INVENTORY MANAGEMENT SYSTEM
AMITY BUSINESS SCHOOL, AUUP
Inventory control is concerned with minimizing the total cost of inventory.The three main
factors in inventory control decision making process are:
1.The cost of holding the stock (e.g., based on the interest rate).
2.The cost of placing an order (e.g., for row material stocks) or the set-up cost of
3.The cost of shortage, i.e., what is lost if the stock is insufficient to meet all demand.
The third element is the most difficult to measure and is often handled by establishing a
"service level" policy, e. g, certain percentage of demand will be met from stock without
SUCCESSFUL INVENTORY MANAGEMENT
Successful inventory management involves balancing the costs of inventory with the
benefits of inventory. Many small business owners fail to appreciate fully the true costs of
carrying inventory, which include not only direct costs of storage, insurance and taxes, but
also the cost of money tied up in inventory. This fine line between keeping too much
inventory and not enough is not the manager's only concern. Others include:
1.Maintaining a wide assortment of stock -- but not spreading the rapidly moving ones thin
2.Increasing inventory turnover -- but not sacrificing the service level;
3.Keeping stock low -- but not sacrificing service or performance.
4.Obtaining lower prices by making volume purchases
5.Having an adequate inventory on hand -- but not getting caught with obsolete items.
The degree of success in addressing these concerns is easier to gauge for some than for
others. For example, computing the inventory turnover ratio is a simple measure of
managerial performance. This value gives a rough guideline by which managers can set
goals and evaluate performance, but it must be realized that the turnover rate varies with
the function of inventory, the type of business and how the ratio is calculated (whether on
sales or cost of goods sold). Average inventory turnover ratios for individual industries can
be obtained from trade associations.
The ABC Classification The ABC classification system is to grouping items according
to annual sales volume, in an attempt to identify the small number of items that will
account for most of the sales volume and that are the most important ones to control for
effective inventory management.
Reorder Point: The inventory level R in which an order is placed where R = D.L, D =
demand rate (demand rate period (day, week, etc), and L = lead time.
Safety Stock: Remaining inventory between the times that an order is placed and when
new stock is received. If there are not enough inventories then a shortage may occur.
Safety stock is a hedge against running out of inventory. It is an extra inventory to take
care on unexpected events. It is often called buffer stock. The absence of inventory is
called a shortage.
EOQ is essentially an accounting formula that determines the point at which the
combination of order costs and inventory carrying costs are the least. The result is the
most cost effective quantity to order. In purchasing this is known as the order quantity, in
manufacturing it is known as the production lot size.
While EOQ may not apply to every inventory situation, most organizations will find it
beneficial in at least some aspect of their operation. Anytime you have repetitive
purchasing or planning of an item, EOQ should be considered. Obvious applications for
EOQ are purchase-to-stock distributors and make-to-stock manufacturers, however,
make-to-order manufacturers should also consider EOQ when they have multiple orders
or release dates for the same items and when planning components and sub-assemblies.
Repetitive buy maintenance, repair, and operating (MRO) inventory is also a good
application for EOQ. Though EOQ is generally recommended in operations where
demand is relatively steady, items with demand variability such as seasonality can still
use the model by going to shorter time periods for the EOQ calculation. Just make sure
your usage and carrying costs are based on the same time period.
Doesn’t EOQ conflict with Just-In-Time? While I don’t want to get into a long
discussion on the misconceptions of what Just-In-Time (JIT) is, I will address the most
common misunderstanding in which JIT is assumed to mean all components should
arrive in the exact run quantities ―just in time‖ for the production run. JIT is actually a
quality initiative with the goal of eliminating wasted steps, wasted labor, and wasted cost.
EOQ should be one of the tools used to achieve this. EOQ is used to determine which
components fit into this JIT model and what level of JIT is economically advantageous
for your operation. As an example, let us assume you are a lawn equipment manufacturer
and you produce 100 units per day of a specific model of lawn mower. While it may be
cost effective to have 100 engines arrive on your dock each day, it would certainly not be
cost effective to have 500 screws (1 days supply) used to mount a plastic housing on the
lawn mower shipped to you daily. To determine the most cost effective quantities of
screws or other components you will need to use the EOQ formula.
