Inventory Systems Summary Planning and Forecasting is a vital function of management especially as it is related to inventory management. Planning has four processes associated with it. They are establishing goals, formulating strategies, implementing the plan and evaluating its success. The planning process of inventory will assist the organization choose the correct inventory system resulting in reduced costs and increased efficiency. For any business, having large amounts of inventory could prove to be expensive.In most company’s the management team will forecast sales on a monthly basis in order to keep enough inventories to fill customer orders in a timely fashion but not have an overflow of stock. There are various types of inventory systems. For example, just in time (JIT) is a strategic inventory system implemented to improve the return on investment by reducing in-process inventory and the costs associated.
JIT is driven by a series of signals that tell the production processes to make the next part.When implemented correctly, JIT can lead to dramatic improvements in a manufacturing organization’s return on investment, quality, and efficiency. Furthermore, JIT is an attitude of continuous progress in which non-value-adding activities are identified and replaced.
Additionally, there are other inventory systems such as FIFO and LIFO. FIFO means, first-in-first out. The primary purpose of FIFO inventory management practice in retail stores is to rotate stock so that it remains fresh, new, and in good condition for the consumer.
This practice reduces returns and inventory write downs Conversely, LIFO means last in first out. In terms of how a company reports their financials, LIFO and FIFO have different advantages and disadvantages. For instance, with FIFO, as long as a company’s good generally appreciate in value (due to inflation,) income statements will show higher revenues, because the company is taking the least expensive quantities to cost of goods sold. In LIFO, on the other hand, with increasing costs, one is always allocating the largest costs to expense, so income statements will look lower for potential investors.However, LIFO still has a purpose (it was invented for tax, reasons). If a company allocates more expense, then it has less income to be taxed, so a company’s tax burden is lessened.
Furthermore, the company is allocating a more recent and therefore more “current” price of a good (Roviere, 2002-2010). Examples of Inventory Systems Inventory is basically the total amount of goods and materials held in stock by a factory, store and other business. An inventory system keeps track of the goods and material it has available for businesses.Inventory systems serve several different functions for businesses; one purpose is promoting the sales function by ensuring that a sufficient amount of product is available for customers.
Another purpose is shrinkage control, that is monitoring the frequency of loss, theft, or breakage of products received. An additional vital function of inventory control systems is asset valuation; that is establishing the value of the products on the shelf for tax purposes at the end of the tax year.All inventory systems, regardless of technology, require some element of visual inventory management. There are generally three types of inventory systems; manual entry, barcode, and radio frequency identification (RIFD). RFID is a technology that uses remote identification of given objects. RFID systems use tags and readers to obtain certain information about products. The tags are labels with numbers programmed into them, and the tags are then attached to objects to be identified, tracked, or inventoried.The tags are a combination of chips and miniature antennas in the forms of labels.
The readers are devices that read the information contained in the tags, remotely. This system operates without the need for a person to actually see the objects, or walk around with a handheld scanner (Djuric & Athalye, 2008). RFID systems come in many different forms and they all differ in terms of the frequency of operation (high frequency, ultra high frequency, or microwave), the method of communication between the reader and the tags, and the power supply for the tags.
Regardless of the frequency, method of communication, or the power supply, the goal of any RFID system is to enable specific data to be transmitted between a portable device and the tag, and then be processed and used accordingly. RFID systems are used for objects which get lost, stolen often, underutilized, or difficult to locate in a timely manner. RFID systems are currently being used in manufacturing plants to track parts, stay informed of work in progress, reduce product defects, increase throughput, and manage production of given products.Big name retailers such as Best Buy, Metro, Target, Albertson’s, Hewlett Packard, and Wal-Mart are leading the way in implementing RFID systems. These retailers recognize the need to improve inventory efficiency, ensure products are available to customers as needed, decrease theft, and cut down on costs associated with tracking and processing inventory. As RFID technology evolves and becomes less expensive, there will be an increase in the number of companies and vendors using the technology.Eventually, new applications will be developed and these systems may even be able to solve common or unique problems associated with business in today’s market. The inventory system FIFO system or first in, first out, is an abstraction in ways of organizing and manipulation of data relative to time and prioritization.
