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MGT 651 Week Five. Inventory Management. Types of Inventory. Raw Materials Work in Process Semifinished Assemblies Finished Goods Maintenance, Repair, and Operating Supplies. Inventory Objectives. Customer Service Delivery in a Timely Manner Buffering Against Uncertainty

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Mgt 651 week five

MGT 651 Week Five

Inventory Management

MGT 651 - V DR. SAVAS OZATALAY


Types of inventory
Types of Inventory

  • Raw Materials

  • Work in Process

  • Semifinished Assemblies

  • Finished Goods

  • Maintenance, Repair, and Operating Supplies

MGT 651 - V DR. SAVAS OZATALAY


Inventory objectives
Inventory Objectives

  • Customer Service

    • Delivery in a Timely Manner

    • Buffering Against Uncertainty

    • Providing Variety

  • Efficiency

    • In Purchasing

    • In Production

  • Investment

MGT 651 - V DR. SAVAS OZATALAY


Aggregate inventory considerations
Aggregate Inventory Considerations

  • Inventory as an Asset

  • Costs of Goods Sold

  • Return on Investment

  • Inventory Turnover

  • Inventory as Strategy

MGT 651 - V DR. SAVAS OZATALAY


Return on investment
Return on Investment

Net Annual Profit

Return on Total Assets = ----------------------

Total Assets

5,000

-------- = 3.125%

160,000

Net Annual Profit

Return on Inventory Investment = --------------------

Average Inventory

5,000

----------- = 10%

50,000

MGT 651 - V DR. SAVAS OZATALAY


Inventory turnover formula
Inventory Turnover Formula

Cost of Goods Sold

Inventory Turnover = --------------------------

Average Inventory

70,000

= ------------- = 1.4

50,000

MGT 651 - V DR. SAVAS OZATALAY


Strategies for seasonal demand
Strategies for Seasonal Demand

Chase Strategy

Volume

Demand

Time

Balanced Strategy

Volume

Production

Time

MGT 651 - V DR. SAVAS OZATALAY


Reasons for obsolete inventory
Reasons for Obsolete Inventory

  • Engineering changes

  • Spoilage

  • Technical obsolescence

  • Defects

  • Lack of market demand

MGT 651 - V DR. SAVAS OZATALAY


Functions of inventory
Functions of Inventory

  • Safety Stock

  • Cycle Stock

  • Transportation (Pipeline) Stock

  • Anticipation Stock

  • Hedging Stock

  • Decoupling Stock

MGT 651 - V DR. SAVAS OZATALAY


Inventory tracking methods
Inventory Tracking Methods

  • Perpetual Inventory Systems

  • Periodic Inventory Systems

  • Visual Review Systems

  • Four-Wall Inventory Systems

MGT 651 - V DR. SAVAS OZATALAY


Alternative costing methods
Alternative Costing Methods

  • First In , First Out (FIFO)

  • Last in , First Out (LIFO)