The basic Economic Order Quantity (EOQ) formula is as follows:
While the calculation itself is fairly simple the task of determining the correct data inputs
to accurately represent your inventory and operation is a bit of a project. Exaggerated
order costs and carrying costs are common mistakes made in EOQ calculations. Using
all costs associated with your purchasing and receiving departments to calculate order
cost or using all costs associated with storage and material handling to calculate carrying
cost will give you highly inflated costs resulting in inaccurate results from your EOQ
calculation. I also caution against using benchmarks or published industry standards in
calculations. I have frequently seen references to average purchase order costs of $100 to
$150 in magazine articles and product brochures. Often these references trace back to
studies performed by advocacy agencies working for business that directly benefit from
these exaggerated (my opinion) costs used in ROI calculations for their products or
services. I am not denying that some operations may have purchase costs in this range,
especially if you are frequently re-sourcing, re-quoting, and/or buying from overseas
vendors. However if your operation is primarily involved with repetitive buying from
domestic vendors — which is more common — you’ll likely see your purchase order
costs in the substantially lower.
Expressed in units, this is generally the easiest part of the equation. You simply input
your forecasted annual usage.
Also known as purchase cost or set up cost, this is the sum of the fixed costs that are
incurred each time an item is ordered. These costs are not associated with the quantity
ordered but primarily with physical activities required to process the order.
For purchased items, these would include the cost to enter the purchase order and/or
requisition, any approval steps, the cost to process the receipt, incoming inspection,
invoice processing and vendor payment, and in some cases a portion of the inbound
freight may also be included in order cost. It is important to understand that these are
costs associated with the frequency of the orders and not the quantities ordered. For
example, in your receiving department the time spent checking in the receipt, entering the
receipt, and doing any other related paperwork would be included, while the time spent
repacking materials, unloading trucks, and delivery to other departments would likely not
be included. If you have inbound quality inspection where you inspect a percentage of
the quantity received you would include the time to get the specs and process the
paperwork and not include time spent actually inspecting, however if you inspect a fixed
quantity per receipt you would then include the entire time including inspecting,
repacking, etc. In the purchasing department you would include all time associated with
creating the purchase order, approval steps, contacting the vendor, expediting, and
reviewing order reports, you would not include time spent reviewing forecasts, sourcing,
getting quotes (unless you get quotes each time you order), and setting up new items. All
time spent dealing with vendor invoices would be included in order cost.
Associating actual costs to the activities associated with order cost is where many an
EOQ formula runs afoul. Do not make a list of all of the activities and then ask the
people performing the activities "how long does it take you to do this?" The results of
this type of measurement are rarely even close to accurate. I have found it to be more
effective to determine the percentage of time within the department consumed
performing the specific activities and multiplying this by the total labor costs for a certain
time period (usually a month) and then dividing by the line items processed during that
It is extremely difficult to associate inbound freight costs with order costs in an
automated EOQ program and I suggest it only if the inbound freight cost has a significant
effect on unit cost and its effect on unit cost varies significantly based upon the order
In manufacturing, the order cost would include the time to initiate the work order, time
associated with picking and issuing components excluding time associated with counting
and handling specific quantities, all production scheduling time, machine set up time, and
inspection time. Production scrap directly associated with the machine setup should also
be included in order cost as would be any tooling that is discarded after each production
run. There may be times when you want to artificially inflate or deflate set-up costs. If
you lack the capacity to meet the production schedule using the EOQ, you may want to
artificially increase set-up costs to increase lot sizes and reduce overall set up time. If
you have excess capacity you may want to artificially decrease set up costs, this will
increase overall set up time and reduce inventory investment. The idea being that if you
are paying for the labor and machine overhead anyway it would make sense to take
advantage of the savings in reduced inventories.
For the most part, order cost is primarily the labor associated with processing the order,
however, you can include the other costs such as the costs of phone calls, faxes, postage,
Also called Holding cost, carrying cost is the cost associated with having inventory on
hand. It is primarily made up of the costs associated with the inventory investment and
storage cost. For the purpose of the EOQ calculation, if the cost does not change based
upon the quantity of inventory on hand it should not be included in carrying cost. In the
EOQ formula, carrying cost is represented as the annual cost per average on hand
inventory unit. Below are the primary components of carrying cost.
