Inventory Final 97-03

INVENTORY MANAGEMENT

IINTRODUCTIONNTRODUCTION O OFF I INVENTORYNVENTORY M MANAGEMENTANAGEMENT

As the cost of logistics increases retailers and manufacturers are looking to inventory

management as a way to control costs. Inventory is a term used to describe unsold goods held for

sale or raw materials awaiting manufacture. These items may be on the shelves of a store, in the

backroom or in a warehouse mile away from the point of sale. In the case of manufacturing, they

are typically kept at the factory. Any goods needed to keep things running beyond the next few

hours are considered inventory.

Inventory management simply means the methods you use to organize, store and replace

inventory, to keep an adequate supply of goods while minimizing costs. Each location where

goods are kept will require different methods of inventory management. Keeping an inventory,

or stock of goods, is a necessity in retail. Customers often prefer to physically touch what they

are considering purchasing, so you must have items on hand. In addition, most customers prefer

to have it now, rather than wait for something to be ordered from a distributor. Every minute that

is spent down because the supply of raw materials was interrupted costs the company unplanned

expenses.

DEFINITIONS OF INVENTORY MANAGEMENT

1. Involves a retailer seeking to acquire and maintain a proper merchandise assortment

while ordering, shipping, handling, and related costs are kept in check.

2. Systems and processes that identify inventory requirements, set targets, provide

replenishment techniques and report actual and projected inventory status.

3. Handles all functions related to the tracking and management of material. This would

include the monitoring of material moved into and out of stockroom locations and the

reconciling of the inventory balances. Also may include ABC analysis, lot tracking, cycle

counting support etc.

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IIMPORTANCEMPORTANCE OFOF INVENTORYINVENTORY

Inventory represents one of the most important assets that most businesses possess, because the

turnover of inventory represents one of the primary sources of revenue generation and

subsequent earnings for the company's shareholders/owners.

The word 'inventory' can refer to both the total amount of goods and the act of counting them.

Many companies take an inventory of their supplies on a regular basis in order to avoid running

out of popular items. Others take an inventory to insure the number of items ordered matches the

actual number of items counted physically. Shortages or overages after an inventory can indicate

a problem with theft or inaccurate accounting practices.

Possessing a high amount of inventory for long periods of time is not usually good for

a business because of inventory storage, obsolescence and spoilage costs. However,

possessing too little inventory isn't good either, because the business runs the risk of losing out

on potential sales and potential market share as well.

Restaurants and other retail businesses which take frequent inventories may use a 'par' system

based on the results. The inventory itself may reveal 10 apples, 12 oranges and 8 bananas on the

produce shelf, for example. The preferred number of each item is listed on a 'par sheet', a master

list of all the items in the restaurant. If the par sheet calls for 20 apples, 15 oranges and 10

bananas, then the manager knows to place an order for 10 apples, 3 oranges and 2 bananas to

reach the par number. This same principle holds true for any other retail business with a number

of different product lines.

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IIMPORTANCEMPORTANCE OFOF INVENTORYINVENTORY MANAGEMENTMANAGEMENT

1. COUNTING CURRENT STOCK

All businesses must know what they have on hand and evaluate stock levels with respect to

current and forecasted demands. You must know what you have in stock to ensure you can meet

the demands of customers and production and to be sure you are ordering enough stock in the

future. Counting is also important because it is the only way you will know if there is a problem

with theft occurring at some point in the supply chain. When you become aware of such

problems you can take steps to eliminate them.

2. CONTROLLING SUPPLY AND DEMAND

Whenever possible, obtain a commitment from a customer for a purchase. In this way, you

ensure that the items you order will not take space in your inventory for long. When this is not

possible, you may be able to share responsibility for the cost of carrying goods with the

salesperson, to ensure that an order placed actually results in a sale. You can also keep a list of

goods that can easily be sold to another party, should a customer cancel. Such goods can be

ordered without prior approval.

Approval procedures should be arranged around several factors. You should set minimum and

maximum quantities which your buyers can order without prior approval. This ensures that you

are maximizing any volume discounts available through your vendors and preventing over-

ordering of stock. It is also important to require pre-approval on goods with a high carrying cost.

3. KEEPING ACCURATE RECORDS

Any time items arrive at or leave a warehouse, accurate paperwork should be kept, itemizing the

goods. When inventory arrives, this is when you will find breakage or loss on the goods you

ordered. Inventory leaving your warehouse must be counted to prevent loss between the

warehouse and the point of sale. Even samples should be recorded, making the salesperson

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responsible for the goods until they are returned to the storage facility. Records should be

processed quickly, at least in the same day that the withdrawal of stock occurred.

4. MANAGING EMPLOYEES

Buyers are the employees who make stock purchases for your company. Reward systems should

be set in place that encourage high levels of customer service and return on investment for the

product lines the buyer manages.

Warehouse employees should be educated on the costs of improper inventory management. Be

sure they understand that the lower your profit margin, the more sales must be generated to make

up for the lost goods. Incentive programs can help employees keep this in perspective. When

they see a difference in their paychecks from poor inventory management, they are more likely

to take precautions to prevent shrinkage.

Each stock item in your warehouse or back room should have its own procedures for

replenishing the supply. Find the best suppliers and storage location for each and record this

information in official procedures that can easily be accessed by your employees.

Inventory management should be a part of your overall strategic business plan. As the business

climate evolves towards a green economy, businesses are looking for ways to leverage this trend

as part of the “big picture”. This can mean reevaluating your supply chain and choosing products

that are environmentally sound. It can also mean putting in place recycling procedures for

packaging or other materials. In this way, inventory management is more than a means to control

costs; it becomes a way to promote your business.

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WWHATHAT ISIS I INVENTORYNVENTORY C CONTROLONTROL??

Inventory consists of the goods and materials that a retail business holds for sale or a

manufacturer keeps in raw materials for production. Inventory control is a means for maintaining

the right level of supply and reducing loss to goods or materials before they become a finished

product or are sold to the consumer.

Inventory control is one of the greatest factors in a company’s success or failure. This part of the

supply chain has a great impact on the company’s ability to manufacture goods for sale or to

deliver customer satisfaction on orders of finished products. Proper inventory control will

balance the customer’s need to secure products quickly with the business need to control

warehousing costs. To manage inventory effectively, a business must have a firm understanding

of demand, and cost of inventory

UNCERTAINTY IN DEMAND

Methods to control inventory can depend on the kinds of demand a business experiences.

Derived demand, or the demand of raw materials for production and manufacture, can be met

through calculations in manufacturing output, balanced with demand forecasts for a given

product.

Independent demand comes from consumer demand, making it more susceptible to market

fluctuations and seasonal changes. By coordinating the supply chain businesses can reduce

uncertainty in this area.

Inventory costs are controlled through different models that will apply to varying products. Items

that are in continuous supply benefit from the Economic Order Quantity model (EOQ). Products

available for a limited period are best suited to News Vendor models.

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INVENTORY COSTS

There are three main types of cost in inventory. There are the costs to carry standard inventories

and safety stock. Ordering and setup costs come into play as well. Finally, there are shortfall

costs. A good inventory control system will balance carrying costs against shortfall costs.

SAFETY STOCK

Safety stock is comprised of the goods needed to be kept on hand to satisfy consumer demand.

Because demand is constantly in flux, optimizing the Safety Stock levels is a challenge.

However, demand fluctuations do not wholly dictate a company’s ability to keep the right supply

on hand most of the time. Companies can use statistical calculations to determine probabilities in

demand.

ORDERING COSTS

Ordering costs have to do with placing orders, receiving and stowage. Transportation and invoice

processing are also included. Information technology has proven itself useful in reducing these

costs in many industries. If the business is in manufacturing, then to production setup costs are

considered instead.

THE COST OF SHORTFALLS

Stockout or shortfall costs represent lost sales due to lack of supply for consumers. Sales

departments prefer these numbers be kept low so that an ample stock will always be kept.

Logistics managers prefer to err on the side of caution to reduce warehousing costs.

Shortfall costs are avoided by keeping an ample safety stock on hand. This practice also

increases customer satisfaction. However, this must be balanced with the cost to carry goods.

The best way to manage stockout is to determine the acceptable level of customer service for the

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business. One can then balance the need for high satisfaction with the need to reduce inventory

costs. Customer satisfaction must always be considered ahead of storage costs.

CYCLICAL COUNTING

Many companies prefer to count inventory on a cyclical basis to avoid the need for shutting

down operations while stock is counted. This means that a particular section of the warehouse or

plant is counted physically at particular times, rather than counting all inventory at once. While

this method may be less accurate than counting the whole, it is much more cost effective.

Cyclical counting is preferred because it allows for operations to continue while inventory is

taken. If not for this practice, a business would have to shut down while counts were taken, often

requiring the hire of a third party or use of overtime employees. Cyclical counting usually

utilizes the ABC rule, but there are other variations of this method that can be used. The ABC

rule specifies that tracking 20 percent of inventory will control 80 percent of the cost to store the

goods. Therefore, businesses concentrate more on the top 20 percent and counter other goods

less frequently. Items are categorized based on three levels:

A Category: Top valued 20 percent of goods, whether by economic or demand value

B Category: Midrange value items

C Category: Cheaper items, rarely in demand

Warehouse staff can now schedule counting of inventories based on these categories. The “A”

category is counted on a regular basis while “B” and “C” categories are counted only once a

month or once a quarter.