  • Average Cost

  • Standard Cost

  • Replacement Cost

  • Actual Cost

  • Value-Added Costing

MGT 651 - V DR. SAVAS OZATALAY


Activity based costing terminology
Activity-Based Costing Terminology

  • Activity

  • Activity Analysis

  • Activity-Based Management

  • Avoidable Cost

  • Driver

  • Cost Driver

  • Resource Driver

  • Traceability of Costs

MGT 651 - V DR. SAVAS OZATALAY


Principles of item identification
Principles of Item Identification

  • Uniqueness

  • One number for all uses

  • Assignment of responsibility

  • No reuse

  • Conciseness

  • Uniformity in length and composition

  • No confusing characters

  • Expansion

  • Use of check digits when possible

MGT 651 - V DR. SAVAS OZATALAY


Part numbers
Part Numbers

  • Advantages of Meaningful Part Numbers

    • Communicates information to people

    • Easier to understand, work with, and recall

    • Facilitates detection of miscoded numbers

    • May use hyphens to separate segments

  • Advantages of Nonmeaningful Part Nos

    • Codes tend to be shorter

    • Codes can be all numeric

    • Facilitates the use of check digits

    • Better accommodation of growth

MGT 651 - V DR. SAVAS OZATALAY


Example of bin locations
Example of Bin Locations

  • Space on a shelf

  • Vat or other liquid container

  • Space on the floor

  • Outdoor space in a storage lot

  • Designated segment of a rack

MGT 651 - V DR. SAVAS OZATALAY


Location methods
Location Methods

  • Prearranged Locations

    • Familiarity with locations speeds retrieval

    • Locate most frequently used materials at the front

    • Orderly and easy to understand

    • Problems with overflow materials

    • May result in poor utilization

  • Random Location

    • More, but smaller, locations improve utilization

    • Lot, or batch, identify more easily maintained

    • Picking can be on a FIFO basis

    • Locations can be assigned to facilitate picking

    • Changes to variety of items can be easily accommodated

  • Zoned Locations

    • Compromise method-random within groups

    • Zones assigned based on physical characteristics

  • Automated Storage and Retrieval Systems

    • Usually based on a random location scheme

    • May vary greatly in size and capacity

MGT 651 - V DR. SAVAS OZATALAY


Stockkeeping principles
Stockkeeping Principles

  • Security

  • Transaction recording

  • Authorization control

  • Automation when cost effective

MGT 651 - V DR. SAVAS OZATALAY


Consequences of inaccurate records
Consequences of Inaccurate Records

  • Lost sales

  • Shortages

  • Excesses

  • Missed schedules

  • Low productivity

  • Late delivery

  • Excessive expediting

  • Excess freight costs

  • High inventory levels

  • High levels of obsolescence

MGT 651 - V DR. SAVAS OZATALAY


Cycle counting vs periodic inventory

CYCLE COUNTING

Efficient use of few

experienced people

continuously throughout the

year

RESULTS

Timely detection and correction of causes of errors

Fewer mistakes in item identification

Minimal loss of production time

Systematic improvement of record accuracy

PERIODIC INVENTORY

Inefficient use of many

inexperienced people in a short,

hectic period once a year

RESULTS

No correction of causes of errors

Many mistakes in item identification

Plant and warehouse shutdown for inventory

No improvement of record accuracy

Cycle Counting vs. Periodic Inventory

MGT 651 - V DR. SAVAS OZATALAY


Example target level of accuracy
Example Target Level of Accuracy

ALLOWABLE ALLOWABLE

INVENTORY TOLERANCE TOLERANCE

CLASS QUANTITY VALUE

A (+,-) 0.2 % $ 100

B (+,-) 1.0 % $ 100

C (+,-) 5.0 % $ 100

* Tolerance specified by user

* If variance is less than both quantity and value tolerance,

then accept count

MGT 651 - V DR. SAVAS OZATALAY


Sources of problems
Sources of Problems

  • Poor design of forms

  • Untrained personnel

  • Carelessness

  • Poor control of documents

  • Faulty computer programs

  • Items not identified properly

  • Inadequate storage space

  • Open (unsecured) storage areas

MGT 651 - V DR. SAVAS OZATALAY


Alternatives for when to count
Alternatives for When to Count

  • ABC classification

    • A items monthly

    • B items quarterly

    • C items annually

  • When reorder is indicated

  • When replenishment lot is received

  • When record indicates a zero balance

  • When record balance becomes negative

  • Every so many transactions

MGT 651 - V DR. SAVAS OZATALAY


Data elements for inventory control
Data Elements for Inventory Control

  • Item identification

  • Item description

  • Stock location data

  • On-hand balances in each stock location

  • On-order information by due date

  • Reorder and safety stock information

  • Financial information

  • Usage data

  • Classification information

  • Sourcing data

  • Lead-time data

MGT 651 - V DR. SAVAS OZATALAY


Data collection methods
Data Collection Methods

  • Computer terminals

  • Bar code systems

  • Magnetic stripe systems

  • Optical recognition devices

  • Automatic counting devices

MGT 651 - V DR. SAVAS OZATALAY


Data communication
Data Communication

Customer

Supplier

Plant

Distribution Center

Distribution Center

Plant

Supplier

Customer

MGT 651 - V DR. SAVAS OZATALAY


Determination of order quantity
Determination of Order Quantity

  • The order quantity considerations

  • Total inventory costs

  • Reorder point

  • The Economic Order Quantity (EOQ)