Interest. If you had to borrow money to pay for your inventory, the interest rate would
be part of the carrying cost. If you did not borrow on the inventory, but have loans on
other capital items, you can use the interest rate on those loans since a reduction in
inventory would free up money that could be used to pay these loans. If by some miracle
you are debt free you would need to determine how much you could make if the money
Insurance. Since insurance costs are directly related to the total value of the inventory,
you would include this as part of carrying cost.
Taxes. If you are required to pay any taxes on the value of your inventory they would
also be included.
Storage Costs. Mistakes in calculating storage costs are common in EOQ
implementations. Generally companies take all costs associated with the warehouse and
divide it by the average inventory to determine a storage cost percentage for the EOQ
calculation. This tends to include costs that are not directly affected by the inventory
levels and does not compensate for storage characteristics. Carrying costs for the purpose
of the EOQ calculation should only include costs that are variable based upon inventory
If you are running a pick/pack operation where you have fixed picking locations assigned
to each item where the locations are sized for picking efficiency and are not designed to
hold the entire inventory, this portion of the warehouse should not be included in carrying
cost since changes to inventory levels do not effect costs here. Your overflow storage
areas would be included in carrying cost. Operations that use purely random storage for
their product would include the entire storage area in the calculation. Areas such as
shipping/receiving and staging areas are usually not included in the storage calculations.
However. if you have to add an additional warehouse just for overflow inventory then
you would include all areas of the second warehouse as well as freight and labor costs
associated with moving the material between the warehouses.
Since storage costs are generally applied as a percentage of the inventory value you may
need to classify your inventory based upon a ratio of storage space requirements to value
in order to assess storage costs accurately. For example, let's say you have just opened a
new E-business called "BobsWeSellEverything.com". You calculated that overall your
annual storage costs were 5% of your average inventory value, and applied this to your
entire inventory in the EOQ calculation. Your average inventory on a particular piece of
software and on 80 lb. bags of concrete mix both came to $10,000. The EOQ formula
applied a $500 storage cost to the average quantity of each of these items even though the
software actually took up only 1 pallet position while the concrete mix consumed 75
pallet positions. Categorizing these items would place the software in a category with
minimal storage costs (1% or less) and the concrete in a category with extreme storage
costs (50%) that would then allow the EOQ formula to work correctly.
There are situations where you may not want to include any storage costs in your EOQ
calculation. If your operation has excess storage space of which it has no other uses you
may decide not to include storage costs since reducing your inventory does not provide
any actual savings in storage costs. As your operation grows near a point at which you
would need to expand your physical operations you may then start including storage in
A portion of the time spent on cycle counting should also be included in carrying cost,
remember to apply costs which change based upon changes to the average inventory
level. So with cycle counting, you would include the time spent physically counting and
not the time spent filling out paperwork, data entry, and travel time between locations.
Other costs that can be included in carrying cost are risk factors associated with
obsolescence, damage, and theft. Do not factor in these costs unless they are a direct
result of the inventory levels and are significant enough to change the results of the EOQ
A firm's break-even point occurs when at a point where total revenue equals total costs.
Break-even analysis depends on the following variables:
Selling Price per Unit:The amount of money charged to the customer for each unit of a
product or service.
Total Fixed Costs: The sum of all costs required to produce the first unit of a product.
This amount does not vary as production increases or decreases, until new capital
expenditures are needed.
Variable Unit Cost: Costs that vary directly with the production of one additional unit.
Total Variable Cost The product of expected unit sales and variable unit cost, i.e.,
expected unit sales times the variable unit cost.
Forecasted Net Profit: Total revenue minus total cost. Enter Zero (0) if you wish to find
out the number of units that must be sold in order to produce a profit of zero (but will
recover all associated costs)
Each of these variables is interdependent on the break-even point analysis. If any of the
variables changes, the results may change.
Total Cost: The sum of the fixed cost and total variable cost for any given level of
production, i.e., fixed cost plus total variable cost.
Total Revenue: The product of forecasted unit sales and unit price, i.e., forecasted unit
sales times unit price.