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FLOW MANAGEMENT

Manufacturers are less likely to use cyclical counting and often rely on flow management, by

analyzing cycle times in the manufacturing process. This involves calculating lead times for raw

materials and the manufacture time in which the materials are used to create the product. By

analyzing the time cycle, manufacturers learn when the optimal ordering times are for raw

materials.

SPECIAL CONCERNS FOR RETAIL

Retail businesses have a greater risk of loss to goods than other businesses. They suffer from

shrinkage due to employee and third party theft on a regular basis. Because of this, hiring

practices play an important role in inventory control for these businesses. By screening potential

employees for criminal records and drug use, retailers are able to reduce shrinkage.

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SSTOCKTOCK K KEEPINGEEPING U UNITNIT (SKU) (SKU)

Warehouses are full of boxes and boxes of stock. These boxes are full of items that must be

tracked using some system or method in order to keep up with them. One of the best ways to

keep up with stock is to assign it a Stock Keeping Unit (SKU). An SKU is a number or code that

is used to identify individual products and services which can be purchased.

An SKU is a stock number used by businesses and merchants that allows them to track inventory

and services from point of distribution to point of sale. SKU is a type of data management

system. Each individual item or package is given a code either by the distributor or the business

owner. There is an SKU code applied to every product, item, or other forms of goods that can be

purchased by a customer.

SKU are not necessarily assigned to just physical products. They also are used to identify

services and fees. As some companies provide services, they use SKU’s for billing. As an

example, if a computer store repairs a customer’s computer; they use an SKU to determine what

services were completed in order to fill out a bill for services rendered. All SKU tracking varies

from business to business and according to regions and corporate data systems. SKU also varies

from other product tracking systems due to manufacturer regulations or even government

regulations.

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HOW DOES SKU FUNCTION?

SKU’s are typically printed as a barcode on a label somewhere on the product. This makes it

easy and quick to find the products information by scanning it with a barcode reader.

Every item and variant item has its own SKU. This means that slightly different models have

different tracking codes which make it easier to keep up with the items. The first part of a SKU

may contain the code for that type of product while the second part of the code may represent the

color or style. Not only is the SKU given to an item, the same number is also used on the

packaging. So if a box contains 12 widgets that all have the same SKU, then the box will also

have the same SKU code.

Retail stores generally track the individual items through their store while warehouses track the

boxes. While pretty self-explanatory in a store, this can get tricky when ordering items online or

through catalogs. Since the SKU represents the number of units in the item, you should read

carefully to make sure you are ordering the desired quantity. In some cases, a quantity of 1 may

mean one box full of a dozen separate products. The problem arises when you only need one

product, not a dozen.

SKU can also be used to determine how many sales occur at each separate location or where the

inventory is stored. SKU can be used to track products through the supply chain as well as to use

for inspecting sales data. SKU can tell if certain products sell better than other products. Another

benefit of using SKU is with seasonal products that need to be updated every year. Some SKU’s

contain the year somewhere in the code. If product from the following year is going to be used in

a new year, then the year in the code can be changed. This is useful for products that do not

change from year to year.

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Luckily for distributors, there have been advances in computer software and systems that make

the task of giving a product an SKU much easier. This new technology has made the task easier

and more convenient, not to mention more accurate because it is free from human error.

IINVENTORYNVENTORY M MANAGEMENTANAGEMENT S SYSTEMSYSTEMS

Look at any large successful retailer today and you will be astounded at the sheer numbers

involved. Wal-Mart alone carries items manufactured in over 70 countries. The logistics of

managing such an inventory is astounding. Other discount retailers like Wal-Mart are able to

maintain low prices by using inventory management systems and sharing the information with

store managers.

The goal of inventory management systems is to ensure there is always enough supply to meet

demand while keeping as little stock as possible. Selling out of a product causes damaged

customer relations and lost sales. Large retailers can offset these problems by offering low costs

to consumers, who will keep coming back even when a store is sometimes out of stock on items

they regularly buy. Smaller businesses will have less success with this strategy as they are simply

not capable of securing the same bulk discounts on goods that larger retailers benefit from.

TRACKING IN INVENTORY MANAGEMENT

Inventory is managed primarily through tracking. Systems are put in place that monitor sales,

available supply, demand and market forecasts. Businesses must be able to communicate quickly

and efficiently with suppliers and central offices to keep up with the every changing demand and

availability of goods.

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THE HUMAN ELEMENT

A good system does not make purchasing decisions directly, but allows employees to make good

decisions based on information provided by the system. Such systems provide information such

as demand forecasting, and warehouse supply information. Other benefits to a inventory

management system allow for strategic planning, providing sales forecasts and procurement

information on raw materials and finished goods. Some retailers avoid the need to manage

inventory altogether by employing vendors to do the work. Product vendors visit a retail

location, stocking and placing products. Store managers and vendors share information to

maximize sales. This reciprocal arrangement is often ideal for both parties in that the retailer has

no duty to track inventory and the vendor receives important feedback to use in marketing and

product development.

Bar Codes and Scanners

Most businesses manage inventory through the use of bar codes and laser scanners. The barcodes

represent a product identification that a computer recognizes when scanning the code. In this

way, companies can count items as they come into the warehouse, are shipped off to the retailer

and finally sold to a customer. This allows the retailer to know how much has come into the

store, how much has been sold, and by extension, how much should remain on the shelves. This

tells retailers which items are selling well and also alerts them when products need to be

reordered.

THE TRADE OFF

Maintaining a backup supply of goods ensures you can always provide items to customers when

they are desired, resulting in high customer satisfaction. Time is saved as well. Lags can occur at

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every point along the supply chain. Safety stock compensates for these delays be preventing

disruptions in the flow of products from warehouse to retailer. As demand fluctuates, they can be

sure a supply remains on hand. There are also cost savings in buying large lots, so businesses are

well served to purchase extra inventory to keep as safety stock.

UPCOMING TECHNOLOGIES IN INVENTORY MANAGEMENT

In coming years, expect to see more automation in respect to product tracking through the use of

RFID (radio frequency identification). This method uses a microchip to transmit the information

about a product to a data collection source. Because radio waves travel in all directions, there is

no need for a specific scanning point. This means a business can receive information about each

item in a large shipment without ever opening the container. This will allow for greater

flexibility in order consolidation and shipping for resellers. The method can also give specific

location information to a store manager, allowing better theft protection for high-ticket items.

Businesses can run into problems with RFID signals, which can interfere with each other and

create inaccurate readings. Still, RFID is generally becoming accepted as superior to bar codes.

Such devices allow for more efficiency, more compact storage of merchandise, and swifter

movement of inventories through the business. All this drives down costs for everyone, both

business and consumer alike. Heavy reliance on technology has its share of headaches. There are

problems with computer crashes and software failures that can severely disrupt a company’s

ability to do business. Many large discount retailers are caught off guard by unpredicted surges

in sales because they rely too heavily on inventory management systems instead of keeping

safety stock. This results in lost sales.

INVENTORY ACCOUNTING

It is also important to look at the role of inventory management systems in inventory accounting.

Businesses who do not keep safety stock have fewer assets on the books, limiting cash flow in

the business. The big retailers who rely heavily on technology to manage inventory justify the

lost sales with the savings in taxes. The level of reliance on technology in inventory management Page | 13


systems depends on the business. It is notable that this methodology is not widely used. While

larger retailers have trended towards reducing or eliminating safety stock, other businesses have

not adopted this model. They instead rely more on traditional methods of inventory management

which include keeping a buffer stock on hand. This allows such companies to leverage the buffer

stock as an asset in securing loans to increase cash flow.

IINVENTORYNVENTORY A ACCOUNTINGCCOUNTING

Inventory accounting is the method by which a business determines the value of assets both for

financial statements and tax purposes. Inventory is comprised of fixed assets that are intended for

sale or being used in production. The value of your inventory is determined by taking the value

of the beginning inventory, adding the net cost of purchases, and then subtracting the cost of

goods sold. This results in the ending inventory value. Retailers and manufacturers cannot

expense the cost of goods sold until those goods have actually been sold. Until then, those items

are counted as assets on the balance sheet.

COMMON INVENTORY VALUATION METHODS

The methods a company uses to value the costs of inventory have a direct effect on the business

balance sheets, income statements and cash flows. Three methods are widely used to value such

costs. They are First-In, First-Out (FIFO), Last-In First-Out (LIFO) and Average Cost. Inventory

can be calculated based on the lesser of cost or market value. It can be applied to each item, each

category or on a total basis.

FIFO

FIFO operates under the assumption that the first product that is put into inventory is also the

first sold. An example of this in action can be made when we assume that a widget seller

acquires 200 units on Monday for $1.00 per unit. The next day, he spots a good deal and gets 500

more for $.75 per unit. When valuing inventory under the FIFO method, the sale of 300 units on

Wednesday would create a cost of goods sold of $275. That is, 200 units at $1.00 each and 100 Page | 14


units at $.75 each. In this way, the first 200 units on the income statement were valued higher.

The remaining 400 widgets would be valued at $.75 each on the balance sheet in ending

inventory.

LIFO

LIFO assumes instead that the last unit to reach inventory is the first sold. Using the same

example, the income statement and balance sheet would instead show a cost of goods sold of

$225 for the 300 units sold. The ending inventory on the balance sheet would be valued at $350

in assets. When this method is used on older inventories, the company’s balance sheet can be

greatly skewed. Consider the company that carries a large quantity of merchandise over a period

of 10 years. This accounting method is now using 10-year-old information to value its assets.

