Efficient inventory management is achieved through inventory control and inventory management. Inventory control involves managing the inventory that is already in the warehouse, stockroom, or store. The information about where is it, how many of them and how much each of it costs. Inventory management involves determining what, when, whom, and how much to order. It is forecasting of the future requirements based on current and past trends.
It is best to start with inventory control. Once you have all the information, you can use scientific methods to forecast and perform inventory management.
They can be broadly classified into ‘stock’ and ‘stuff’. Stock is the material you intend to have in warehouse. These are materials that you anticipate that your customers will want for a given time frame. It is a commitment that a reasonable quantity is available for immediate delivery/ shipment.
Stuff is any other material that you have. Inventory is not worth what you paid for it, but what someone is willing to pay for it. So it is important to liquidate the stuff and focus on stock.
The liquidation of ‘Stuff’ can be done in following ways:
- Return the material to vendor: depending on the time of purchase, condition, nature of goods, etc., this could be a good option. Assess vendors fees and conditions before making decisions
- Move the stuff internally to some other store/ location/ branch/ division which could be a stock there. Transportation and handling charges might be an issue to consider
- Liquidation sale: any price above cost of liquidation is a good sale price to get rid of the ‘stuff’
- Donate the material to non-profit, if it can benefit from your ‘stuff’. There are provisions to take tax deductions up to twice the cost of inventory.
These are some of the following methods by which stock can be managed scientifically:
It’s a strategy to reduce work-in-process inventory and its associated costs. The process should be driven by signals and these signals should indicate the when to make the next part. This signaling is achieved through a job-card or ticketing called Kanban. These processes can be simple visual signals such as presence or absence of part on the shelf, etc. but, when implemented effectively, it leads to dramatic improvements in organization’s return on investment, quality and efficiently.
This technique was first used by Ford Motor Company, US as described by Henry Ford‘s My Life and Work (1922): “We have found in buying materials that it is not worthwhile 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.”
However this technique was pioneered by Toyota Motor Corporation, Japan. When Toyota executives made a visit to Ford and Piggly Wiggly in the US, they saw how it was conceptualized but never used fully by Ford, and its effective implementation at Piggly Wiggly. They adopted a lot of what they saw at Piggly Wiggly at Toyota and published the Toyota Production System (TPS).
Material Requisite Planning (MRP)
This is a software based production planning and inventory system used to manage manufacturing process, the objective of MRP are:
- Ensure materials are available for production and products for delivery
- Maintain lowest possible level of inventory
- Plan manufacturing activities, delivery schedules and purchasing activities
Cycle Counting & Physical Inventories
Radio-frequency identification (RFID) is the use of an object (typically referred to as an RFID tag) applied to or incorporated into a parts for the purpose of identification and tracking using radio waves. Some tags can be read from several meters away and beyond the line of sight of the reader.
Capacity Requirement Planning
Capacity planning is the process of determining the production capacity needed by an organization to meet changing demands for its products. In the context of capacity planning, “capacity” is the maximum amount of work that an organization is capable of completing in a given period of time. The inventory management will get the input from capacity requirement planning.
Best practices of inventory control can be achieved by:
- Bill of material accuracy
- Handling efficiency issues proactively
- Inventory accuracy such as auditing, using cycle counting, etc.
- Recording inventory transactions with barcodes/ RFID, etc.
- Inventory reduction