  • Quantity Discounts

MGT 651 - V DR. SAVAS OZATALAY


Inventory carrying cost components
Inventory Carrying Cost Components

  • Storage facility costs

  • Counting, transporting, and handling

  • Risk of obsolescence due to engineering changes or spoilage

  • Insurance and taxes

  • Risk of loss due to pilferage

  • Opportunity cost

MGT 651 - V DR. SAVAS OZATALAY


Purchase order costs
Purchase Order Costs

  • Supplier selection, follow-up, and other contacts

  • Accounts payable and collection

  • Receiving, inspecting, and handling

  • Preparation and handling of an authorization document

MGT 651 - V DR. SAVAS OZATALAY


Production order costs
Production Order Costs

  • Setup of equipment or assembly line changeover

  • Preparation of production order paperwork

  • Tracking and reporting work orders in the plant

  • Scrap that results from start-up after a new setup

MGT 651 - V DR. SAVAS OZATALAY


Limitations of the eoq
Limitations of the EOQ

  • Annual usage is assumed to be level and continuous

  • Underlying costs are assumed to be accurate

  • Replenishment is assumed to be instantaneous

  • Costs are more often expressed as total, or average, rather than marginal

  • Single-item replenishment is assumed

MGT 651 - V DR. SAVAS OZATALAY


Significant relationships
Significant Relationships

  • The more demanded per year, the larger the order quantity

  • The higher the order, or setup cost, the larger the order quantity

  • The more expensive the item, the smaller the order quantity

  • The higher the carrying cost, the smaller the order quantity

MGT 651 - V DR. SAVAS OZATALAY


Inventory record accuracy cycle counting

INVENTORY RECORD ACCURACY &CYCLE COUNTING

MGT 651 - V DR. SAVAS OZATALAY


Ira is required
IRA is required

  • To make valid planning possible

  • To provide satisfactory customer service

  • To determine proper replenishment time for individual items

  • To assure material availability

  • To analyze inventory levels and dispose of excess correctly

MGT 651 - V DR. SAVAS OZATALAY


Inaccurate inventory records can result in
Inaccurate Inventory Records Can Result In

  • Lost sales

  • Shortages

  • Excesses

  • Missed Schedules

  • Low productivity

  • Late delivery

  • Excess expediting

  • Excess cost

MGT 651 - V DR. SAVAS OZATALAY


Inaccurate inventory records lead to
Inaccurate Inventory Records Lead To

Overordering

Which causes

High inventories and

High obsolescence

MGT 651 - V DR. SAVAS OZATALAY


Requirements for accurate inventory records
Requirements For Accurate Inventory Records

  • Adequate, disciplined record keeping

  • Qualified people

  • Effective audits of accuracy

  • Timely error and cause correction

MGT 651 - V DR. SAVAS OZATALAY


The ability to audit inventory records stems from
The Ability To Audit Inventory Records Stems From

  • The Physical inventory

    • Periodic or

    • Cyclic

MGT 651 - V DR. SAVAS OZATALAY


Physical inventory
Physical Inventory

  • Count items

  • Compare with records

  • Reconcile differences

  • Adjust records

MGT 651 - V DR. SAVAS OZATALAY


Cycle counting
Cycle Counting

  • Sample count records frequently

  • Test their accuracy

  • Identify causes of errors

  • Eliminate causes of errors

  • Provide measure of record accuracy

MGT 651 - V DR. SAVAS OZATALAY


Cycle counting objectives
Cycle Counting Objectives

  • Identification of causes of errors

  • Correction of conditions causing errors

  • Provide quantitative measure of accuracy

  • Maintenance of a high level of inventory record accuracy

  • Provide accurate statement of assets

MGT 651 - V DR. SAVAS OZATALAY


Cycle counting vs periodic inventory1

Cycle Counting

Efficient use of a few experienced people continuously throughout the year

Timely detection and correction of causes of error

Fewer mistakes in item identification

Minimum loss of production time

Systematic improvement of record accuracy

Continuous Record of accuracy levels

Periodic Inventory

Inefficient use of many inexperienced people in a short, hectic period once a year