WEIGHTED AVERAGE

Average Cost works out a weighted average for the cost of goods sold. It takes an average cost

for all units available for sale during the accounting period and uses that as a basis for the cost of

goods sold. To site our example again, we would calculate the cost of goods sold at [(200 x $1) +

(500 x $.75)]/700, or $.821 each. The remaining 400 units would also be valued at this rate on

the balance sheet in ending inventory.

SPECIFIC IDENTIFICATION

A less commonly used, but important method to valuation is called specific identification. This

method is used for high-end items that are more easily tracked. In some cases, this method can

be used for more common items, but less value is realized from this accounting method is such

cases. This is because powerful and detailed tracking software is required to employ specific

identification on large numbers of goods.

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INFLATIONARY EFFECTS ON VALUATION

No matter how you look at it, you are still coming up with 700 widgets that cost you a total of

$575. This would all be well and good if the value of money remained static. However, market

conditions change causing inflationary changes. When this happens, your accounting method can

have a strong impact on how healthy the business looks on income statements and balance

sheets. The affects cash flow when businesses seek credit to pay for ongoing operations.

RISING PRICES

When prices are rising, using FIFO will show a greater value on the balance sheet, thereby

increasing tax liabilities but also improving credit scores and the ability to borrow cash for

ongoing operations. Older inventory is being used to determine the cost of goods sold and newer

inventory is being used to report assets. LIFO decreases the value on the income statement, but

can reduce the level of depreciation you are able to take on assets. This is good for taxes but bad

for borrowing. Industries most likely to adopt LIFO are department stores and food retailers. The

method is rarely used in defense or retail apparel.

FALLING PRICES

When prices are falling, the effect on FIFO and LIFO values is reversed. FIFO produces a lower

income statement and higher balance sheet. LIFO produces a higher income statement and a

lower balance sheet. In either case, Average costs falls somewhere between, while specific

identification will give the most accurate and reliable results. It is important to understand that

LIFO is only used widely in the United States. This valuation method is disallowed under

International Financial Reporting Standards. When firms adopt LIFO, it is for the tax advantages Page | 16


during periods of high inflation. Once adopted however, switch back to FIFO during a period of

market growth can be painful. The switch will create an artificially lower net income.

MAKING THE COMMITMENT

The problem with committing to either FIFO or LIFO is found in tax filing. Once a company

uses one or the other on its tax filing, it must use the same method when reporting to

shareholders. So using one method to a company’s benefit on taxes can harm earnings per share.

In either case, the company’s financial statements must disclose the method used. It must also

disclose the LIFO reserve, or the difference in value between what the inventory would have

been worth under FIFO accounting. The method a company chooses does not necessarily have to

reflect the actual flow of goods. The method chosen will be used for tax and accounting benefits

and will rarely be based in reality.

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WWHATHAT ISIS DISTRESSEDDISTRESSED STOCKSTOCK??

Distressed inventory is comprised of those goods or materials that have spoiled, become ruined,

or are otherwise impossible to sell on the standard market. It can also be items in good condition

that have remained on the shelf too long, taking up valuable resources that could be used towards

more profitable merchandise. Sometimes distressed inventory comes about due to overstock;

other times, demand simply dries up. Distressed inventory is a serious threat to the livelihood of

any business.

THE COST OF DISTRESSED INVENTORY

For many businesses, the cost to buy goods for sale or manufacture eclipses even the cost of

labor. When inventory levels are allowed to grow beyond sales forecasts, margins are reduced

because excess stock must be sold at discounted rates, resulting in lower margins. Stagnant

inventory is a source of money a business cannot access when it may be most needed. This slows

down a company’s ability to maneuver in a competitive market. The money would be put to

better use in purchasing the next high-margin product of the day.

Beyond tying up dollars, unsold inventory declines in value over time, creating a double

jeopardy. Not only is the business losing profits it could be securing, it is also losing monetary

value on the product itself. This makes it harder to sell, forcing deeper discounts and lower

margins. This is especially damaging if the inventory was purchased with a loan. Now it is also

costing to company money in interest fees.

PRODUCT LIFE CYCLES

Every product stocked by a company has a life cycle. There will be increasing demand until a

peak is reached and then the demand will subside. These trends may run along seasonal lines or

simply be a one-time fad event. Once demand begins to ebb, huge mark downs are needed to

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keep sales going. The value of the merchandise can go down as much as 50% annually while it

sits on the shelves taking up the space of cash that could be used to grow the business.

OOCCURRENCECCURRENCE O OFF O OVERSTOCKINGVERSTOCKING

Overstocking comes from several sources, most of which are forces from within the company.

This means the business can control overstocking through proper management. Market forces are

only the cause of overstocking in a small percentage of cases.

INTERNAL CAUSES OF OVERSTOCKING

Various managers are encouraged to maximize inventory investments to paint a rosier picture on

balance sheets. In addition, buyers look at the cost per unit, rather than paying attention to the

bulk of the inventory. The more they buy, the cheaper they get it, making them look good at

review time. Operations managers like to over-buy so that the production line will not come to a

stall because the supply of a part has been depleted. Salesmen are ever-optimistic and will over-

buy in anticipation of gains in sales and fears of running out of stock just when a big sale is being

closed. The various motivations of these workers are well-intentioned, but they lose sight of the

effects over-buying has on the company’s bottom line.

TRYING NEW ITEMS

Market forces can also contribute to over stocking and dead inventory. The biggest culprit is

often a new product that the business tries in an effort to find new sources of profit. Too often

wholesalers try out new items based on a vendor’s recommendations without getting any

assurances about what will happen to items that do not sell. When agreeing to try a new product,

wholesalers should negotiate terms for the vendor to take back unsold merchandise at or near

cost, within a specific time frame. A good target date is six to nine months after the wholesaler

receives shipment of the stock.

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Another way to reduce the risk of dead inventory on new products is to search the market for

smaller quantities of the item that can be tested to see how the sales will be. Even if the cost per

unit is higher, the reduction in dead inventory will be well worth the extra cost.

WHAT TO DO ABOUT DEAD INVENTORY

Distressed or “dead” inventory is a problem for any company in the distribution business. While

sooner or later every company must deal with this problem, any business caught in a cycle of

over-buying must take measure to break the trend. This means ridding the business of distressed

inventory, freeing up cash to purchase goods that will sell quickly and monitoring stock more

closely in the future. Managers must be level-headed and sober in assessing the steps needed to

liquidate the inventory.

MARK DOWNS

The most popular method for ridding the business of distressed inventory is to mark the goods

down for quick sale. It is common for businesses to keep a regular practice of scheduled mark

downs as long as particular products remain in inventory. Managers must be merciless in

discounting merchandise to make it move quickly. While marking items down as much as 75%

can be painful, the cost of keeping the goods is even more so.

RETURNS

In some cases, the company can communicate with distributors to request that they take back

excess inventory. Proposals should be structured in a way that benefits the distributor, such as

offering the merchandise in exchange for other merchandise that may sell better.

In some cases, the company can communicate with distributors to request that they take back

excess inventory. Proposals should be structured in a way that benefits the distributor, such as

offering the merchandise in exchange for other merchandise that may sell better.

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CHARITABLE DONATIONS

If all else fails, charitable donations are always an option. If goods have been drastically reduced

and still remain on the shelves, a charitable donation allows the business to write the donation off

on taxes.

MONITORING STOCK

Close monitoring of inventory levels is needed to keep them at healthy limits. Cycle counting

should be done to maintain control of stock on a regular basis. This allows the business to spot

problems before they cause serious financial concerns. In addition, strong inventory manage-

ment systems should be kept in place that base purchase decisions on market forecasts and

stock levels, not on the influence of salespeople or operations managers.

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IINVENTORYNVENTORY C CREDITREDIT

Inventory credit is the business practice of using a company’s stock or inventory as collateral for

a loan. Ost banks, especially in today’s economy, are reluctant to issue unsecured loans, even to

established companies with good credit. But inventory represents a company’s physical assets

and has cash value if liquidated.

The concept of inventory credit started in ancient Rome with agriculture and merchant goods.

One common product that uses inventory credit for financing and can be found in any grocery

store is parmesan cheese from Italy. Inventory credit is also used for agricultural businesses in

Latin American and Africa, manufacturing, and automobile dealers with a lot of money tied into

their inventory.

HOW INVENTORY CREDIT WORKS

Before you can get a loan using inventory credit, you need a few things. Your business needs to

have a good credit rating. This means it needs to be current with all bills and no outstanding

accounts. The second thing needed to make a list, along with estimated value, of the inventory to

be used. You also need to have a business plan worked out to pitch to the bank for the loan.

Inventory values can fluctuate depending on the economy and the particular industry of the

company. To make sure they do not lose money should inventory values plummet, banks usually

only lend up to 60 percent of the total value of the inventory being used. Plus, physical inventory

can be liquidated but you would not get the full value for it.

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The bank will inspect any inventory before they approve a loan. They will want to know exactly

what they are loaning the money for and what kind of condition the collateral is in. If the loan is

approved, the bank has the right to inspect the inventory at any time.

When inventory is sold, it is up to the owner to keep track of it. A portion of the profits will need

to go towards paying off the loan. Banks tend to frown on companies that borrow money based

on inventory credit and then sell the inventory without paying off the loan.

