Inventory Systems are very useful to businesses for tracking inventory. They are basically used by organizations dealing with product manufacturing or those companies that are in one way involved with the selling of goods, especially on a large scale, so that they can account for all physical goods that facilitate the sale of any finished product. Inventory systems can be costly; hence, the size of a particular firm is critical in determining whether the firm is in need of such an investment. Large firms contain various components and require a system which will assist the management in tracking their inventory. The justification of this paper is to provide a discussion of the various components of an inventory system, how they can be utilized in making them more effective, as well as real life examples, which will assist in understanding how this has been achieved.
Inventory can be described as the physical stock of goods, other items, or resource kept in a storage facility to meet the expected demand. Given the definition of inventory, a number of situations may be interpreted as inventory management problems, and they include manufacturing inventory, distribution inventory, and services inventory, as well as the retail inventory. According to Jacobs, Chase, and Richards (2013), manufacturing inventory refers to raw materials which is expected to be used in the production finished products, component parts; for example, in an assembly plant, supplies for maintenance, repair, and operation (MRO), and work-in-process, which is also referred to as work-in-progress (WIP) or pipeline inventory. Distribution inventory refers to inventory in-transit, indicating that it is in motion somewhere in the system and warehouse inventory. Retail inventory is carried for direct sales to consumers while services inventory basically refers to any physical goods that will be sold and the resources or supplies required to administer the service.
Having understood what inventory is, then, one would wonder, why do we keep inventories? How is it beneficial? Well, the process of inventory is effective because when there is a fall in supply of various goods, inventory provides access to more supply to keep up with demand. The inventory also allows the flexibility of operations in an organization in that for every new range of products, there are costs associated with its production. Inventory reduces these costs by ensuring that there is the least number of possible production setups when there is a stock in the inventory. In fact, the pressure to release goods is eased on the production system, thus causing longer lead time, which in turn allows proper planning in production, which ensures a smoother and lower cost operation by producing large lot sizes. The inventory also provides security for differences in the delivery of raw materials. Many inconveniences could occur when an organization orders raw material from its vendor. These may include delays because of a shortage of the materials, delays in normal shipping time, and other unexpected and unplanned inconveniences. In addition, availability of ready stock caters for this anomaly. For an order to be placed, received and the good to be delivered, many small costs are involved, including phone calls, labor, and others charges. The larger the order is, the lower these costs are. Having a large inventory stock allows the organization to take advantage of this large purchase order. On the other hand, inventory also has its disadvantages in that it takes space in warehouses and costs money in terms of space, losses, and capital. Carrying cost could cost up to 30% of its value annually in some instances (Zipkin, 2000).
At this juncture, it is clear that there are a lot of variables and dynamics involved in the process of managing inventory, and that is where inventory control comes in. Under normal circumstances, control of inventory basically takes up 45% to 90% of all business expenses. Inventory control refers to the process of managing inventory that is in the warehouses or stockroom, and to be efficient, it basically requires that one knows what products are in the warehouse and how much they are and being conversant with where each item is located in the warehouse, a situation that makes sure that every product in the warehouse remains in perfect condition as it was in the beginning, as well as storing the products in order to reduce the cost of filling orders. There is no fixed ideal inventory; the ideal inventory depends on the market, and an organization normally uses industry figures to determine the ideal stock to maintain. Often, there is no justification in a large inventory because the turnover does not make the investment worth it, and a low stock, on the other hand, means sales and profits alike will be low, and a number of products will not be able to meet the demand (Schreibfeder, 2009).
Benefits of Inventory Control
Inventory control is important because it aids in balancing the stock based on different properties in relation to demand. Similar goods may come in different sizes, packaging, colors, quantity, and many other properties. Therefore, good inventory control enables the company to identify the effects of each particular property and adjust the inventory accordingly. Another reason for inventory control is that planning helps add the movers and move slow sellers. In fact, it is worth noting that some products will sell more than the others based on the different market dynamics; hence, the inventory control helps to manage this aspect. Inventory control also helps get the best stock turnover rate for each item in the inventory and reduces expenses and markdowns. Finally, with good inventory control, an organization is able to maintain a good reputation for its customers by always having quality merchandise with the desirable properties (Prem, 2014).