No correction of causes of error

Many mistakes in item identification

Plant & warehouse shut-down for inventory

No improvement of record accuracy

No measure of accuracy

Cycle Counting vs Periodic Inventory

Results

MGT 651 - V DR. SAVAS OZATALAY


Additional advantages of cycle counting
Additional Advantages of Cycle Counting

  • Efforts can be concentrated in problem areas

  • Constant surveillance maintains system integrity

  • No requirements for advance staging of items

  • Valid MRP output

  • Less obsolete inventory

  • Less excess inventory

  • Reduced year-end inventory write-offs

  • Correct statement of assets throughout year

MGT 651 - V DR. SAVAS OZATALAY


Disadvantages of periodic physical inventory
Disadvantages of Periodic Physical Inventory

  • People unfamiliar with inventory items

  • As many errors are introduced as are corrected

  • Inefficient manpower utilization

  • Plant and warehouse must be shut down

  • Too late to find out what happened

  • Unable to correct causes of errors

MGT 651 - V DR. SAVAS OZATALAY


Government procurement regulations
Government Procurement Regulations

  • Standard requires

    95% accuracy of part number inventory records

MGT 651 - V DR. SAVAS OZATALAY


Record accuracy
Record Accuracy

“How good” is “Good enough”?

Improvement toward 100% is the key

Level of accuracy can never be too high

Measure in terms of significant errors

MGT 651 - V DR. SAVAS OZATALAY


Typical levels of accuracy
Typical Levels of Accuracy

Allowable Allowable

Inventory Tolerance Tolerance

Class Quantity Value

A +/- 0.2% $ 100

B +/- 1.0% $ 100

C +/- 5.0% $ 100

Tolerances are specified by user.

If variance is less than quantity or value tolerance, accept count.

MGT 651 - V DR. SAVAS OZATALAY


Initial phase of cycle counting
Initial Phase of Cycle Counting

  • Select small representative sample

  • Count on a short cycle

  • Correct causes of errors

  • When test sample is 100% error free, start full scale program

MGT 651 - V DR. SAVAS OZATALAY


Identification of problem areas
Identification of Problem Areas

  • Storage space adequate?

  • Items stored orderly?

  • Access to storage area controlled?

  • Locations planned properly?

  • Locator system effective?

  • “Good” and “Bad” inventory segregated?

  • Transactions reported efficiently?

  • Inventory classifications compatible with accounting system?

MGT 651 - V DR. SAVAS OZATALAY


Typical workload determination
Typical Workload Determination

Inventory Number Annual Count Total

Class Of Items Frequency Count

C 4,000 1 4,000

B 1,500 2 3,000

A 250 6 1,500

Total: 8,500

Number of work days per year: 250

Items to be counted per day: 34

MGT 651 - V DR. SAVAS OZATALAY


Typical abc cycle count frequency
Typical ABC Cycle Count Frequency

Once a Month? Once a Quarter? Once a year?

“A” Items “B” Items “C” Items

High Frequency Intermediate Low frequency

Of Order, Such Frequency Of Order, Such

As Monthly Of Order, Such As Annually

As Quarterly

High Cost Medium Cost Low Cost

Of Error Of Error Of error

MGT 651 - V DR. SAVAS OZATALAY


Activity criteria method
Activity Criteria Method

When to Count?

  • When a reorder is indicated

    • Is the order really needed?

  • When a replenishment lot is received

    • Normally the lowest count

  • When the record or stock is zero

    • Is it true?