In agriculture, inventory credit works a little different. The produce that is used for the loan has

to be stored in a reliable and bonded warehouse by a third party. In agriculture, inventory credit

is used for imported produce, produce ready to be exported, and domestic products. The

warehouse owner that stores the produce has to ensure that it remains in good condition and is

secure. The agricultural company that borrows the money is charged a fee for the storage of the

produce and to insure it against damage. This inventory credit process is used widely in Africa

and parts of Asia

WHEN SHOULD INVENTORY CREDIT BE USED?

Inventory credit is not a practical means of financing for every business. It largely depends on

the type of industry you are in as well as the current state of the economy. Businesses that should

not use inventory credit are those will a low turnover rate for their inventory. This means that if

your inventory sits there for a long time and cash flow from it is slow, you would be better off

finding an alternative means of financing. Otherwise, you may have a difficult time paying back

the loan. This is also true for inventory that is out of date, expired, or obsolete.

Businesses that would benefit from an inventory credit loan would be those who have a high

turnover rate for their inventory. If business is good and your company is moving a lot of

inventory product but you still need more money in order to keep up with demand, then you

should check out an inventory credit loan.

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EECONOMICCONOMIC O ORDERRDER Q QUANTITYUANTITY

Economic Order Quantity is the calculating method used to determine the best level of inventory

for production while being the most cost effective for holding and ordering. EOQ, as it is

referred to, has been around since the rise of modern manufacturing processes back in the early

20th century. The first model for calculating EOQ was designed in 1913 by F.W. Harris.

What EOQ basically does is determine the best point where the costs for inventory holding and

ordering are at the lowest. This helps to determine the number of units of stock to order to re-

supply inventory without spending too much money on overstock.

HOW DOES EOQ WORK?

EOQ is not used in every type of business and industry. Most companies that deal with large

volumes of stock use a form of EOQ. It is common in manufacturing where the ordering of stock

is constant and repetitive. EOQ is primarily used for purchase-to-stock distributors and make-to-

stock manufacturers. These are businesses that have multiple orders, release dates for their

products, and have to plan for their components.

Another type of business that uses EOQ are those that have maintenance, repair, and operating

inventory (or MRO). Businesses that have a steady demand for stock are the most suitable for

EOQ applications but some seasonal items can benefit from the method, too.

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HOW TO CALCULATE EOQ

Economic Order Quantity must be calculated using a mathematical equation. By using a set of

numbers for production, demand, and a few other variables, a company’s inventory costs can be

minimizes. Here is the equation for EOQ:

The sub-components that make up the equation are as follows:

Annual Usage – This part is pretty self-explanatory. Based on units, a company simply enters

the predicted annual usage amount.

Order Cost –This component is the sum of the fixed costs that occur every time an item is

ordered. They are not associated with the quantity ordered, only with the actual physical act

required to process the order. Also known as purchase cost or set up cost.

Carrying Cost – This part is the financial costs of carrying and storing inventory at or near the

business. The amount is mostly made up of the costs associated with physically storing the

inventory and the financial investment for the inventory. It is also referred to as holding cost .

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As long as the data used for the calculations is accurate, this formula is a good method for

determining EOQ. Miscalculations such as exaggerated costs are common mistakes. If a

company only uses the data from purchasing and receiving, or from product storage and

handling, the calculations will yield very high numbers. Sometimes the goals of a company do

not meet the product of the EOQ calculations. When this happens, company leaders and

executives usually ignore the EOQ calculations. The EOQ formula is not absolute and can be

modified slightly from its original form. It can be used to determine many things such as

production levels and lengths of time between orders.

IMPLEMENTING EOQ

There are two main methods to implement EOQ in a business. It is assumed before you do that

the data for costs have already been gathered. The first method is to use a spreadsheet and

manually enter the quantity one at a time onto the inventory sheet. While simple, this can be very

time-consuming. It also works best for companies that deal with smaller amounts of inventory.

If the company in question has a large inventory, say more than several thousand units, then you

will have to use the EOQ software along with your existing inventory system. This method will

calculate it at a much quicker rate and save money on manpower and resources.

The second method you can use is to download company data to a spreadsheet. Once the

calculations are finished, you can upload them to your inventory system manually or with a batch

program. Either way will work.

To make sure that the EOQ you are using for your company is running efficiently, there are some

things you can do. The first is to run a test on the model. This should be done before the EOQ

model is finalized to make sure it is accurate and no glitches are involved. The best way to test it

is to run the method on a sample batch of items. Afterwards, manually check the results to make

sure they match the model’s final numbers.

Adjust the EOQ formula if needed. By running tests, you can determine how the method will

work on inventory storage and ordering costs. Try to look at a long term plan if possible. Small

changes may not be readily apparent with the model and may only become noticeable over time.

To reach the best inventory level, the EOQ model may need to be slightly adjusted.

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INVENTORY

MANAGEMENT

IN

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RETAIL SECTOR

IINTRODUCTIONNTRODUCTION T TOO R RETAILETAIL

Selling of merchandise directly to the consumer. Retailing began several thousand years ago with

peddlers hawking their wares at the earliest marketplaces. It is extremely competitive, and the

failure rate of retail establishments is relatively high. Price is the most important arena of

competition, but other factors include convenience of location, selection and display of

merchandise, attractiveness of the establishment, and reputation. The diversity of retailing is

evident in the many forms it now takes, including vending machines, door-to-door and telephone

sales, direct-mail marketing, the Internet, discount houses, specialty stores, department stores,

supermarkets, and consumer cooperatives.

Retail comes from the French word retailler, which refers to "cutting off, clip and divide" in

terms of tailoring (1365). It first was recorded as a noun with the meaning of a "sale in small

quantities" in 1433 (French), its literal meaning for retail was to "cut off, shred, paring".

The technical definition, adapted from the North American Industrial Classification (NAICS) is

more specific:

Retail establishments are primarily engaged in retailing merchandise, generally without

transformation, and rendering services incidental to the sale of merchandise

They are organized to sell merchandise in small quantities to the general public

Store retailers operate fixed point-of-sale locations, located and designed to attract a high

volume of walk-in customers using

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o extensive displays of merchandise, and

o Mass-media advertising to attract customers.

Non-store retailers focus on catalogue and in-home sales as well as sales of specialty

products such as home heating fuels.

Retail is the sale of goods to end user, not for resale, but for use and consumption by the

purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large

quantities of products to retailers, and retailers sell small quantities of those products to

consumers. For example, a person who wants to obtain a product for their own personal use will

usually purchase it at a retail store or from some other retail marketing channel.

MMERCHANDISEERCHANDISE A ANDND M MERCHANDISINGERCHANDISING

Merchandise, by this term is understood all those things which merchants sell either wholesale

or retail, as dry goods, hardware, groceries, drugs, &c. It is usually applied to personal chattels

only, and to those which are not required for food or immediate support, but such as remain after

having been used or which are used only by a slow consumption.

Merchandising is the practice of making products in retail outlets available to consumers,

primarily by stocking shelves and displays. While this used to be done exclusively by the stores'

employees, many retailers have found substantial savings in requiring it to be done by the

manufacturer, vendor, or wholesaler that provides the products to the retail store. In the United

Kingdom there are a number of organizations that supply merchandising services to support

retail outlets with general stock replenishment and merchandising support in new stores. By

doing this, retail stores have been able to substantially reduce the number of employees needed

to run the store.

While stocking shelves and building displays is often done when the product is delivered, it is

increasingly a separate activity from delivering the product. In grocery stores, for example,

almost all products delivered directly to the store from a manufacturer or wholesaler will be

stocked by the manufacturer's/wholesaler's employee who is a full time merchandiser. Product

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categories where this is common are Beverage (all types, alcoholic and non-alcoholic), packaged

baked goods (bread and pastries), magazines and books, and health and beauty products. For

major food manufacturers in the beverage and baked goods industries, their merchandisers are

often the single largest employee group within the company. For nationwide branded goods

manufacturers such as The Coca-Cola Company and PepsiCo, their respective merchandiser

work forces number in the thousands.

SSTOCKTOCK M MANAGEMENTANAGEMENT

Inventory plays a significant role in a company’s physical assets. It represents a financial

investment that if not used properly, can really drain a company’s cash flow. To make sure that

they do not just throw their money away on stock, a company spends quite a bit of manpower

and resources on monitoring their stock. The process of monitoring inventory is known as stock

management .

Stock management is basically a series of processes for keeping up with rotating stock. This

includes tracking, shipments, handling of goods, and ordering to resupply the current levels of

inventory. If not implemented correctly, a company can waste a lot of money on excess

inventory or they could be short on supplies which slow down production.

COMMON METHODS OF STOCK MANAGEMENT

With the changing world economy, businesses are paying more attention to their inventory

levels. They are looking into better ways to manage stock. A structured method is needed to

make sure that inventory levels are optimized for production and cost. A successful system for

stock management ensures that a company has enough supplies of raw materials for their

production. A faulty or inadequate management system can slow down production if not enough

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raw materials are kept on hand. If production slows then there is a shortage of finished products

which means lower sales.

When a company runs completely out of stock, it is called a stockout. Stockout can hurt

customer service and company image. A company that continually experiences stockout will lose

customers to the competition.

The same is also true of having too much stock. An inadequate stock management system can

order too much raw materials which results in overstock. This is stock that will just sit there,

taking up space, and waiting until it can be used. If the stock has an expiration date, it may go

bad before it can be used in production.

To prevent too much stock or not enough, stock management systems use one of two different

methods to avoid these blunders. They are Buffer Stock and Just-In-Time Stock.

BBUFFERUFFER S STOCKTOCK

Buffer Stock is an additional amount of stock that is held in reserve during times of re-ordering.