Three main approaches used for inventory control are the eyeball system, Reserve stock/brown bag system, and perpetual inventory system. The eyeball system is mostly a large number of retail and small manufacturing companies. The person in charge stands in a central position and observes around. If he or she notices a product that is out of stock, they place an order immediately. The problem with this system is that a product that is doing quite well on the market might be out of stock for some time before the manager is able to notice. This means the organization will lose stocks for that particular period (Score, 2006). Also, in a small manufacturing company, the low stock may go unnoticed until when none will be left, and there will be a problem with production until the issue is resolved.
The reserve stock system can be said to be more methodical compared to the eyeball system. In this system, a certain quantity of stock is reserved; on most occasions a brown bag is actually positioned at the back of the area where the stock is stored. After the last product of the remaining stock has been used, the stock in the brown bag is now used as open stock from which point an order is placed immediately. If accurate calculations had been carried out, the replenishing stock should arrive just in time before all the stock was depleted. For this to take place, it is important to be aware of the rate at which the product is being used and the time taken by one order cycle. Therefore, if, for example 50 units are sold in a week, and the order cycle delivery takes two weeks, the reserve stock would be made up of 100 units (50u x 2w). This is okay, provided the cycle period is maintained. After a new order is received, the reserve stock is replaced, and the cycle continues. It is a fairly simple and efficient system for almost any organization. The differences in this system only occur in the management of the reserve stock (Score, 2006).
Perpetual inventory systems are the final group, and some types of the same are manual systems, the computer operated systems, and card-based systems. Computer oriented systems usually use a programmed instruction or message that is mostly called a trigger, which places an order to the right vendor when a particular item falls below the required level. The role played by each of the three systems is to count either the dollar use, unit use, or both of product lines and different goods. These facts aid in evading stock outs and maintaining the evaluation of product sales to determine where most of the emphasis should be focused (Score, 2006).
Warehousing and Distribution Centers
Warehousing and distribution activities have existed since the production and transportation processes were established. In modern times, warehouses are normally used as points of storage along with the supply chain from the source of raw materials to the point of consumption. They exist due to the economies of scale in transportation and manufacturing. In fact, the distribution centers, on the other hand, can be described as a special form of warehouses whose main attention is on throughput. Products received from different manufacturers are put together and shipped depending on the customer’s requirement (Chopra & Meidl, 2003).
Warehouses normally have roofed spaces, equipment for lifting products, shelves, loading docks, and offices. In many cases, products are packaged on pallets and lifted onto racks so as to maximize the use of vertical space. Warehouse design may vary depending on the type of product that will be stored. For instance, the decision on whether to build up or build out or have a two docks or single dock layout is based on the expected design. Warehousing operations can be said to have four major roles. First, there is the process of accumulating also referred to as bulk-making, which involves putting together of the quantity of stock. Secondly, there is break bulking, which involves breaking down a large quantity of smaller portions. Thirdly, there is assorting, which involves collecting different products and fourthly, there is sorting, which involves separating products of different grades and quantities.
Improvement in supply chain management ensures that the warehousing activities are efficient by using the automation process with a very good example being the picker system. The ordered parts are transported by a conveyor belt to the place the assembly is taking place to make the packages for distribution. Contrastingly, a picker to order system requires order pickers which search for and retrieve every item that is ordered. Automatic tracking of thousands of stock products makes it possible to replenish the stock automatically. Warehouses can be classified into three categories which are public, private, as well as a contract (Lester, Giuliano, & Meyer, 2011).
Public warehouses have a concept similar to the for-hire carrier used for transportation. They are mostly used for bulk breaking and repackaging. A disadvantage of public warehouses is that users have no control, and this makes it take more time before customers get their orders. Special public warehouses like bonded storage refer to a scenario where the customer has to pay a certain fee before the order is released. They are conveniently used by US Customs to hold untaxed stock. Private warehouses are held by the person using them for a long time because it is expensive to relocate or abandon. Contract warehousing is where a third party is consulted, and the warehousing task is outsourced to them. It is an agreement between private and public warehousing.
Inventory control in distributed centers, on the other hand, is specialized on throughput. A common practice in recent times is cross docking. After being received at the receiving dock, products are transported to the shipping dock immediately, where they are distributed to the waiting vehicles, a situation that minimizes the time for storage. Unlike in warehousing, the products must not necessarily be put in shelves (Lester, Giuliano, & Meyer, 2011).