It describes the principle of a queue processing technique or servicing possible conflicting demands by ordering process of a first-come, first serve basis similar to how persons standing in line would be handled by helping the first person in line, and working to the next person onward.The FIFO method is a form of inventory that enables a company to determine the valuation of the amount of inventory that is left at the end of a financial year. For many organizations that produce goods, inventory management is an important part of the end of the year documents that they will release, and the FIFO method plays an important role in the balance sheet released by the company. Investors who are interested in buying a company a company or are interested in buying stocks and shares of the company also take a keen interest in the inventory management and costing of the organization.Along with the FIFO inventory system, the company also relied heavily upon barcodes and RFID tags to provide automatic identification of inventory objects. The inventory objects included physical assets including various kinds of legal documents, and used a barcode scanner or RFID reader to automatically identify the inventory object and collects additional information from fixed terminals in the shipping department before the documents were shipped out. Case of Wal-Mart Wal-Mart Stores Inc. has been using RFID tags to track pallets of products throughout their supply chain.
The RFID tags have unique identification codes encoded in them, just like a barcode, but they can be read at a distance even outside of the line of sight. The goal is to increase inventory awareness and accuracy in the stores as well as ensure that the shelves are optimally stocked, which could lead to more sales. Barcodes and RFID tags can be used together to tackle some of the challenges faced in retail, warehouse, and manufacturing environments (Research with Impact, 2010). Wal-mart experimented with RFID tags, which will help them to obtain real-time information about product availability.RFID can provide several other advantages that cannot be achieved easily using a barcode system: faster product, check out, theft reduction, dynamic pricing of products and tracking employees for labor efficiency, (Research with Impact, 2010).
There are two types of RFID tags: passive and active. The passive works with little or no energy. The active type can use either radio waves or satellite signals to track products. Case of Sprint/Nextel Just-in-time (JIT) inventory systems are common throughout the telecommunications industry.The basic premise of a JIT inventory system is keeping assets centrally located, keep inventory to a minimum to reduce costs, and dispersing assets based on real-time need. However, the successful implementation of a JIT inventory system requires careful planning and logistics to support it (Shepherd, 1993). Sprint/Nextel uses a JIT inventory system to manage the spare equipment needed to maintain its wireless and wire line networks. This is a barcode system that interfaces with computer software, which is managed on a centralized network server.
The equipment is used at network switching locations and cell sites around the nation. A small amount of basic inventory is kept within the outlying field locations. However, the majority of the spare equipment inventory is stored within several regional warehouses. If a spare part is required and is not located within the local field inventory, the technician must use the computerized inventory system, known as ATLAS, to locate a spare item in the regional inventory and request shipment. The usual turnaround time on a request is 24 to 48 hours, depending on availability.If an item does not exist in either the local field or regional inventory, then the field manager must request a part from the equipment vendor. However, this is a process which is only used on a limited basis.
The computerized inventory systems tracks spare parts on a local, regional, and national level. The ability to located parts in this way helps to quickly identify spare equipment opportunities, while keeping costs down by not having to continually purchase new spare items directly from equipment vendors. Case of TargetTarget Corporation also uses a JIT system for its inventory tracking and replenishment. It differs slightly from Sprint’s in that there isn’t an individual who orders additional units of inventory. Every item in the store is tracked by a barcode. When an item is sold, it is automatically subtracted from the inventory counts.
Once an item reaches a predetermined level, it is automatically reordered from the warehouse. The manager cannot request additional units of an item unless there is a legitimate business need.For example, if a customer requests to purchase a bulk order of a particular item, then the store manager can place a special order for additional quantities of that item. All of the inventory levels are determined by shelf space on the sales floor and capacity in the stock room. The shelf space is determined by sales trends from the previous year and forecasted sales for the next year. If an item sells above forecasted sales for the season, then the following season, that item will receive additional shelf space as well as additional pieces in the stockroom.If the item sells below forecast and the store is facing a potential loss, the additional units in the stock room can get sent back to the warehouse, where they can get redistributed to a store that has stronger sales of that item.