It works like this. Normally, stock is held at certain levels. When it drops below those levels, the

management re-orders more stock to bring it back up to that desired level. However, there is a

waiting period between the time stock is ordered and when it is actually delivered. Meanwhile,

stock is still being used. Buffer stock is kept in case the delivery takes longer and supplies get

low. Buffer stock keeps a company from running out of stock while they wait for a delivery.

The benefit of Buffer Stock is that profits will increase as the price rises. Stock that was

purchased at a lower price can be sold at current market levels that have risen. Buffer Stock also

ensures the company has an inventory of supplies in case of emergencies

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JJUSTUST-I-INN-T-TIMEIME S STOCKTOCK

Just in Time Stock was developed by the Japanese in order to minimize holdings of stock. How

this works is distributors deliver the needed supplies at the exact time the stock is required.

Finished products are completed only so far as the next phase of production. The deliveries

arrive at such regular times that a company does not have to deal with storage of production

supplies. A company does not have a build-up of finished products to distribute and try to sell.

They are only produced as they are needed.

The benefit of Just in Time Stock is that there is less risk of stock becoming obsolete or going

past its expiration date. Also, more space is available because there isn’t a large amount of stock

taking up valuable space. This also provides a lower maintenance cost. The method promotes

flexibility in a company’s workforce. This flexibility is essential is problem-solving and

increasing product quality.

A successful stock management system can be achieved from several approaches. The first is the

manual method. This is where all of a company’s stock is manually inspected and counted.

Mostly companies do their inventories once a year. There are even third parties who can come in

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and calculate stock for the company. While the manual method works well for many small

businesses, it is quite impractical for large companies.

Another element to successful stock management is stock rotation. This is the practice of using

up older stock first. This is especially important for stock that has an expiration date such as

produce and groceries. The older stock is moved to the front so that it may be used next. The

newer stock is placed at the rear of the chain. This is an ongoing process.

A computerized system is the most accurate method of keeping up with stock. For larger

companies, it is also the most practical. It would be far too costly in manpower and resources to

try to manually keep up with thousands of different items when a computer can do it faster,

cheaper, and more efficiently. The use of a bar code makes a computerized system much easier

than any other method.

CCONSIGNMENTONSIGNMENT S STOCKTOCK

Consignment stock is goods which are stored at one location, such as a business or a warehouse,

but are legally owned by a different company such as a supplier. Stock remains under ownership

of the supplier until the customer is ready to use it. The customer is not obliged to pay for these

supplied goods until they remove them from their consignment stock. It is at this point that they

technically buy the stock. If the stock does not sell or the customer decides that it no longer

needs it, then the items that are left over are returned to the legal owner.

Consignment stock is closely related to Vendor Managed Inventory (or VMI). Since the

inventory is still under ownership of the supplier, an immediate invoice is not needed when the

stock arrives at its location. Only when the stock is sold will the customer create an account

payable. The supplier is responsible for crediting a customer’s inventory and debiting their stock.

WHY USE CONSIGNMENT STOCK?

In order to stay competitive, customers must work with their suppliers for an arrangement that

best suits the customer’s needs. That is the main reason for the consignment stock method.

Consignment stock is often used to make it more convenient for the customer to have their Page | 33


supplies and raw materials close to where they manufacture their products. It is also used to

reduce a customer’s total working capital. By having consignment stock on hand, either in a

stock room or nearby warehouse, a customer can continue with their manufacturing without

interruption.

FUNCTIONS OF CONSIGNMENT STOCK

In Vendor Managed Inventory, the supplier oversees a company’s inventory items. But in

consignment stock, it is the customer’s responsible to manage it. The customer is in charge or

moving stock from storage to production.

They are also in charge of keeping up with quantities and in contacting the supplier when stock

runs low. They are also responsible to communicating with the supplier about moving the stock

around, since the supplier still legally owns the items.

The supplier normally inspects the stock quarterly or every half-year. If there are any errors in

invoicing and more consignment stock has been used than recorded, the customer is billed for the

usage.

When setting up a contract for consignment stock, the supplier and customer will agree on the

terms such as how long the contract will last and what to do with left-over consignment. Details

are recorded on estimated usage and reorder quantities.

ADVANTAGES OF CONSIGNMENT STOCK

Dealing with consignment stock has many advantages. For instance, the customer knows that

raw materials will always be readily available. They do not have to worry about hunting for new

suppliers every few months. Consignment stock also saves on money that would normally be

invested in unused inventory. This helps keep up a positive cash flow for the customer.

Another advantage is that the purchasing of inventory is not tied into re-supplying and waiting

for the new stock to arrive. Purchasing is automatic when the items are used. This saves on time.

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One of the main benefits of consignment stock is that customers store the consignment goods at

their own warehouses. They can access the goods in the consignment warehouse at any time

which makes it much more convenient for the customer.

Customers do not get billed up front for the entire stock. They are only billed for the goods when

they are removed from the warehouse and only for the actual quantity taken. Capital is increased

because there is less money tied up in non-used inventory.

Re-supply of the consignment can be made at convenient and regular times. This keeps

production running smoothly and without having to stop.

Dealing in consignment stock prevents customers from being susceptible to what is known as

panic buying. This is when there is a change in the market and the customer panics trying to buy

(or sell) stock in order to adapt with the change.

RISKS OF CONSIGNMENT STOCK

Although there are advantages to consignment stock, there are some risks and disadvantages as

well. One disadvantage is that the supplier does not get paid until the stock is used. If customer

production is slow, then this will be reflected in the supplier’s cash flow.

Although the customer is saving money by not buying the stock until it is used, it still takes up

physical space. This is space that could be put to better use storing supplies the customer actually

owns.

Having a well supplied consignment stock is not necessarily a good thing. Stock inventory may

increase due to duplicating inventories and to the suppliers negotiating inflated stockholdings.

There is not as much pressure to reduce inventory because the customer does not have money

tied up in it. While beneficial for the customer, it is a disadvantage for the supplier.

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Customers may not be properly motivated to come up with an optimal business plan. This is

again due to the fact that they do not have any money sitting in stock that is not being used.

One major disadvantage for customers is that any discrepancy in consignment stock that is short

is the financial responsibility of the customer. So they could end up paying for stock that was

misplaced and never used.

Most of consignment stock’s record-keeping is designed to be done by computer but usually

ends up being done manually. Because accuracy is key, record-keeping must be of the highest

quality. This can lead to the possibility of human error.

IINVENTORYNVENTORY M MANAGEMENTANAGEMENT S SOFTWAREOFTWARE

Inventory management is important to every business, especially so for manufacturers and

resellers. Managing materials and goods so that they utilize the fewest of an enterprise’s

resources can give the company a competitive edge in an ever-increasingly tight market.

Inventory management software lets a business manage inventory along all points in the supply

chain, from receiving to the point of sale.

FUNCTIONS OF INVENTORY MANAGEMENT SOFTWARE

Inventory management is a highly complex process that involves many variables. A business

must coordinate receiving and stowing with outbound shipments, always ensuring there is ample

space for new stock and that all items are accounted for. The flow of goods in and out of a

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business must be monitored closely to identify market trends and to create strategic plans for the

enterprise’s future.

FLOW OF GOODS

Not only must a business keep track of the goods coming in and going out, it must also track the

costs to procure, store, sell and ship these goods. The company must also account for damage,

loss, and labor costs associated with handling the merchandise. Inventory management software

allows an enterprise to track all of these things, while detailing the precise location of goods to

allow for fast and efficient order picking.

REPLENISHMENT

The business can determine the appropriate ordering times for inventory replenishment with

inventory management software. Software allows for controls to be set that determine stock

levels for reorder, ensuring the business always have enough product to meet demand. The

software even helps determine what an item’s reorder point should be by taking in factors like

lead time, seasonal changes and the time between receiving and stowing. These settings can

easily be altered when needed.

TRACKING

Inventory management software also lets a company monitor and track multiple locations or the

business as a whole. The business can review complete histories of lot numbers so that products

can be tracked throughout the life cycle. This feature is especially helpful for resellers working

with perishable goods because it allows the business to set expiration dates for the products.

Accounting is made easier with such software as well. It allows the company to track specific

cost for each lot. The lot can be tracked all the way to the point of sale.

ADDITIONAL FUNCTIONALITY

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Some software packages carry other functions that allow the company to extend operations

beyond brick and mortar, addition E-commerce capabilities. Further enhancements allow the

business to consolidate shipments, and process back orders, returns and substitutions.

TAILORING TO BUSINESS NEEDS

Distributors will want software that functions well in order processing, inventory management

and transportation logistics. In most cases, software packages are designed for one of these

elements and then altered to include the other two. It is rare that the software salesman is the

same person that answers customer questions, solves problems and coordinates implementation.

The salesman’s main goal is to get a business to buy his product. Focus on meeting the

company’s core business functions and negotiate other functionality modifications with the

seller.

CUSTOMER SERVICE

No company should purchase a software package without first speaking to other clients who use

the software. While contacts can be made through the salesman, it is obvious that the salesman

will only point to positive reviews. A business can research forums online to connect with other

users of software and collect user experiences before making a purchase decision. The research

should focus on customer satisfaction, responsiveness of the help desk and ease of use.

USABILITY

While core functions are the most important aspects to software, usability is also important to

minimize training costs for staff. Pay special attention to tasks that will be commonly performed

in the organization. Consider how many clicks, how many screens and how much time is

involved in performing a specific task.