Break-Even Point: Number of units that must be sold in order to produce a profit of zero
(but will recover all associated costs). In other words, the break-even point is the point at
which your product stops costing you money to produce and sell, and starts to generate a
profit for your company.
problems, such as:
1.setting price level and its sensitivity
2.targeting the "best" values for the variable and fixed cost combinations
3.determining the financial attractiveness of different strategic options for your company
The graphic method of analysis (below) helps you in understanding the concept of the
break-even point. However, the break-even point is found faster and more accurately with
the following formula:
Q = FC / (UP - VC)
Q = Break-even Point, i.e., Units of production (Q),
FC = Fixed Costs,
VC = Variable Costs per Unit
UP = Unit Price
Break-Even Point Q = Fixed Cost / (Unit Price - Variable Unit Cost)
JUST IN TIME (JIT)
Just In Time (JIT) is an inventory strategy implemented to improve the return on
investment of a business by reducing in-process inventory and its associated costs. The
process is driven by a series of signals, or Kanban , that tell production processes to make
the next part. Kanban are usually simple visual signals, such as the presence or absence
of a part on a shelf. JIT can lead to dramatic improvements in a manufacturing
organization's return on investment, quality, and efficiency when implemented correctly.
New stock is ordered when stock reaches the re-order level. This saves warehouse space
and costs. However, one drawback of the JIT system is that the re-order level is
determined by historical demand. If demand rises above the historical average planning
duration demand, the firm could deplete inventory and cause customer service issues. To
meet a 95% service rate a firm must carry about 2 standard deviations of demand in
safety stock. Forecasted shifts in demand should be planned for around the Kanban until
trends can be established to reset the appropriate Kanban level. In recent years
manufacturers have touted a trailing 13 week average is a better predictor than most
forecastors could provide.
A related term is Kaizen which is an approach to productivity improvement literally
meaning "continuous improvement" of process.
INTRODUCTION TO JIT
The technique was first used by the Ford Motor Company as described explicitly by
Henry Ford's My Life and Work (1922): "We have found in buying materials that it is not
worth while to buy for other than immediate needs. We buy only enough to fit into the
plan of production, taking into consideration the state of transportation at the time. If
transportation were perfect and an even flow of materials could be assured, it would not
be necessary to carry any stock whatsoever. The carloads of raw materials would arrive
on schedule and in the planned order and amounts, and go from the railway cars into
production. That would save a great deal of money, for it would give a very rapid
turnover and thus decrease the amount of money tied up in materials. With bad
transportation one has to carry larger stocks." This statement also describes the concept
of "dock to factory floor" in which incoming materials are not even stored or warehoused
before going into production.
The technique was subsequently adopted and publicised by Toyota Motor Corporation of
Japan as part of its Toyota Production System (TPS).
Japanese corporations cannot afford large amounts of land to warehouse finished
products and parts. Before the 1950s, this was thought to be a disadvantage because it
reduced the economic lot size. (An economic lot size is the number of identical products
that should be produced, given the cost of changing the production process over to
another product.) The undesirable result was poor return on investment for a factory.
The chief engineer at Toyota in the 1950s, Taiichi Ohno examined accounting
assumptions and realized that another method was possible. The factory could be made
more flexible, reducing the overhead costs of retooling and reducing the economic lot
size to the available warehouse space.
Over a period of several years, Toyota engineers redesigned car models for commonality
of tooling for such production processes as paint-spraying and welding. Toyota was one
of the first to apply flexible robotic systems for these tasks. Some of the changes were as
simple as standardizing the hole sizes used to hang parts on hooks. The number and types
of fasteners were reduced in order to standardize assembly steps and tools. In some cases,
identical subassemblies could be used in several models.Toyota engineers then
determined that the remaining critical bottleneck in the retooling process was the time
required to change the stamping dies used for body parts. These were adjusted by hand,
using crowbars and wrenches. It sometimes took as long as several days to install a large
(multiton) die set and adjust it for acceptable quality. Further, these were usually installed
one at a time by a team of experts, so that the line was down for several weeks.
Toyota implemented a strategy called Single Minute Exchange of Die (SMED),
developed by Shigeo Shingo. With very simple fixtures, measurements were substituted
for adjustments. Almost immediately, die change times fell to about half an hour. At the
same time, quality of the stampings became controlled by a written recipe, reducing the
skill required for the change. Analysis showed that the remaining time was used to search
for hand tools and move dies. Procedural changes (such as moving the new die in place
with the line in operation) and dedicated tool-racks reduced the die-change times to as
little as 40 seconds. Dies were changed in a ripple through the factory as a new product
After SMED, economic lot sizes fell to as little as one vehicle in some Toyota plants.
