Managing Inventory Chapter 18 Managing Inventory Copyright 2009

Managing Inventory Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 1

Managing Inventory Excess inventory masks a host of other problems that a company may have n Inventory carrying costs are high n Ø $400 billion annually in inventory carrying cost n Taxes n Depreciation n Insurance n Obsolescence Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 2

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 3

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 4

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 5

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 6

Inventory Control Systems Visual inventory systems n Partial inventory systems n Ø ABC method Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 7

ABC Method n The ABC technique focuses inventory control efforts on the small percentage of items that account for the majority of a company’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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 8

ABC Method Dollar usage volume = cost per unit x annual quantity used n A items - items accounting for a large dollar usage volume (Approximately the top 15% of items) n B items - items accounting for a moderate dollar usage volume (Approximately the next 35% of items) n C items - items accounting for a low dollar usage volume (Approximately the remaining 50% of items) Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 9

ABC Inventory Control Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 10 Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 11

Two Bin and Tag Systems Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 12 Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 12

Physical Inventory Count Periodic count n Cycle counting n Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 14

Just-In-Time Techniques 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 n Goal: To achieve a smooth flow of materials and inventory through the business n Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 15

Just-In-Time Techniques Rather than build up costly stockpiles of inventory, JIT seeks to get items where they are needed “just in time” n Heart of JIT philosophy is eliminating waste in a business – whatever form it may take n Ø Shiego Shingo’s Eight Wastes Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 16

The Eight Wastes Shigeo Shingo identified eight forms of waste that can appear in any production system. Lean systems are designed to minimize this waste. Overproduction – Manufacturing or acquiring too many items too early or” just in case. ” Talent – Failure to maximize people’s mental, creative, and physical abilities. Inventory – Any raw material, work-in-process, or finished goods to which no value is being added. Defects – Failure to complete a task correctly the first time. Overprocessing – Using more expensive resources than a task requires or including features for which customers must pay but do not want or value. Transportation – Unnecessary movement of goods between processes. Waiting – People or parts that wait for a bottleneck in the process to be cleared. Motion – Wasted movements by people or unnecessary movement of equipment. Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 17 Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 17

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 and production Reduced manufacturing costs as a result of improved coordination among departments Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 18

When JIT Works Best § § Reliable deliveries of parts and supplies Short distances between customers and vendors Consistent quality of vendors’ products Stable and predictable demand Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 19

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 20

Protecting Inventory from Theft Businesses lose an estimated $652 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 21

Employee Theft The greatest criminal threat to small businesses comes from inside n Dishonest employees steal 5. 7 times more merchandise than do shoplifters n Average time required to catch an employee who is stealing: 18 months n How discovered? Usually by accident! n Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 22

Employee Theft Is more common in small companies, where control and security measures are less stringent n Is more pervasive than most owners think n 30% of workers steal from their employers at some point in their careers n Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 23

Reasons for Employee Theft The trusted employee n Disgruntled employees n Organizational atmosphere n Physical breakdowns n Improper cash control n Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 24

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 25

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 26

Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Source: 2006 National Retail Security Survey, National Retail Federation. 27

Shoplifting n The most frequent business crime Ø One out of 11 adults in the U. S. has shoplifted Retailers lose $13. 5 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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 28

Types of Shoplifters Juveniles n Impulse shoplifters n Alcoholics, vagrants, and drug addicts n Kleptomaniacs n Professionals n Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 29

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’ jobs more difficult Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 30

Apprehending Shoplifters n Catching shoplifters is difficult Ø On average, caught just once every 48 times they steal Ø Turned over to the police just 50% of the time Ø Result: The chance that a shoplifter will actually go before a judge is just 1 in 100 Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 31

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 32

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 © 2009 Pearson Education, Inc. Publishing as Prentice Hall 33

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter 18 Managing Inventory Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall 34