The old adage, “garbage in, garbage out” rings especially true when it comes to procuring the

right software. The successful implementation of a given software package depends greatly on

the effort spent in investigating all options available and selecting the most appropriate package.

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CHALLENGES OF IMPLEMENTATION

No matter which software package a business chooses, it is important to understand that

implementation is an even greater challenge than choosing the right software. Implementation

always takes more time, money and energy than anticipated. By making a good choice in

selecting software, a firm minimizes the challenges associated with implementation.

IINVENTORYNVENTORY C CONTROLONTROL S SOFTWAREOFTWARE

Inventory is the life blood of your business. Whether you keep an inventory of raw materials for

manufacturing or if you store finished products for sale, you need to know what you already

have to know what you will need in the future. You can minimize inventory costs with inventory

control software.

BENEFITS OF INVENTORY CONTROL SOFTWARE

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Large companies benefit from inventory control software because it allows them to process large

amounts of inventory with relatively few resources. Even small businesses benefit because this

kind of software comes with multiple business tools helping to track, handle and manage the

supply chain. Manual management of inventory is no longer an acceptable method of doing

business in the modern world. Even computer management of inventories through human means

leaves too much room for error and loss of information, putting a company at great disadvantage

against competing businesses.

A properly managed inventory supplies the right amount of goods to meet demand without

wasting resources in procuring and storing the goods. Inventory software lets a business manage

all aspects of inventory management including purchasing, receiving, warehousing and sales.

To remain competitive, businesses must maintain a balance of adequate supply but minimize the

supply they keep to meet demand in order to control costs. Overstock is a waste of space where

other profitable items could be stored. Shortfalls result in missed sales opportunities and can lead

to loss of customers. Inventory management software is ideally suited to maintaining this

balance, helping to forecast demand in the coming weeks or months.

ONLINE INVENTORY SOFTWARE

The leading edge of inventory software gives you nothing to install on your computers at all.

There is no concern with compatibility because all you need is an internet browser. Such

programs are especially useful where a great deal of travel is required for your business. These

systems let you access date from anywhere, even your Blackberry.

Internet based inventory systems are often cheaper that traditional software because no additional

license purchases are required. You may be concerned with the security of your data, but internet

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bases systems are reliable and secure. Servers are protected behind firewalls and other security

programs. These servers are backed up on a regular basis, keeping your information safe.

USING INVENTORY CONTROL SOFTWARE

Your inventory software is only as good as the data you put into it. For this reason, there are

certain best practices you should keep in place. This includes ensuring entries from stock receipts

are accurate, initiating replenishment strategies and installing procedures for managing dead

stock and excess inventory.

Inventory software will monitor materials as they are received at the warehouse and stocked. It

will reconcile inventory balances, track and report on replenishing methods, and analyze

projections for inventory status as well. You can even set periodic goals and try out different

ways you might be able to achieve them by changing parameters within the program.

The return on investment for inventory control software is great. Some businesses have reduced

expenses six fold with the implementation of such programs. The money you save can be put

towards marketing your business and improving your infrastructure.

OONLINENLINE I INVENTORYNVENTORY T TOOLSOOLS

Online inventory tools are available to help your business reduce costs through structured

inventory control and accounting. Because online inventory tools are web based applications,

they are able to help your business stay on the cutting edge of inventory management in many

ways.

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The advantage of web-based software has long been seen in back office functions, such as day to

day accounting and cash flow management. With the inclusion of inventory management, you

end up with a full suite of tools that can all be accessed online. For a low monthly cost,

companies can use browser-based applications to handle all aspects of the business faster and

more accurately. These applications make reports easily accessible to any person in your

organization that needs them at any location.

In the old days, a company’s buyer would periodically check stock for inventory items and then

place an order, such methods resulted in overstock and shortages on a regular basis. Just as

computers revolutionized the business world in the 80’s, the internet is changing everything

today. This every changing medium has evolved to a level where all your business needs can be

handled in one web based application. The easy and speed of such applications have given rise to

new thinking about the supply chain and how inventory is managed. These new methods are

increasing customer satisfaction and the ability for

WEB BROWSER INTERFACE

One of the best aspects of these applications is that the user interface is your web browser. There

is less training needed for managers and employees because they are already familiar with web

browsers. This universal interface gives you easy access to your information from any location in

the world, whether it is on your desktop, laptop, cell phone or PDA. Browser interface means

that you no longer need to worry about the operating system you are working with. All platforms

like Windows, Mac, Linux or Unix are compatible with internet browsers.

CENTRALIZED STORE FOR INFORMATION

The reason computers have been such a powerful tool in the corporate world is that they allow

companies to keep all of their data in a centralized location. This means anyone in your business,

no matter their location, can access the information needed to get business done. Your inventory

database, inventory procedures and market forecasts will all be in one place for you to access.

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SECURITY MANAGEMENT

Online inventory tools take care of security for you. Your data is kept on secure servers using

state of the art technology. These systems allow you to set security levels and protocols for users,

so only those employees that truly need to get the information can have access. Your information

is backed up daily on remote servers ensuring your data can be recovered if anything goes

wrong. In most cases, you can also create your own data backup if you prefer to have the

information onsite.

LESS DOWN TIME

Web based application upgrades are done automatically and remotely, saving you the time to

have a service representative come in to reconfigure your system. This also means that you do

not need to service and maintain servers at your location if you prefer not to. This saves on IT

infrastructure and labor costs. Because your data is all online, the need to integrate software and

upgrades with your current system becomes obsolete. Organizations with remote offices will

benefits enormously from this feature. Most applications do not charge for these regular

upgrades.

MANAGE MULTIPLE LOCATIONS

Online inventory tools also allow you to manage several warehouses at once, letting you set

different replenishment levels for each location and product. The information is available to the

users you choose, so your warehouse managers can each access the information whenever it is

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needed. You can monitor inventory not only in your warehouse, but at any point along the supply

chain. You can look at data as a whole for your business, or look only at specific locations or

groups of locations. Whether your distribution chain involves external customers or internal

departments, you can allow users to view the inventory available when placing orders,

eliminating back orders and other problems. Users can easily print catalogs of your merchandise

and place orders from remote locations.

IMPROVED COMMUNICATION

Internet based applications can also allow you to communicate more effectively with your team

through messaging. If you notice a problem at one location, you can easily contact the location

manager and work out the solution. These applications give you access to every business

function you may need.

STREAMLINED ACCOUNTING

Because online inventory tools allow you to track all aspects of your business in one location,

end of year accounting becomes much easier. Now you can create a separate listing for assets not

found instead of poring over reports and invoices to get the data. You will have a clear picture of

your assets and the ability to track them at all times. Systems allow you to manage both tangible

and intangible assets.

MRP IMRP INVENTORYNVENTORY M MANAGEMENTANAGEMENT

Manufacturing can be a highly detailed, highly complex process that requires specific planning.

Material Requirement Planning (or MRP) is an inventory system that is computer based and used

to manage the manufacturing process. It is designed to assist in the scheduling and filling of

orders for raw materials that are manufactured into finished products

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WHAT DOES MRP DO?

The main objective of MRP is to manage dependent demand items. These are the raw materials

and unfinished goods used in the manufacturing process. Raw materials must be kept as

inventory stock. As they are used, stock must be replenished through re-ordering. MRP fulfills

three mains functions:

MRP makes sure that dependent demand items on kept in stock.

MRP maintains the optimal level of inventory that is most cost effective for a company.

MRP is used to purchase new stock, deliver finished products, and plan the daily manufacturing

processes.

What makes MRP effective is that it works backward from a plan for producing finished

products in order to develop the amount of raw materials that a company needs. How this works

is MRP breaks down inventory requirements into separate stages. This helps to manage

production and keep it flowing at an even level. It also helps to keep inventory costs to a

minimum.

The drawback is that MRP systems can be expensive to implement and the costs can be quite

high, offsetting the amount of money that a company could save in inventory costs. Larger

companies that produce large volumes of finished products may find it beneficial but the same

may not be true for smaller companies. Plus, for MRP to produce accurate results, you need to

have accurate data. Information such as orders, bills, item numbers, and records must be accurate

or the results will be off.

HISTORY OF MRP

The roots for MRP have been around since the early 1950’s. MRP is one of the predecessors for

Enterprise Resource Planning (or ERP), a computer software system that is widely used to link a

company’s entire infrastructure together.

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MRP was especially popular during the 1980’s. Manufacturers needed better resources to

manage their processes and inventory requirements. Manufacturing managers realized that

computers could keep track of inventory quicker and with more accurate results. Mainframe

computers that ran on custom software were built that could extract information from a list of

raw materials and create a production plan.

As MRP proved successful, it was eventually used to include information feedback loops so that

managers could modify the inputs into the system for better production results.

INPUTS FOR MRP

To get results, you have to input information into the MRP system. There are three main sources

of information for input: a bill of sale for materials, a master schedule, and an accurate record of

existing inventory.

The bill of sale for materials is a list that contains all of the raw materials, components,

subcomponents, and other materials needed to complete the finished product. The bill is usually

arranged into separate sections so that companies can see what materials are used for each stage

of production. This helps to determine the amount of materials needed.

A master schedule is a production plan that covers all aspects of the manufacturing process. The

schedule states the amount of finished products that can be produced and the time frame in which

they can be finished. Master schedules do not take into account available inventory. They only

cover how many finished products are needed.

