since developed a standardized set of comprehensive inventory management systems to help businesses control and manage their inventory stock.

Aside from certain specialty features, the requisite module should be able to integrate into the pre-existing software system of the business. In addition to providing a quick and easy access to detailed inventory and ordering information, the new inventory management software should also give accurate and timely data.

Although the inventory management system is a beneficial tool, there are some basic and extremely significant points to ensure an effective and proper flow.

These will include good practices like making accurate entries on every stock receipts into the computer, setting up a replenishment strategy on all items in the stock houses and drawing up specific guidelines on the control of excess inventory as well as on-going dead stock. Such effective inventory management habits will give any kind of businesses a superior competitive advantage over their competitors, especially with an easy-to-use stock analysis tool that delivers quick and accurate information.

Ske Chay of www.trade-opportunities.com Providing some comprehensive information on inventory management at www.inventoryanalytics.com

Inventory Management

Inventory Management when implemented correctly, saves your company time and money! Keep track of your company's products and materials and know not only exactly what you have, but exactly where it is, how old it is, how much you paid for it, where it came from, where it is going and more.

Inventory Management is an ongoing process of keeping track of everything needed to run your operation and keep it running. Proper Inventory Management will keep your business flowing from the time an order is placed right down to the point your product gets into your customer's hands. Track your materials, your products during manufacturing, your ready to ship products, and your products in transit and on store shelves.

With today's technology this can be accomplished right from your desk! No need to go out and count everything anymore! Today we have bar code scanners to read labels on boxes of supplies and finished products. We have RFID Tags to track our products, shipments, supplies, orders in transit and more. This new technology allows us to even know where the final product ends up right down to the street and house number where the final user resides!

RFID is playing a bigger and bigger part in today's Inventory Management. From drug stores, retail outlets, libraries, and even credit cards to name a few, this RFID technology will soon be used to track people with their diver's licenses! RFID Tags are found in almost every product already and more products every day are using RFID Tags and RFID Readers. These RFID Readers are hooked up to Inventory Management Software that allows the user to track it during every step of the manufacturing process and depending on the method of delivery, tracks it to the end user.

Today's Supply Chain Inventory Management Software is just incredible with everything it can do! What i huge time saver and asset for businesses. Microsoft is even getting in on it with their Great Plains Inventory Management Division. They strive to give companies the best possible Inventory Control along with real time Inventory Information. This helps to reduce the cost of doing business and saves companies time and money. The Inventory Management Software in use today does several important things. It prepares invoices, keeps an up to date database of your clients, automatically reorders stock (if desired), maintains the balances of your inventory and many more crucial time saving functions.Inventory Management Today, Engineering Today, as well as Warehouse Spot where he provides detailed and informative articles, tips, and advice on Inventory Management along with other great Manufacturing and Storage Information.

Inventory Management Software

Effective management of finished product inventory is quite essential for running a business efficiently and profitably. Inventory strategies and decisions become particularly important in businesses where inventory costs form a sizeable part of total marketing costs.

Carrying inventories becomes inescapable in most businesses, because the producing activities and consuming activities take place at different times, in different locations and at different rates. Inventories are made up of several elements: operational stocks kept for meeting the ready demand at different consumption centers. Some stock will be in transit at any given point of time, while other stock will be awaiting shipments. Finally, there are kept for meeting emergencies. All these make up the total inventory.

While discussing inventory management software, it is important to keep an eye on the elements of inventory costs. A variety of costs are incurred in carrying the inventories. They include interest on capital tied up in the inventory, warehouse rent, staff salaries, insurance, rates and taxes, stationery, postage and communication charges, administrative overheads, costs of handling, unloading and stacking, loss due to damage and deterioration while on storage and cost of order processing.

In businesses where the turnaround of inventories is rather slow, interest on the capital tied up in the inventory becomes the most significant element of the total inventory carrying costs. In fact, inventory cost causes the most worry to manufacturers today. Increased competition has resulted in the accumulation of stock in a number of industries. Inventory carrying costs are on the increase not merely because of increased level of inventories. Every increase in the price of the products pushes up the inventory carrying costs as the value of the locked up product goes up in the process. Similarly, every increase in the interest rates also pushes up the inventory carrying costs.



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