Managing Inventory Chapter 18 Managing Inventory Copyright 2006

Managing Inventory Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 1

Managing Inventory Involves. . . 1. 2. 3. 4. Developing an accurate sales forecast. Developing a plan to make inventory available when and where customers want it. Building relationships with quality suppliers. Setting realistic inventory turnover objectives. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 2

Managing Inventory Involves. . . 5. 6. 7. Computing the cost of carrying inventory. Using the most timely and accurate information system the business can afford to provide everyone with vital inventory information. Teaching employees how inventory control systems work so they can help manage inventory on a daily basis. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 3

Pareto’s Law n n Business owners must recognize the importance of Pareto’s Law (“the 80/20 Rule”): About 80% of a firm’s sales are generated by about 20% of the items in its inventory. The goal of inventory control is to focus the majority of the effort on that 20% of the inventory. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 4

Inventory Control Systems n Perpetual inventory systems Ø Point-of-sale (POS) systems Ø Sales ticket method Ø Sales stub method Ø Floor sample method Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 5

Inventory Control Systems Visual inventory systems n Partial inventory systems n Ø ABC method Ø "Just-In-Time" techniques Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 6

ABC Method n The ABC technique focuses inventory control efforts on the small percentage of items that account for the majority of the firm’s sales. Categorizes inventory items into three classes – A, B, and C – with the goal of establishing different levels of control over each class. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 7

ABC Method n n n A items - items accounting for a large dollar usage volume (Approximately the top 15% of items). B items - items accounting for a moderate dollar usage volume (Approximately the next 35% of items). C items - items accounting for a low dollar usage volume (Approximately the remaining 50% of items). Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 8

ABC Inventory Control Copyright 2006 Prentice Hall Publishing Company 9

ABC Analysis ABC analysis enables business owners to focus their attention on these items. 100 75 Percent of Dollar Usage 50 A 25 B C 0 25 50 75 100 Percent of Items in Inventory Copyright 2006 Prentice Hall Publishing Company 10

ABC Inventory Control n n n A items - Strict control; Perpetual inventory control systems. B items - Moderate control; Periodic control systems using EOQ and reorder point analysis. C items - Minimal control; Simple, inexpensive control systems such as the two-bin or tag systems. Many businesses carry large levels of safety stock of C items where carrying costs are low. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 11

Two Bin and Tag Systems Copyright 2006 Prentice Hall Publishing Company 12

Physical Inventory Count Periodic count n Cycle counting n Electronic data interchange (EDI) n Web-based supply chain management systems n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 13

Radio Frequency Identification (RFID) n n n Radio tags attached to individual items or to shipments that transmit data to a company’s inventory control system. Tiny microchip stores a unique electronic product code and a tiny antenna. Provides highly accurate, real-time information constantly and allow owners to locate and track an item at any point in the supply chain. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 14

Just-In-Time Techniques n n n JIT attempts to reduce the investment required in inventory because it drains a company’s cash and hides a multitude of problems managers need to address. Goal: To achieve a smooth flow of materials and inventory through the business. Rather than build up costly stockpiles of inventory, JIT seeks to get items where they are needed “just in time. ” Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 15

Benefits of JIT 1. 2. 3. 4. 5. Lower investment in inventory. Reduced inventory carrying and handling costs. Reduced costs resulting from obsolete inventory. Smaller investment in inventory storage space. Reduced manufacturing costs as a result of improved coordination among departments. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 16

JIT II n n n JIT II techniques focus on creating a closer, more harmonious relationship with a company’s suppliers so that both benefit from increased efficiency. JIT II is “empowerment of the supplier within the customer’s organization. ” --Lance Dixon In a retail environment, JIT II principles are called Efficient Consumer Response (ECR), which enable retailers to replenish their inventories constantly and on an as-needed basis. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 17

Protecting Inventory from Theft Businesses lose an estimated $400 billion annually to criminals. n Small businesses are more susceptible to crime than large companies. n Two biggest criminal threats to small businesses are employee theft and shoplifting. n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 18

Employee Theft n n n The greatest criminal threat to small businesses comes from inside. 30 percent of all employees are “hard-core pilferers. ” 80 percent of employees are likely to become involved in theft unless preventive security measures are in place. Is more common in small companies, where control and security measures are less stringent. Is more pervasive than most owners think. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 19

Reasons For Employee Theft n n n Chapter 18 Managing Inventory The trusted employee Disgruntled employees Organizational atmosphere Physical breakdowns Improper cash control Copyright 2006 Prentice Hall Publishing Company 20

Factors Encouraging Employee Theft The need or desire to steal. n A rationalization for the act. n The opportunity to steal. n The perception that there is a low probability of being caught. n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 21

Preventing Employee Theft Screen employees carefully. n Create an environment of honesty. n Establish a system of internal controls. n Ø Create proper checks and balances. Ø Keep records up-to-date. Ø Demonstrate zero tolerance for theft. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 22

Causes of Inventory Shrinkage Copyright 2006 Prentice Hall Publishing Company 23

Shoplifting The most frequent business crime. n Businesses, especially retailers, lose $17 to $20 billion per year to shoplifters. n Shoplifting losses add approximately 3 to 4 percent to the average price tag. n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 24

Types of Shoplifters Juveniles n Impulse shoplifters n Alcoholics, vagrants, and drug addicts n Kleptomaniacs n Professionals n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 25

Deterring Shoplifters n n Resources are best spent on prevention. Train employees to spot shoplifters. Create a store layout that discourages shoplifting. Use mechanical devices such as cameras and electronic tags to make shoplifters’ job more difficult. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 26

Apprehending Shoplifters Catching shoplifters is difficult; about 98 percent of the time, shoplifters are successful. n The chance that a shoplifter will actually go before a judge is just 1 in 100. n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 27

Making a Case To make shoplifting charges stick , a business owner must: 1. See the person take or conceal the merchandise. 2. Identify the merchandise as belonging to the store. 3. Testify that it was taken with the intent to steal. 4. Prove that the merchandise was not paid for. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 28

Preventing Shoplifting Principle 1: Sharpen the shoplifter's awareness that he is being watched. n Principle 2: Remove opportunity by minimizing the shoplifter's unattended access to merchandise. n Principle 3: If principles 1 and 2 fail, prosecute the shoplifter. n Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 29