The record of existing inventory lists how much inventory is already available. This is useful for

determining how much, if any, additional inventory is needed to fulfill production orders.

ADVANTAGES AND DISADVANTAGES OF MRP

MRP has several benefits as well as drawbacks. As for benefits, MRP helps managers with the

following:

Keep inventory levels to a cost-effective minimum

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Keeps track of inventory that is used

Tracks the amount of material that is required

Set safety stock levels for emergencies

Determine the best lot sizes to fulfill orders

Set up production times among the separate manufacturing stages

Plan for future needs of raw materials

However, MRP also has its share of drawbacks. They are:

Information used as input must be accurate. Inaccurate information can result in misplanning,

overstock, understock, or lack of appropriate resources.

The master schedule must be accurate in order to provide appropriate lengths of time for

production.

MRP systems can be costly and time-consuming to set up.

There may be problems with employees who, before MRP, were not disciplined in their record

keeping. Also, some departments may hoard raw materials for their own use.

CCOMMONOMMON I INVENTORYNVENTORY M MANAGEMENTANAGEMENT P PROBLEMSROBLEMS

Inventory management problems can interfere with a company’s profits and customer service.

They can cost a business more money and can lead to an excess of inventory overstock that is

difficult to move. Most of these problems are usually due to poor inventory processes and out-of-

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date systems. There are a number of problems that can cause havoc with inventory management.

Some happen more frequently than others.

Here are some of the more common problems with inventory systems.

Unqualified employees in charge of inventory: Too many companies put people in charge of

their inventory distribution who either don’t have enough experience, are neglectful in their job,

or don’t have adequate training. No matter what kind of system is used, companies need to pay

closer attention in overseeing their inventory management and making sure employees receive

proper training.

Using a measure of performance for their business that is too narrow: All too often

companies will evaluate how well their business is doing. The processes they use are not wide

enough and do not encompass all the aspects and factors in the company. Many areas get

overlooked and can lead to either inventory shortages or inventory stockpiling.

A flawed or unrealistic business plan for a business for the future: To predict how well a

company may do in the future, you have to collect enough data and accurately analyze it. The

downfall of many companies starting out is that they give an unrealistic assessment of a

company’s growth. This affects inventory management because if a company predicts more

growth than they actually experience, it can lead to an overstock of inventory. The opposite is

true if forecasters do not predict enough growth and are left with not enough inventory.

Not identifying shortages ahead of time: A business needs a number of products or materials

but discover that they do not have enough in stock and must re-order. Waiting for the shipment

to come in can slow down the supply chain process. Not having enough products in stock to meet

customer demand can lead to bad customer relations. A supervisor in charge of inventory

management should look over their inventory on a regular basis to make sure enough products

are in stock.

Bottlenecks and weak points can interfere with on-time product delivery: This means that if

too many orders come in for outgoing shipments and do not get handled in an efficient manner,

they can build up, or ‘bottleneck’. This slows down deliveries. The same is true for any weak

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points in an inventory management system. Weak points slow down the system and can stop it

altogether.

Falling victim to the “bullwhip effect”: This is an over-reaction by a company to changes in

the market. As the demand of a market changes, a company may panic and order an overstock of

inventory, thinking the new market conditions will move the inventory. Instead, the market

stabilizes and the business is now left with a surplus of products that just sit in the warehouse,

taking up space and not making money.

Too much distressed stock in inventory: Distressed stock is products or materials in inventory

that has or will soon pass the point where it can be sold at the normal price before it expires. This

happens all the time in grocery stores. As a particular food product nears its expiration date, the

business will discount the item in order to move it quickly before it expires.

Excessive inventory in stock and unable to move it quickly enough: This is probably the most

common problem for most businesses. Cash-flow comes from moving inventory. If a company

buys an amount of product for their inventory and they do not move it, the company ends up

losing money.

Computer assessment of inventory items for sale is inaccurate: Nothing is more frustrating

than going to a business that says it has a product but it turns out that they do not. The quantities

are off and the actual items are not available. Too many people assume that the computer records

are infallible. But the records have to be entered by a person and if the person responsible does

not keep accurate records, it can turn into a real headache. Inaccurate inventory records can

easily result in loss of money and strained customer service.

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Computer inventory systems are too complicated: There are many inventory software

programs available for business use. The problem is that many of these programs are not user-

friendly. Computer software developers do not take into account that most of the people who will

actually be using these systems are not tech savvy. A company does not always have the time

and money to invest in training of personnel to use software effectively.

Items in-stock gets misplaced: Even if the computer accurately shows the item as in stock, it

may have been misplaced somewhere at the warehouse, or in the wrong location within a store.

This can lead to a decrease in profits due to lost sales and higher inventory costs because the item

must be re-ordered. Plus, the company must spend the time for employees to track down the

misplaced item.

Not keeping up with the rising price of raw materials: This falls more into the accounting end

of inventory management. By not keeping current with the rising price of raw materials, a

company will lose profits because they are not adjusting the price of their finished products.

Finished items in inventory must be relative to the cost of raw goods.

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HHOSTEDOSTED I INVENTORYNVENTORY M MANAGEMENTANAGEMENT

The main idea behind hosted inventory management is that instead of a company’s inventory

being managed within the company’s own network and maintained by the company itself, a

separate network host outside the company manages the inventory. The inventory is often

accessible through the web on a secure network.

With hosted inventory management, a company or institution purchases software packages from

an inventory management provider. This software, while originally referred to as “hosted”

software, has also been called “on-demand” software or even more recently as SAAS (Software

As A Service).

WHY IS HOSTED INVENTORY MANAGEMENT IMPORTANT?

It takes time, money, and specialized personnel to manage a company’s inventory. This can add

to payroll and risk costs as well as keeping employees from performing their original job

requirements and duties.

In today’s business world, inventory management can help control profit margins. Having

software can help a business reduce waste and prevent inventory from stockpiling or

bottlenecking.

In order to implement a hosted inventory management system, a business must pay a licensing

fee for the software. It is much cheaper than spending the money on your own system but care

must be taken. Many hosted inventory management systems are either outdated or too

complicated for general employees to maintain.

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ADVANTAGES OF HOSTED INVENTORY MANAGEMENT

One of the main advantages to a hosted inventory management system is lower cost which

translates to a higher cash-flow. It is decidedly cheaper to buy a hosted software package

versus traditional software. No special equipment or hardware is needed such as a network. The

software and set-up, along with the license fees, are cheaper than traditional implementation.

Another benefit of hosted inventory management is that it takes less time to install and can be

up and running a lot quicker than traditional software. You don’t have to mess with setting

up internal servers, network security, and other hardware. This fast deployment of the system

means businesses and institutions can begin using their management system sooner. It also

means companies spend less time in training employees. Hosted inventory systems are generally

are less distracting because the software is doing most of the work. This leaves employees free to

pursue other tasks.

Hosted inventory management is less risky that traditional software. When a company begins

a project, the longer it takes to get it off the ground, the more likely that something may occur to

derail the project, including the project’s team members losing motivation and momentum. With

hosted software, there is usually a faster time period before a project is ready for completion. The

less time spent on a project, the more money a company saves.

Traditional inventory management systems require a business to manage relations and

communications with multiple vendors and suppliers. With hosted inventory management,

you just deal with one source which makes reorders faster and much easier. As a company

striving to be successful, you have more time to focus on your company’s goals.

HOW DOES HOSTED INVENTORY MANAGEMENT WORK?

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The beauty of hosted inventory management is that it does all the work for you. You still have to

sit down and collect data but you no longer have to juggle every aspect of inventory single-

handedly. Hosted inventory management manages all aspects such as:

Purchasing of products and materials

Shipping of all items to and from the company’s distribution center.

Setting up bar codes on all items.

Management of work orders.

Inventory maintenance such as keeping up with quantities and item locations.

Management of a company’s assets

Logging reports and sending them to appropriate departments.

Processing of all orders through the correct channels.

Able to keep accurate information on multiple distribution centers and warehouses.

Keeping accurate accounting records of all inventories as they are sold.

.

RRETAILETAIL I INVENTORYNVENTORY M MANAGEMENTANAGEMENT

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The retail industry can be extremely competitive and one of the biggest challenges is managing a

store’s retail inventory. Businesses need to have space to store a wide number of products along

with a wide variety. If a retail store does not carry enough of a product, then they are losing

potential customers who will shop elsewhere.

Retail inventory is different from other forms of inventory because of the quantities needed.

Retail chains need warehouses to keep all of their stock and the means to transport it to their

stores. Keeping up with such large quantities can be difficult for anyone, even with the help of an

automated system. To track a company’s products, a retail inventory management system needs

to be successfully implemented.

Retail inventory management is the process and methods used to keep track of the stock in a

retail business. These methods control everything from ordering, shipping, receiving, tracking

inventory, retail turn-over, and storage. Retail inventory management can help keep a business’

profits at a steady margin as well as reducing theft and loss of inventory. Many retail businesses

lose money every year because they do not have a successful inventory management system in

place.

Retail Inventory Management should provide the following functions for a retail business:

Track and manage all of the inventory for the business

Keep up with store markdowns

Evaluate how well some groups of products do in sales

Provides analysis for comparison shopping with competitors

Collect data on the sales and inventory of individual stores using SKU

Allows you to accurately review your inventory

HOW TO MANAGE INVENTORY

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Most businesses use some form of computer software to manage their inventory. Unless the

retail business is very small, doing it manually would be very impractical, especially for large

companies that deal in thousands of individual products.

