Inventory Management Essay
Every company irrespective of the type of product or service that it sells holds a form of inventory in its daily business operations. Inventory is generally held in the form of finished goods, work in progress i.e. unfinished products as is normally the case in manufacturing and raw materials. Inventory is considered a current asset in a company since it can be itemized in the books of accounts and has a definite economic value. Companies are interested in holding optimum inventory levels at all times since excess inventory results in incremental costs and blocks working capital which affects the overall performance of the company at the end of each financial year (Ou, Liu, Hung & Yen, 2010). Holding less than optimum inventory on the other hand, can easily reduce a company’s market share as clients move to competition due to disruption in supply of products into the market. Inventory management thus involves continuous monitoring of inventory levels, smart planning and quick decision making in the part of management of a company. Companies must therefore be careful not to overstock the wrong product, over-order the wrong inventory or under stock since each has far reaching implications to the company’s performance (Bernardel, Panizzolo & Martinazzo, 2012).
The two reputable multinational corporations that are focused in this assignment are Apple Inc. (Apple) and Dell Inc. (Dell). These two companies manage inventory as part of their daily business operations. Apple was started in 1976 by Ronald Wayne, Steve Wozniak and Steve Jobs. The company is a major multinational corporation and its headquarters are located in Cupertino, California. The company’s main business activity is designing, developing and marketing personal computers, computer software and consumer electronics (Grinnell & Muise, 2010). The company changed its name to Apple Inc. in 2007; a development which marked its shift towards consumer electronics. Before then the company focused on being a market leader in designing, developing and selling personal computers and computer software (Wakabayashi, 2014; Woodward, 2009).
The company’s flagship products and which constitute an important percentage of its inventory include the Mac line of computers, the iPod media player, the iPhone Smartphone, the iPod tablet computer, and computer software such as the iTunes media browser, the iWork and, iLife productivity and creativity suites, the OS X and iOS operating systems (Wakabayashi, 2014; Woodward, 2009; Worthen, 2011). Dell is a major multinational corporation that was started in 1984 by Michael Dell in his dorm room at the University of Texas. The company’s headquarters are located in Rock Round, Texas. The Company is currently the third largest personal computers vendor in the world after HP and Lenovo. The company’s product line includes desktop computers, notebook computers, network servers, workstations and storage products (Worthen, 2011).
Dell offers a total of 1.6 million different possible product configurations for all its different product offerings which form an important percentage of its inventory. The company deals with several suppliers who include Sony of Japan for its monitors, Nvidia for graphic chips and Microsoft for Windows and Intel for microprocessors (Wakabayashi, 2014; Woodward, 2009; Worthen, 2011). Description of Essential Inventory Characteristics
These companies assemble their different products from their assembling plants located in various parts of the world. The companies obtain different physical parts and software from their various suppliers which they use to assemble the various products that they offer to their clients. Their inventory is therefore made up of parts and software that they purchase from suppliers, the work in progress which is made up of unfinished products and software products and the finished products that are ready for sale to clients (Worthen, 2011). One of the essential characteristics of this type of inventory is that its shelf life is very short due to the fast changing nature of technology. These companies cannot hold their inventory for several years as they risk holding obsolete parts.
The next characteristic is that the inventory is very huge due to the large number of clients that these companies serve. The companies must therefore invest in up to date inventory management software and adopt the appropriate inventory management techniques that help them to manage large quantities of inventory. The other characteristic of the inventory is that it can be in complete state or in incomplete form (Worthen, 2011). For instance raw materials are generally bought in a complete state; finished goods are also in a complete state whereas work in progress is normally in incomplete state. The entire raw material inventory held by these companies is sourced from various suppliers so the companies use an inventory management system that is called built to order in the case of Dell and Apple with Just in Time (JIT). This inventory management model has one common aim; which is to hold only the required inventory levels (Worthen, 2011). Role of Inventory in Performance, Operational
Efficiency, and Customer Satisfaction
Inventory plays a very important role in the overall performance of a company. Inventory consists of assets with an economic value that can be sold to clients if it is in the form of finished goods. Inventory planners try to ensure optimum levels of inventory are held at all times since holding excess inventory could be a sign of operational inefficiency, falling market share or poor quality products. Excess inventory could be a sign of operational inefficiency in that the company might be producing products that do not meet the desired quality standards by customers (Worthen, 2011). Due to this demand might consistently fall leading to stock build up. Excess stock might also be caused by poor demand forecasting. During the end of every year executives forecast demand for their goods and services in the following year.
These demand forecasts dictate the amount of inventory that a company should hold for onward selling. If the demand forecasts are not done correctly then excess stock may occur which in that case would be caused by operational inefficiency (Worthen, 2011). Too much inventory held in work-in-progress is also a sign of operational inefficiency. A company lack competent personnel in its production department to turn around tasks in good time. This may be due to poor planning or high employee turnover which leads to loss of key personnel. Build up in stock could therefore be a sign of operational inefficiency (Worthen, 2011). Conversely holding less than the optimum amount of stock is a sign of operational inefficiency (Worthen, 2011). This could be due to poor demand forecasting, liquidity problems to purchase staff quantities or lack of competent staff to turn raw materials to finished products in good time. Company’s performance is tied to inventory management due to the fact that less than optimum stock holding impacts on the financial performance at the end of each financial year.