Carrying the process into parts-storage made it possible to store as little as one part in
each assembly station. When a part disappeared, that was used as a signal to produce or
order a replacement.
Philosophy behind JIT
Just-in-time (JIT) inventory systems are not just a simple method that a company has to
buy in to; it has a whole philosophy that the company must follow. The ideas in this
philosophy come from many different disciplines including; statistics, industrial
engineering, production management and behavioural science. In the JIT inventory
philosophy there are views with respect to how inventory is looked upon, what it says
about the management within the company, and the main principle behind JIT.
Firstly, inventory is seen as incurring costs instead of adding value, contrary to traditional
thinking. Under the philosophy, businesses are encouraged to eliminate inventory that
doesn’t add value to the product. Secondly, it sees inventory as a sign of sub par
management as it is simply there to hide problems within the production system. These
problems include backups at work centres, lack of flexibility for employees and
equipment, and inadequate capacity among other things.
In short, the just-in-time inventory system is all about having ―the right material, at the
right time, at the right place, and in the exact amount.‖
Some of the results were unexpected. A huge amount of cash appeared, apparently from
nowhere, as in-process inventory was built out and sold. This by itself generated
tremendous enthusiasm in upper management. Another surprising effect was that the
response time of the factory fell to about a day. This improved customer satisfaction by
providing vehicles usually within a day or two of the minimum economic shipping delay.
Also, many vehicles began to be built to order, completely eliminating the risk they
would not be sold. This dramatically improved the company's return on equity by
eliminating a major source of risk. Since assemblers no longer had a choice of which part
to use, every part had to fit perfectly. The result was a severe quality assurance crisis, and
a dramatic improvement in product quality. Eventually, Toyota redesigned every part of
its vehicles to eliminate or widen tolerances, while simultaneously implementing careful
statistical controls. (See Total Quality Management). Toyota had to test and train
suppliers of parts in order to assure quality and delivery. In some cases, the company
eliminated multiple suppliers.
When a process problem or bad parts surfaced on the production line, the entire
production line had to be slowed or even stopped. No inventory meant that a line could
not operate from in-process inventory while a production problem was fixed. Many
people in Toyota confidently predicted that the initiative would be abandoned for this
reason. In the first week, line stops occurred almost hourly. But by the end of the first
month, the rate had fallen to a few line stops per day. After six months, line stops had so
little economic effect that Toyota installed an overhead pull-line, similar to a bus bell-
pull, that permitted any worker on the production line to order a line stop for a process or
quality problem. Even with this, line stops fell to a few per week.
The result was a factory that became the envy of the industrialized world, and has since
been widely emulated. The Just in Time philosophy was also applied to other segments
of the supply chain in several types of industries. In the commercial sector, it meant
eliminating one or all of the warehouses in the link between a factory and a retail
Benefits of JIT
As most companies use an inventory system best suited for their company, the Just-In-
Time Inventory System (JIT) can have many benefits resulting from it. The main benefits
of JIT are listed below.
1 Set up times are significantly reduced in the warehouse. Cutting down the set up time to
be more productive will allow the company to improve their bottom line to look more
efficient and focus time spend on other areas that may need improvement.
2 The flows of goods from warehouse to shelves are improved. Having employees
focused on specific areas of the system will allow them to process goods faster instead of
having them vulnerable to fatigue from doing too many jobs at once and simplifies the
tasks at hand.
3 Employees who possess multi-skills are utilized more efficiently. Having employees
trained to work on different parts of the inventory cycle system will allow companies to
use workers in situations where they are needed when there is a shortage of workers and a
high demand for a particular product.
4 Better consistency of scheduling and consistency of employee work hours. If there is no
demand for a product at the time, workers don’t have to be working. This can save the
company money by not having to pay workers for a job not completed or could have
them focus on other jobs around the warehouse that would not necessarily be done on a
5 Increased emphasis on supplier relationships. No company wants a break in their
inventory system that would create a shortage of supplies while not having inventory sit
on shelves. Having a trusting supplier relationship means that you can rely on goods
being there when you need them in order to satisfy the company and keep the company
name in good standing with the public.
6 Supplies continue around the clock keeping workers productive and businesses focused
on turnover. Having management focused on meeting deadlines will make employees
work hard to meet the company goals to see benefits in terms of job satisfaction,
promotion or even higher pay.