Critical Elements of an Inventory System
Companies usually employ different inventory control programs, mainly depending on the type of business. However, irrespective of the type of program, it should contain the following properties to encourage its effectiveness.
Processes and procedures: clearly laid out and documented processes are the backbone of inventory control and should outline specific tasks and requirements. The inventory should only be managed and transactions processed using procedures (Score, 2006).
Training: Everybody involved in the process should understand the system, its procedures, and what is expected of them. It is common practice for employers to provide training to new staff before they are stationed in their respective places.
Compliance: All non-compliance issues should be promptly addressed. Only documented processes should be in use at all times.
Cycle counts: To ascertain the accuracy of inventory and discover problems that might be stemming, the aspect of cycle counts should be taken as a routine.
Inventory metrics: It is best to measure the accuracy of inventory activity and transactions to minimum standards. This measurement should be, in turn, used for process improvements.
Employees: Employee turnover should be monitored, especially in positions that carry out inventory transactions. Having had less experience, newer employees may fall victim to various mistakes. Therefore, the underperforming employees should be retrained or moved to positions that do not affect inventory accuracy.
Storage: Stock should be well organized and marked to prevent damage or errors. Due to disorganization, the product may be declared out of stock while it is available. In fact, damages, on the other hand, cause huge losses, especially when spoiled goods have to be disposed of. An effective warehouse organization goes a long way in inventory control.
System: It is easier to control and manage inventory when only one system is used for keeping records. Transactions should move smoothly from order to warehouse and transportation management systems.
Company mindset: quality and inventory accuracy should be taken up as everybody’s responsibility and not just as the responsibility of the employees in charge of transactions. It is that right mindset among all levels of management that ensures success.
IKEA Inventory and Distribution System
IKEA was formerly established in 1943 in Sweden, and since then, it has offered home accessories and furnishings of high-quality services at affordable prices for the majority of the population. It operates with the vision of creating a better life for its customers. The business model is set with the idea of offering a diverse range of well-designed and operational furnishing home products that are very cheap so that most people can afford them (Ikea, 2010).
Its supply chain is globally spread, with increasing sales in most of the world’s major regions. The approach has made its supply chain very complex because it has very many stores and outlets across the world. It basically has over 1200 suppliers in 55 different countries, and the stores being supplied from 31 central distribution centers from different countries or even directly from its suppliers (Ikea, 2010). Therefore, this has made its distribution channels and inventory system very complex. When it is looking for manufacturers, the company tries to source those who can produce their products at the lowest price possible but maintaining good function ability and design. Some of their producers are from Swedish forests, while others are in China, Germany, or Poland (Bartlett, Dessain & Sjoman, 2006).
It has established local offices nearest to its suppliers to support its distribution. This has also proved to be a good way of creating and maintaining good business relations between the involved companies. In addition, the employees responsible for trading services can make several visits to the supplier’s offices and closely follow up on the production process allowing the testing of new ideas and making frequent control checks. The offices have also been entrusted with the duty of surveilling the working conditions, the external environment around the factories and ensuring suitable working conditions for other employees and social conditions. All those activities should all be in accordance with IKEA’s code of conduct (Jonsson, Rudberg, & Holmberg, 2008).
To overcome the difficult situation of stock control, IKEA has established a program to achieve better control of its supply chain while still upholding performance in its delivery service and pricing. A global planning concept that is still being implemented was set up. It works on the principles of maintaining a mutually integrated planning process and centralized planning organization. In addition, it also focuses on data quality and the use of advanced software support (Ikea, 2010).
Apart from achieving this, IKEA aims to minimize the effect its production and distribution has on the environment. The general principle of doing this is that it calculates the number of products needed to satisfy the market demand as accurately and as possible. This eliminates any unnecessary warehousing costs by a great deal. The secret being that, having a global distribution network that is combined with large volumes of production put in flat packages will ultimately translate into lower costs. Transporting flat package minimizes waste of space, thus making it possible to transport more products at any given time. The initiative increases efficiency altogether. In addition, in the next three years, most of its products will be transported by rail as opposed to the road as has been done traditionally (Lief, 2008). Therefore, this aspect will enable them to monitor their environmental work and reduce fuel use, which will boost both cost and environmental objectives.
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