Overstocking leads to increase in holding stocks, may lead to pilferage, degradation or obsolescence of the inventory. All these may lead to poor performance (Martin, 2010; Worthen, 2011). Under stocking also impacts negatively on company’s performance since clients are forced to move to competitors. This leads to a fall in a company’s market share and a drop in sales which impacts on the performance of a company. Without optimum inventory it is impossible for a company to serve customers to their satisfaction. This is because most of the time they will be forced to wait for long periods of time to get a company’s product. This will create dissatisfied customer who end up moving to the competition (Martin, 2010; Worthen, 2011). Layouts Found with Each Company and Their Importance
Apple inventory management strategy saw it do away with their manufacturing and opt for contract manufacturers. Apple viewed inventory as essentially evil since it deprecates very quickly its value weekly under standard conditions. Apple also adopted JIT inventory management layout. In this inventory management strategy, a company holds only what it needs. This strategy requires dedicated suppliers who are able to supply at short notice. Dell on the other hand operates several processing facilities spread throughout the world. Dell offers a total of 1.6 million different possible product configurations for all its different product offerings which form an important percentage of its inventory (Smith, 2013; Worthen, 2011). The company deals with several suppliers who include Sony of Japan for its monitors, Nvidia for graphic chips and Microsoft for windows and Intel for microprocessors (Worthen, 2011). Dell customers place orders by phone or through the internet.
The corporation processes the orders, does credit checking, and financial evaluation of the customer. The company then sends order to an assembly plant to build, test and package the product. Dell then undertakes to ship all the orders to the customers within a period of not later than five days from receipt of order (Worthen, 2011). Dell does not maintain in-house stock of finished goods inventories and has eliminated retailers. The company has maintains warehouses in its processing facilities which enable suppliers to hold stock awaiting Dell orders (Ou, Liu, Hung & Yen, 2010; Worthen, 2011). Layouts are important in inventory management because they assist a company’s production to access raw materials faster and efficiently. They also control pilferage and wastage. Layouts are also useful in lean manufacturing. Layouts assist a company to determine its operational limitations and manage its supplier network (Ou, Liu, Hung & Yen, 2010; Worthen, 2011).
Dell’s layout as compared to Apple’s appears to be more customer friendly. This is because Dell’s suppliers operate warehouse space in Dell’s processing facilities which enable them to control the amount of stock they require in each facility. The two companies are assured of reliable supply of raw materials due to good supplier relationships (Worthen, 2011). Apple’s contract manufacturing strategy transfers the risks of holding inventory to its suppliers. It is however a risky strategy since the suppliers can opt out of the contract agreement and sell the products directly to Apple customers. Apple’s inventory management strategy has made it the industry leader (Ou, Liu, Hung & Yen, 2010; Worthen, 2011). Two Metrics to Evaluate Supply Chain Performance
One of the key metrics in evaluating supply chain performance is inventory turnover. This metric measure how many times a company’s inventory balance can be turned around i.e. sold and re-placed in a given period of time. The formula that is used to calculate the metric is Inventory Turnover = Cost of Goods Sold/Average Inventory. The higher the inventory turnover ratio the better for a company because it implies that it is able to sell its inventory fast and is also a sign of operational efficiency and good customer service (Martin, 2010). The other metric is days of inventory which measures how long it takes for a company to sell its inventory holding in a given time period. It shows how much stock a company holds in a given time period. The lower the number the better for a company since it indicates the company forecasts demand correctly.
The formula for calculating this ration is Days of Inventory = Number of Days in Period/Inventory Turnover (Martin, 2010). Based on these two metrics, Dell and Apple should invest in research to determine demand patters and also use trend performance or exponential smoothing to forecast demand correctly(Ou, Liu, Hung & Yen, 2010). This would enable them to use the metrics to improve their sales turnover. For example if inventory turnover ratio in comparative years is declining it raises alarm about demand of the concerned company’s inventory management practices. If any of the companies discovers that its days of inventory compared to previous years is on the rise then it can investigate the cause and put in place remedial measures to reverse the situation. My suggestion is that the two companies should determine the ratio for a period of about 5 years to check how they have been managing inventory and take measures to correct any situation that is not desirable (Ou, Liu, Hung & Yen, 2010; Wakabayashi, 2014; Woodward, 2009; Worthen, 2011).
Ways to Improve Inventory Management for Each of the Companies Without Affecting Operations and the Customer Benefit Package The best method of improving inventory management is through lean synchronization. This is a way of carrying out an audit of all inventory processes to remove any unnecessary wastage that may occur. This will not only save the companies a lot of money but will improve the quality of finished goods and enhance customer satisfaction. The second suggestion is that the companies should use inventory management ratios to determine a trend on how they are managing inventory. It is very easy to be deceived by some terminologies like “Just in Time” and forget that the situation might actually be deteriorating instead of improving.
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