Problems associated with the JIT system:
Within a JIT System
The major problem with Just In Time operation is that it leaves the supplier and
downstream consumers open to supply shocks. In part, this was seen as a feature rather
than a bug by Ohno, who used the analogy of lowering the level of a river in order to
expose the rocks to explain how removing inventory showed where flow of production
was interrupted. Once the barriers were exposed, they could be removed; since one of the
main barriers was rework, lowering inventory forced each shop to improve its own
quality or cause a holdup in the next downstream area. Just In Time is a means to
improving performance of the system, not an end.
With shipments coming in sometimes several times per day, Toyota is especially
susceptible to an interruption in the flow. For that reason, Toyota is careful to use two
suppliers for most assemblies. As noted in Liker (2003), there was an exception to this
rule that put the entire company at risk by the 1997 Aisin fire. However, since Toyota
also makes a point of maintaining high quality relations with its entire supplier network,
several suppliers immediately took up production of the Aisin-built parts by using
existing capability and documentation. Thus, a strong, long-term relationship with a few
suppliers is preferred to short-term, price-based relationships with competing suppliers.
Within a raw material stream
As noted by Liker (2003) and Womack and Jones (2003), it would ultimately be desirable
to introduce flow and JIT all the way back through the supply stream. However, none of
them followed this logically all the way back through the processes to the raw materials.
With present technology, for example, an ear of corn cannot be grown and delivered to
order. The same is true of most raw materials, which must be discovered and/or grown
through natural processes that require time and must account for natural variability in
weather and discovery.
The Japanese Breakthrough
Consider a (highly) simplified mathematical model of the ordering process.
K = the incremental cost of placing an order
kc = the annual cost of carrying one unit of inventory
D = annual demand in units
Q = optimal order size in units
TC = total cost over the year
We want to know Q.
We assume that demand is constant and that the company runs down the stock to zero
and then places an order, which arrives instantly. Hence the average stock held (the
average of zero and Q, assuming constant usage) is Q / 2. Also, the annual number of
orders placed is D / Q.
TC consists of two components. The first is the cost of carrying inventory, which is given
by Q * kc / 2, i.e. the average inventory times the carrying cost per unit. The second cost
is the cost of placing orders, given by D * K / Q, the annual number of orders, D / Q.
times the cost per order, K.
Thus total annual cost is
We differentiate TC with respect to Q and set it equal to 0 to find the Q for minimum
total cost, giving
which is known as the Economic Order Quantity or EOQ formula.
The key Japanese breakthrough was to reduce K to a very low level and to resupply
frequently instead of holding excess stocks.In practice JIT works well for many
businesses, but it is not appropriate if K is not small.The theory above can be fairly easily
adapted to take into account realistic features such as delays in delivery times and
fluctuations in demand.Both of these are usually modelled by normal distributions.The
delay in delivery, in particular, means that additional 'safety stocks' need to be held if a
stockout is to be rendered very unlikely.
In the 1980s, Just in Time, a new Japanese management system that advocated ordering
parts or inventory as they are needed, created a stir worldwide because it did away with
conventional ideas about overhead. One of the most prominent companies to adopt the
Just in Time method of ordering inventory was Toyota. For example, Toyota does not
have endless numbers of cars assembled and sitting waiting for someone to purchase.
Instead, Toyota can fabricate most cars upon placement of the order in approximately four
hours. They do not have one plant with all of the parts and components of the car, but
rather outside plants that deliver the parts and components immediately upon notification.
In some cases, parts and components can be delivered to a main plant in less than one
hour and a car assembled in the following three hours. This is not the process for a
custom or special car, but rather a routine process the company uses.
Just in Time ordering or Just in Time inventory is founded on the idea of waiting until the
last possible minute to acquire what is needed. Implementing this system saves significant
resources by not tying up capital in inventory that sits on the shelf, and ordering just the
amount you need to fill existing needs. Naturally, Just in Time ordering will not work in
dental offices without certain modifications. A dentist would not want impression
material arriving 60 seconds prior to the need to take impressions. On the other hand, Just
in Time ordering for inventory can be modified to the needs of a dental practice by
retaining only a 30-day supply of what is needed in the practice.