  • When the record is negative

    • You know it isn’t true

  • Every so many transaction

    • Neat and orderly

MGT 651 - V DR. SAVAS OZATALAY


Bar coding and scanning equipment
Bar Coding and Scanning Equipment

  • Eliminates human error in record keeping

  • Speeds up handling of most transactions

  • Bar coded labels identify items

MGT 651 - V DR. SAVAS OZATALAY


Impact of jit on cycle counting
Impact of JIT On Cycle Counting

  • Shop orders may be replaced by Kanban

  • Kitting of materials may be eliminated

  • Primary storage of raw materials and purchased components may be work-in-process at the point of use

  • Fabricated components remain in work-in-process until consumed

  • Storeroom/warehouse inventories are significantly reduced

MGT 651 - V DR. SAVAS OZATALAY


What cycle counters and inventory analysts need to know
What Cycle Counters and Inventory Analysts Need to Know

  • How and where material is stored

  • Location and record control

  • Identification of items

  • Transaction handling and reporting

  • Cut-off controls

MGT 651 - V DR. SAVAS OZATALAY


Implication of errors

ERROR

Missed Locations

Incorrectly Read Scale

Wrong Identity

Missed transaction documents

Poor cut-offs

IMPLICATION

Understated Count

Over/Understated count

Two records wrong

Incorrect adjustment

Adjustments made incorrectly

Implication of Errors

MGT 651 - V DR. SAVAS OZATALAY


Assign responsibilities for cycle counting
Assign Responsibilities for Cycle Counting

  • Full time or part time cycle counters?

  • Important to allocate time for cycle counting

  • Assignment of specific person to inventory location for each item

MGT 651 - V DR. SAVAS OZATALAY


Steps to follow
Steps to Follow

  • Complete cycle counting form

  • Take physical count

  • Total counts for all locations

  • Perform location audits

  • Check physical count against record

  • Perform recounts

  • Analyze causes of error

  • Implement corrective actions

  • Adjust computer balance if required

MGT 651 - V DR. SAVAS OZATALAY


Number of cycle counters depends on
Number of Cycle Counters Depends On

  • Number of items in inventory

  • Physical size of inventory

  • Count frequency

  • Standardized packaging

  • Number of storage locations for each item

  • Anticipated number of recounts

  • Specific functions performed

MGT 651 - V DR. SAVAS OZATALAY


Techniques of counting
Techniques of Counting

  • Scale counting

  • Mark counters

  • Location planning

  • Orderly stacking

  • Groups of ten

  • Nested containers

MGT 651 - V DR. SAVAS OZATALAY


Symbology and voice recognition
Symbology and Voice Recognition

  • Optical character recognition (OCR)

  • Magnetic stripe

  • Bar coding

  • Voice recognition

MGT 651 - V DR. SAVAS OZATALAY


Cycle count record
Cycle Count Record

  • Item number

  • Lot number or serial number

  • Location (s)

  • Units of measure

  • Count quantity

  • Date and time

  • Name of cycle counter

MGT 651 - V DR. SAVAS OZATALAY


Ways to control cut off
Ways To Control Cut-off

  • Count during “non operational” shift

  • Count at end of day

  • Hold documents and process next day

  • Stamp documents for items which have been counted

  • Use real time, on-line cycle counting system

MGT 651 - V DR. SAVAS OZATALAY


Error analysis
Error Analysis

Error Factors Shortage of Material Overage of Material

(Negative Variance) (Positive Variance)

1. Counting error 1. Counted incorrectly or didn’t 1. Counted incorrectly

count all locations

2. Recording error 2. Less received than recorded or 2. Receipts of material

issued more than recorded not recorded

3. Identification error 3. Item identified incorrectly 3. Item identified

or not counted under incorrectly or another

correct number item counted

4. Quality control error 4. Less received than recorded or 4. More received than

(Storeroom) issued more than recorded recorded or issued

less than recorded

5. Physical control (Security) 5. Theft

MGT 651 - V DR. SAVAS OZATALAY


Detecting missing or lagging documents
Detecting Missing or Lagging Documents

  • Batch transactions using hash totals

  • Post on each transaction the date it was created

  • use transaction documents with serial numbers

  • Time stamp all transaction documents for items being cycle counted that day

MGT 651 - V DR. SAVAS OZATALAY


Typical sources of error
Typical Sources of Error

  • Poor forms design

  • Untrained personnel

  • Carelessness

  • Poor document control

  • Faulty computer programs

  • Poor operations control in computer room

MGT 651 - V DR. SAVAS OZATALAY


Location audits
Location Audits

To make sure that….