A business that has a successful system for retail management will allow the business to keep a

sufficient amount of stock to meet customer demand. If a business does not have enough

inventories, then it can slow down cash flow. Too much inventory can cost business money and

take up more room.

When dealing with retail inventory management, companies will utilize one of these systems:

Point-of-sale terminals – These are check-out points that automatically update a company’s

inventory levels.

Job costing and inventory systems – Another automatic system that updates computerized

levels of inventory.

Barcodes and readers – Every product these days contains a barcode with the items

information. Barcodes makes it easy and quick track stock.

Electronic Supplier Product catalogs – This system can update inventory levels

automatically through either the internet or media disk.

MANAGING RETAIL INVENTORY INVOLVES SEVERAL CHARACTERISTICS AND STEPS .

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One of the most important steps is to make sure that you always remove products from the

system as soon as they are sold. The same is true for receiving shipments of new stock. Make

sure you record it as quickly as possible.

Physical inspections should be regularly performed to make sure the computerized system is

accurate with what is actually in stock. A physical inspection involves manually looking over the

stock to see that they numbers match.

Review sales reports weekly. You want to do this to see what is selling and what is not. Products

that spend more time on the shelf should be re-evaluated or discounted to get rid of them.

Another step is to research to find the right products to sell. Businesses should come up with a

target market and try to carry the right type of inventory to meet that target. To make sure that

you have the right product in your stores, you need to know what type of products to order and

how much, when to order, and when the products should arrive.

Keeping up with retail inventory management should be delegated to several individuals or a

department. Supermarkets that have both grocery and non-grocery items have separate

departments for each. By delegating inventory into smaller groups, it allows the individuals in

charge of their group to have a better understanding of what stock is available and how well it

sells.

Prevention of Inventory Theft and Loss One of the biggest problems to plague retail inventory is

theft and loss of retail products. Every time this happens, it costs business money. Preventing

inventory theft can be difficult. But with the right system, you can definitely reduce it. Here are

some tips:

Do not share or hand out the same password for every cashier. Having separate passwords and

log-ins tells who was manning the register at certain times.

Always check out any transactions that were voided or canceled. This is a common way for

inventory to disappear from a store.

Set up a password-protected security on all computers and systems. Only when employees

absolutely must have access should it be granted.

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Go over inventory reports every day to make sure sales figures match with the current quantities.

Make sure the back door has a security alarm system that is activated every time the door is

opened without authorization. If employees know the door should not be opened without

permission, they shouldn’t open it.

Inspect the garbage every night before it goes out. Use clear plastic bags so that you can easily

see inside the bag and make sure there is no inventory hidden inside.

Set up security cameras not only in the store but in the back storage as well. This allows you to

keep an eye on items out on the racks as well as in stock.

IINVENTORYNVENTORY M MANAGEMENTANAGEMENT C COMPANIESOMPANIES

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The outsourcing of inventory management is common practice in the current world economy. In

fact, the third party industry has seen tremendous growth over the past several years. In the

rapidly growing markets of today, it has become more profitable to outsource their inventory.

The third party companies that handle inventory are referred to as inventory management

companies.

Inventory management companies handle a variety of functions that involve other companies’

stock. These companies deal with warehousing and storage of materials, setting up bar codes,

creating inventory databases, and installing any software or hardware that might be needed.

Some companies even specialize in specific types of inventory such as chemicals or agriculture.

The two most common types of inventory management companies deal in either storage or

software development. The ones that handle storage also handle shipping, packaging, and other

areas related to the physical materials.

Companies that handle the computer end of things develop software platforms that are used to

track and manage inventory as it is used or shipped. These companies do not handle the physical

stock but instead offer tech support for their clients as well as do all the upgrades and databases.

It is nice having someone else keep track of what can quickly develop into a chaotic mess. But is

an inventory management company right for every business? Not necessarily. Some companies

are better off managing their own inventory. Before deciding to use an inventory management

company, a business should research the total cost of the supply service to see if it actually saves

money. This requires a cost/benefit analysis to see what the cost of the service is versus how

much a business would save.

ADVANTAGES TO USING AN INVENTORY MANAGEMENT COMPANY

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Using an inventory management company can have many benefits. Here are ten such benefits to

help you decide if you should use one or not:

Frees up the costs you would have spent on managing the inventory yourself. This additional

cash flow can then be invested in other areas to promote the business.

Frees up time that would have been spent tracking inventory as well as personnel man hours.

You are now available to concentrate on other tasks and can delegate employees more

efficiently.

Allows you time to concentrate on increasing business and improving customer service.

Frees up space and storage costs because you no longer have to store materials at your place of

business. Many inventory management companies houses client inventory at their own

warehouses.

Set up a bar code system and tracks the inventory, Bar codes are fast and easy ways of tracking

inventory logistics. Bar codes can store information such as unit weight, price, and overall

quantity.

By using the Internet, clients can inspect and control all management of inventory from

practically any computer.

Databases are created for cataloging all inventory as it moves through the supply chain. Clients

do not have to create these databases themselves but can browse them through computer

networks.

In some instances, inventory management companies take care of packaging and shipping.

Again, this is one less thing the client has to worry about.

You do not necessarily need special software or hardware. Most inventory management software

is adaptable for almost any operating system or web browser.

SSHOPPERSHOPPERS S STOPTOP I INVENTORYNVENTORY M MANAGEMENTANAGEMENT S SYSTEMYSTEM

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Future projects at Shoppers Stop include Automatic Data Capture (ADC) at the distribution

centers. Every product has a different bar code and since every bar code is number based there

are chances of errors in operations resulting in stock inaccuracy. Shoppers Stop has already set

up the ADC for the cashier and stock taking process. It further plans to use it for the stock

receiving process and stock replenishment at distribution centers. The company is also in the

process of testing out a consolidated intake model, which, in time, will add value to the total

supply chain management (SCM). For this the company plans to take the services of a 3PL (third

party logistics) company which would do milk-runs on a daily basis and collect the stocks as per

the delivery authorizations and deliver the same to the distribution centers. Another endeavor is

to integrate suppliers into Shoppers Stop supply chain through electronic data interchange (EDC)

and the Internet. Shoppers Stop has already initiated progressive steps in management of the

supply chain in line with its mission of ‘Nothing but the best’. It won’t be very long before other

retailers also take up developments in the area of SCM based on these benchmarks. Shoppers

Stop implemented an auto replenishment system in 2000. Today, the auto replenishment

schedule (ARS) acts as a live, real time link between the distribution centre and Shoppers Stop

outlets. The ARS automatically analyses data and suggests that a particular stock in a particular

quantity, size and colour be sent to a specific Shoppers Stop outlet.

The warehouse management system (WMS), on the other hand, is designed to optimize the space

in the warehouse. So when stock comes in from vendor, the system allocates the slot in the

warehouse for the merchandise to be put away in such a way that space utilization is optimum.

The ARS minimizes the reaction time to raise a replenishment trigger and the WMS minimizes

processing of the replenishment trigger at the distribution centre in order to provide 100 per cent

availability of goods. Shoppers Stop has made investments in warehousing infrastructure and

systems. Today, distribution centers of Shoppers Stop operate round the clock, supplying stock

to stores much before the first customer walks in and eliminating any kind of interference to the

customer while he\she is browsing the products on display. Today, Shoppers Stop distribution

centers deliver service levels at a cost, which is comparable to the best of the world’s distribution

centre operation. The other major area of concern is inventory control. Shoppers Stop which is

basically a lifestyle retailer is hard-pressed to keep pace with changing fashions. Hence, the

focus is on controlling inventory in such a way that obsolescence/dead inventory is decreased.

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With the implementation of the ARS and WMS, Shoppers Stop has reduced the inventory to 10

weeks. An efficient supply chain has enabled the company to optimize stock levels thereby

conserving working capital. It has enabled quick turn around of inventory, which minimizes the

obsolescence in stocks. What makes the retailing business complex is the dimensions - the

number of SKUs, large vendor base, seasonality, tax laws managing expansion and scalability of

operation, inbound and outbound transportation, stock accuracy, and reverse logistics of

defective stocks. All decisions and actions taken anywhere in the chain impact each and every.

CCONCLUSIONONCLUSION Page | 61


Inventory is the physical asset of a company that can create problem if there is shortage while

production and also if its in excess even after production. Inventory is constantly changing as

quantities are sold and replenished.

Hence it can be understood that efficient inventory management can take the company to new

heights and inefficient inventory management can ruin the company.

Accordingly retail sector have thin margin from price point of view and therefore various costs

have to be retained, and therefore inventory holding cost which is the major cost for retail,

inevitably is required to be addressed very closely.

The subject report has tried to understand the various inventory control measures that are

exercised by retail and highlight. The concepts of merchandising, which is the backbone of any

retail activity.

BBIBLIOGRAPHYIBLIOGRAPHY/ R/ REFERENCEEFERENCE

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WWW.INVENTORY .COM

WWW.INVESTOPEDIA.COM

WWW.WISEGEEK.COM

MATERIAL MANAGEMENT BOOK – BY RAJENDRA MISHRA

OPERATION AND PRODUCTION PLANNING BOOK

LOGISTICS MANAGEMENT – BY K. SHRIDHARA BHAT

MATERIAL MANAGEMENT – BY S. D. APHALE

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http://www.askdeb.com/

http://www.inventory/

Inventory Final 97-03

Documents

inventory storage

inventory requirements

inventory balances

turnover of inventory

word inventory

projected inventory

little inventory isnt

stock of goods