Managing Inventory Chapter 18 Managing Inventory Copyright 2012

Managing Inventory Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -1

Managing Inventory Excess inventory masks a host of other problems that a company may have n Inventory carrying costs are high n Ø $357 billion annually in inventory carrying costs n Taxes n Depreciation n Insurance n Obsolescence Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -5

Inventory Control Systems n Perpetual inventory systems Ø Point-of-sale (POS) systems n Accurate and current n Provide reorder alerts n Generate inventory reports Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -6

Inventory Control Systems Visual inventory systems n Partial inventory systems n Ø ABC Chapter 18 Managing Inventory method Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -9

ABC Inventory Control Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -11

Two Bin and Tag Systems Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -12

Physical Inventory Count Periodic count n Cycle counting n Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 Seven Chapter 18 Managing Inventory wastes Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -16

Seven wastes that JIT tries to eliminate Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -20

Protecting Inventory from Theft Businesses lose an estimated $92 million per day to criminals n Small businesses are more susceptible to crime than large companies n The biggest criminal threat to small businesses is employee theft n Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -21

Employee Theft The greatest criminal threat to small businesses comes from inside n Dishonest employees steal 6. 6 times more merchandise than do shoplifters n Average time required to catch an employee who is stealing: 18 months n How discovered? Employee tip! n Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -23

Reasons for Employee Theft n n n Chapter 18 Managing Inventory The trusted employee Disgruntled employees Organizational atmosphere Physical breakdowns Improper cash control Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -25

Preventing Employee Theft n n n Screen employees carefully Create an environment of honesty Establish a system of internal controls Create proper checks and balances Ø Keep records up-to-date Ø n n Use technology to reduce theft Watch for signs of theft Set up a hot line Demonstrate zero tolerance for theft Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -26

Causes of Inventory Shrinkage Source: 2010 National Retail Security Survey, National Retail Federation. Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -27

Shoplifting n The most frequent business crime Ø One out of 11 adults in the U. S. has shoplifted Retailers lose $11. 7 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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 18 -28

Types of Shoplifters Juveniles n Impulse shoplifters n Alcoholics, vagrants, and drug addicts n Kleptomaniacs n Professionals n Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. Publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall 18 -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 © 2012 Pearson Education, Inc. Publishing as Prentice Hall Chapter 18 Managing Inventory Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall 18 -34