The inventory tracking system recognizes when a store has excess inventory and automatically calls back the additional units to the warehouse. The JIT system is a sophisticated tool that helps companies keep their inventory levels to a minimum without sacrificing customer service.The ability to always have the right amount of items on hand without tying up liquid assets in inventory keeps a company lean and allows them to use their monies on other operating expenses. Comparison and Contrast A Just-In-Time (JIT) system is a production and inventory control system in which materials are purchased and items are produced based off consumer needs (Accounting for Management, 2009). Although a JIT system is very beneficial for companies, here are advantages and disadvantages.
Advantages include: low costs that are present because there is not excess inventory sitting on the self or in the stock room.Ordering product in small batches or requesting replenishment from another store location serves to lower overall inventory costs. By decreasing costs, a company has the ability to use the funds in other parts of the business that may be in need of improvement or additional inventory. JIT is a great way to reduce inventories and result in minimal costs that aren’t needed because the company is purchasing only enough products that meet the daily needs of consumers.
This limits the waste of products and costs that could easily be avoided by over purchasing.In today’s economy, it is important for business’s to be careful about costs and finances and by using a JIT system, allows a company more power to take control of their costs, inventory and consumer needs. By only purchasing the products that directly correlate to consumer needs, minimize extra costs and possible over stocking of particular inventory that is not needed. Although there are many advantages of a JIT System, there are also disadvantages.
One disadvantage of JIT is by having to order products to fill a customer order means there is a delay in the sale of the goods.From the time from when an order is placed until it is filled is called lead time. If a product is transferred from one location to another, the lead time is minimal. However, if it is necessary to order the goods from the manufacturer to fill the self or fill a special order, the lead time may be much greater. Companies that adopt the JIT system are relying heavily on road service and delivery.
Delivery can be postponed or late and therefore can cause a disruption to the company and the need of consumers. When a company is required to wait for a specific produce that is in demand, they could possibly lose sales.There is always a chance with road service due to trucks being late, vehicle issues, etc and when a product is late, it could affect the relationships between the company and delivery system (Deierlein, 2000). Adopting a JIT system can prove very beneficial for a company. It can save costs, minimize waste products and increase the ability to receive products that have a direct correlation with consumer needs. In recent decades, more companies are adopting this system because by ordering and purchasing specific products that support consumer needs has saved companies large mounts of money. Although the JIT system has proved to be very beneficial, there are disadvantages. Late deliveries and high product demands are just a couple problems that could occur.
With every system, there are advantages and disadvantages and although JIT has some disadvantages, the advantages have proven more affective. Another inventory system called FIFO ( first in first out), also has its advantages and disadvantages. This method is quite simple in terms of how it basically works.
FIFO also keeps from having goods that are obsolete.While this method is easy to understand and to implement, it does have disadvantages. FIFO can give inaccurate profit estimation during times of increasing inflation (Poudel, 2010). Finally, a third inventory system known as RFID (Radio frequency identification). The inventory system known as RFID is coming into use more and more in order to automate the inventory process. An advantage of RFID is that because of the use of chips and antennae the product is more secure than one with a simple bar code. The chips and antennae are not easily duplicated as a paper label might be.
RFID tags can also contain much more information regarding this item versus what a bar code can contain or a bar code scanner can read (Pandey). Stores equipped with this technology could reduce labor because the system would constantly monitor the movement of inventory within the store. On the downside, the advent of the use of RFID technology has raised some social and privacy issues. There has been some public opposition to having stores monitor consumers with this kind of technology. There have also been issues with the signal frequencies and proper positioning of tags on products (Want, 2004).Final Analysis The basic capabilities of any chosen inventory system should be that it is a live system (a live entity that tracks all costs from the day inventory is purchased, received, used in manufacturing or sold by the company), has the proper tools for inventory costing, tracks holding costs of inventory, tracks the impact of inventory turnover rates, and tracks the cost of freight. Ultimately, a company is concerned with the inventory cost, mitigating the cost and improving bottom line and cash flow. In order to chieve the aforementioned, an organization has to choose the right inventory system which is not always an easy task.
However, the key to choosing and implementing the right system is to perform a situational analysis in order to understand where the organization needs. References Accounting for Management. (2009). Just In Time Manufacturing and Inventory Control Systems. Retrieved from http://www. accountingformanagement.
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