Most dental companies today, including the two largest distributors, can supply dental
practices with almost any item usually in just a few days. Given that most offices already
need more storage space, it is not necessary to purchase large quantities of inventory to
simply have it sit on shelves. There are also bulk-ordering programs in which you do not
have to pay for or take possession of the inventory all at once.
Implementing a Just in Time method of ordering has a number of advantages:
– The practice will not have to allocate significant sums of money up front to pay for
extensive inventory. This allows for a greater cash flow, other investments or simply
increasing monthly net profit.
– By not having to store large amounts of inventory, the practice is able to eliminate a
cramped, uncomfortable environment.
–Many dentists have found that ordering a large quantity of supplies often does not work
out because they decide to change to another supplier or material after using only a
portion of the original materials purchased. Consequently, a great deal of inventory goes
unused. Most practices have significant amounts of supplies already in the office that will
be unused because the dentist has decided to focus on a different product.
–Just in Time inventory or ordering also helps the office staff understand which supplies
and materials it uses, at what speed, and in which quantities. A classic example might be a
composite kit. In any composite kit, the 80/20 rule applies, because 20 percent of the
composite shades will be used 80 percent of the time. The others will sit unnoticed in
storage indefinitely, even though the expiration date has passed long ago.
– The process for Just in Time ordering and inventory creates a discipline for the staff
member assigned to the ordering process. This team member must successfully work with
the desired sales representative or company to achieve the goal of maintaining a 30-day
supply of necessary items.
The process for Just in Time ordering of inventory will help a practice to create an
effective step-by-step system. This discipline is extremely beneficial because the practice
develops a standard process or flow in ordering and achieves all of the above-mentioned
benefits. The practice may not necessarily decrease its overall inventory costs, but rather
spread them out and be better positioned to best manage its finances.
The process for Just in Time ordering of inventory will help a practice to create an
effective step-by-step system.
This method makes much more sense than attending dental shows and making impulse
decisions on purchasing without thinking about how many different orders have been
placed. Talk to the sales representatives about how the products have to be ordered, how
long delivery takes, how they are to be paid for (I strongly recommend the use of credit
cards that allow you to accrue airline miles) and what the shelf life is.
Essential Aspects of Just in Time
1.Reduction/minimisation of inventory in supply chains. Lessons have been learnt from
Japanese methods where substantial efficiencies are gained from frequent deliveries of
small quantities to meet immediate demands. This compares with methods of stock
control such as the calculation of economic order quantities.
2.The application of Kanban - a "pull" system of production/materials control
3.An employee participation and involvement strategy involving the securing of
commitment and changed work practices leading to elimination of waste
At Toyota, the production system used tickets/cards to control immediate material flows
between a work station and another down-stream . The up-stream station (the server)
receives tickets calls for small, fixed quantities from a down-stream user (the client). On
sending the supplies, a production "kanban" is generated requesting the previous
upstream server to make/supply a replacement quantity. Thus:
a.Users "pull" off supplies as required
b.Direct shop-floor communication between client and supplier replaces instructions
issued by a remote centre control point.
c.Materials requirements planning and other systems get rapid feedback on progress or
delays. Kanban involves fine-tuning and quick response to changes.
d.Planning (medium and longer-term planning) is still needed for capacity along the
supply chain. Kanban allows fine tuning.
Just-in-time Demands JIT is not possible without
2.Short distances between client and server
3.Consistent quality so that server performance and throughput is unaffected
4.Stable, predictable production schedules and ability to respond quickly to small
fluctuations in demand. If the production system itself is flexible with quick set up times
for product changes - then the data flowing in the JIT system and the ability of servers to
respond are critical.
Associated Improvement Strategies:
JIT system developments need also to be seen against major associated improvements in
production and materials management systems. Japanese successes were not only based
upon a different industrial culture, they were also (and possibly more importantly) based
on an ability to better integrate a range or production and control methods that were
already available. Together the use of techniques in product and control involves their
application in a complex system. Western management tended to be less able than the
Japanese in bringing these different operational systems together so that they functioned
seamlessly and co-operatively. The Japanese are particularly good - in production
environments - at integrating technical, production applications.
Thus the adoption of JIT systems tended also to be associated with other strategies, tools
and techniques - many learned or re-learned from Japanese practice.