All items in a location are counted

No storage location is overlooked

MGT 651 - V DR. SAVAS OZATALAY


Vital records
Vital Records

  • Open manufacturing orders

  • Bills of material

  • Open purchase orders

  • Open customer orders

  • Routings and standards

  • Costs

MGT 651 - V DR. SAVAS OZATALAY


Who can cycle count
Who Can Cycle Count?

  • Inventory Balances: Cycle counters/Inventory analysts, Storekeepers, Auditors

  • Bills Of Material: Storekeepers (Pick Lists), Inspectors, Assemblers, testers, Production operators

  • Open Purchase Orders: Buyers, Cost accountants

  • Open Manufacturing Orders: Shop planners, Dispatchers, Setup people, Floor inspectors

  • Customer Orders: Order entry people, Internal sales people

  • Routing and Standards: Process engineers, Dispatchers

  • Cost Data: Cost accountants, Planning people

MGT 651 - V DR. SAVAS OZATALAY


Computer applications
Computer Applications

  • List of items to be counted can be prepared by the computer

  • Computer support is necessary in high-part-count assembly

  • The system can determine the items added at a specific operation

  • Bill of material components are linked to operation where used

  • Material “backflushing” capability through work center reporting

MGT 651 - V DR. SAVAS OZATALAY


Lot control traceability
Lot Control Traceability

  • It is essential to maintain the integrity of the lot number of an item with its location

  • When lot controlled items are cycle counted, a three-way match is required between count, lot numbers, and their locations

MGT 651 - V DR. SAVAS OZATALAY


Computer system edits
Computer System Edits

Document controls by serial number

Use of “check digits”

Validation of units of measure

“Ridiculous checks” of transactions

On-line, real time editing and warning messages

Management by exception reports on variances and adjustments

MGT 651 - V DR. SAVAS OZATALAY


Cycle count variance report
Cycle Count Variance Report

MGT 651 - V DR. SAVAS OZATALAY


Cycle counting without counting
Cycle Counting Without Counting

  • The objective of cycle counting is not counting but to get accurate records

  • If these can be assured without counting, then this is the ultimate objective

  • Two methods have been developed to achieve this utopian goal

MGT 651 - V DR. SAVAS OZATALAY


Zero counts
Zero Counts

When a stock picker removes the last item…

A pre-formatted document is filled by the stock picker, giving part number, location, time, and date…

If more of this part has been received between the count and the cut off time, the zero count card is destroyed…

If not, it is processes as a valid cycle count

MGT 651 - V DR. SAVAS OZATALAY


Serialized loads or batches
Serialized Loads or Batches

  • Material is uniquely identified and issued only in these batches… such as uniquely identified pallet-load of product or a product with a unique serial number defining its characteristics.

  • Create a small file of a portion of these serialized loads as a control group.

  • When a transaction with a serial number matches small file (control group), compare the transaction’s details with the inventory file. If they match, that is a good cycle count. If they do not, an error requiring analysis and reconciliation is required.

  • At end of month, cycle count only those items in the small file (control group) that did not have transactions against them.

  • Report record accuracy as if all the items were counted.

MGT 651 - V DR. SAVAS OZATALAY


Data quality improvement process
Data Quality Improvement Process

Don’t inspect quality in, Fix the process

Standard containers

Standard quantities

Zero tolerance for error

Self Auditing System

Transaction Checking

If we moved it we must have had it

MGT 651 - V DR. SAVAS OZATALAY


Major benefits of cycle counting
Major Benefits of Cycle Counting

  • Improved customer service

  • Minimum loss of production time

  • Lower investment in inventories

  • Timely detection of errors and correction of causes

  • Elimination of annual physical inventory

  • High inventory record accuracy

  • Less excess and obsolete inventory

  • Correct statement of assets throughout the year

MGT 651 - V DR. SAVAS OZATALAY