1.Plant maintenance improvements to reduced down-time and secure better reliability of
machinery. This is coupled with 'housekeeping, to maintain clean, tidy, orderly facilities.
This becomes part of a "team or cells" discipline.
2.Quality management systems that emphasised a 'right first time' principles for both
products and processes. Total quality management approaches also promoted the
"empowerment" of employees via team development, quality circles and training.
3.Many firms have implemented ISO 9000 systems to define quality standards, processes
and control systems with documentation of action taken to ensure quality. Introduction of
such systems involves close examination of existing production, operational and support
processes (including inventory standards and flows). Standards and 4.Systems are
improved as a consequence. The process of securing ISO 9000 accreditation is a learning
ad problem-solving process. Close examination before documentation enables changes to
be made and fool-proofing to be built in. Documentation itself and the controls it reflects
involves a cost but it should also mean that problems and action to tackle these become
5.Customer-orientation has encouraged product and service design improvements. These
themselves may help to regularise material flows. Parts and materials can be standardised
using modular designs and fewer parts.
JIT is an important operational system for manufacturing and supplying companies to
adopt and implement. Technically, procedurally and managerially it requires attention to
1.Data, information and communication.
2.Assessment of requirements
3.Programmes to change the structure of production, materials handling, manufacturing
processes and distribution facilities
4.Improved methods of controlling unit supply costs
5.Consideration of the buyer-supplier partnership and the possibility of strategic
THE PURCHASING PLAN
One of the most important aspects of inventory control is to have the items in stock at the
moment they are needed. This includes going into the market to buy the goods early
enough to ensure delivery at the proper time. Thus, buying requires advance planning to
determine inventory needs for each time period and then making the commitments without
For retailers, planning ahead is very crucial. Since they offer new items for sale months
before the actual calendar date for the beginning of the new season, it is imperative that
buying plans be formulated early enough to allow for intelligent buying without any last
minute panic purchases. The main reason for this early offering for sale of new items is that
the retailer regards the calendar date for the beginning of the new season as the
merchandise date for the end of the old season. For example, many retailers view March
21 as the end of the spring season, June 21 as the end of summer and December 21 as the
end of winter.
Part of your purchasing plan must include accounting for the depletion of the inventory.
Before a decision can be made as to the level of inventory to order, you must determine
how long the inventory you have in stock will last.
For instance, a retail firm must formulate a plan to ensure the sale of the greatest number of
units. Likewise, a manufacturing business must formulate a plan to ensure enough
inventory is on hand for production of a finished product.
FEW TIPS FOR CONTROLLING INVENTORY
To maintain an in-stock position of wanted items and to dispose of unwanted items, it is
necessary to establish adequate controls over inventory on order and inventory in stock.
There are several proven methods for inventory control. They are listed below, from
simplest to most complex.
Visual control: It enables the manager to examine the inventory visually to determine if
additional inventory is required. In very small businesses where this method
is used, records may not be needed at all or only for slow moving or
Tickler control: It enables the manager to physically count a small portion of the inventory
each day so that each segment of the inventory is counted every so many
days on a regular basis.
Click sheet control : It enables the manager to record the item as it is used on a sheet of
paper. Such information is then used for reorder purposes.
Stub control :(used by retailers) It enables the manager to retain a portion of the price
ticket when the item is sold. The manager can then use the stub to record the
item that was sold.
DEVELOPMENTS IN INVENTORY MANAGEMENT
In recent years, two approaches have had a major impact on inventory management:
Material Requirements Planning (MRP) and Just-In-Time (JIT and Kanban). Their
application is primarily within manufacturing but suppliers might find new requirements
placed on them and sometimes buyers of manufactured items will experience a difference
Material requirements planning is basically an information system in which sales are
converted directly into loads on the facility by sub-unit and time period. Materials are
scheduled more closely, thereby reducing inventories, and delivery times become shorter
and more predictable. Its primary use is with products composed of many components.
MRP systems are practical for smaller firms. The computer system is only one part of the
total project which is usually long-term, taking one to three years to develop.
Just-in-time inventory management is an approach which works to eliminate inventories
rather than optimize them. The inventory of raw materials and work-in-process falls to that
needed in a single day. This is accomplished by reducing set-up times and lead times so
that small lots may be ordered. Suppliers may have to make several deliveries a day or
move close to the user plants to support this plan.