In materials management, the ABC analysis (or Selective Inventory Control) is an inventory categorization technique. ABC analysis divides an inventory into three categories- “A items” with very tight control and accurate records, “B items” with less tightly controlled and good records, and “C items” with the simplest controls possible and minimal records. The ABC analysis provides a mechanism for identifying items that will have a significant impact on overall inventory cost, while also providing a mechanism for identifying different categories of stock that will require different management and controls.
The ABC analysis suggests that inventories of an organization are not of equal value.
Thus, the inventory is grouped into three categories (A, B, and C) in order of their estimated importance. ‘A’ items are very important for an organization. Because of the high value of these ‘A’ items, frequent value analysis is required. In addition to that, an organization needs to choose an appropriate order pattern (e.g. ‘Just- in- time’) to avoid excess capacity.
‘B’ items are important, but of course less important than ‘A’ items and more important than ‘C’ items. Therefore ‘B’ items are intergroup items. ‘C’ items are marginally important.
Activity Based Costing, or ABC, is a method of allocating overhead and direct expenses related to the most important activities of the company first. This process allows business owners and managers an opportunity to better define the areas of manufacturing or sales that generate the most profit for the company.
Inventory analyzed under the ABC method is classified in order of profitability to the company. Class A inventory accounts for 80 percent of revenue, class B inventory for 15 percent of revenue and class C inventory for 5 percent of revenue.
ABC inventory analysis places tighter and more frequent controls on high-priority inventory. High-priority inventory, or class A inventory, is the class of inventory that customers request most often. In manufacturing, class A inventory also can include the items most often used in the production of goods. Because Class A inventory is directly linked to the success of the company, it is important to constantly monitor the demand for it and ensure stock levels match that demand. With ABC analysis, your company can use its resources to prioritize control of high-priority inventory over inventory that has a lower impact on your bottom line.
Under the ABC inventory analysis method, you can allocate your resources more efficiently during cycle counts. A cycle count is the process of counting only certain items on scheduled dates. The frequency of your cycle counts and the items you choose to include depends on how often your inventory fluctuates. Once inventory is organized by class, you can focus regular cycle counts on class A inventory. Depending on your needs, it may be necessary to count class B inventory as infrequently as twice per year and class C inventory only once per year. The ABC analysis method saves time and labor counting only the inventory required by the cycle for the class of inventory versus counting all inventory items each cycle
The ABC inventory analysis does not meet Generally Accepted Accounting Principles (GAAP) requirements and also conflicts with traditional costing systems. Companies that use ABC methods must operate two costing systems, one for internal use under the ABC method and another for compliance with GAAP. Traditional costing systems generate the figures required by GAAP. Traditional costing systems allocate cost drivers by the actual unit cost, rather than by the activity percentage of the cost driver. As a result, ABC cost assignments often differ from traditional cost system assignments.
The ABC method requires more resources to maintain than traditional costing systems. When cycle counts are performed, class A inventory must be routinely analyzed to determine if the inventory still consists of high-priority items. If an inventory piece is no longer used or demanded as frequently, it is moved to another inventory classification. This constant process requires much more data measurement and collection
A strategy for inventory management in which raw materials and components are delivered from the vendor or supplier immediately before they are needed in the manufacturing process
Companies turnover significant inventory control to suppliers with just-in-time inventory. Just-in-time (JIT) inventory refers to an inventory management system with objectives of having inventory readily available to meet demand, but not to a point of excess where you must stockpile extra products. Maintaining inventory takes time and has costs, which is what motivates companies to implement JIT programs.
Balancing the goals of avoiding stock outs while minimizing inventory costs is at the heart of just-in-time inventory. One of the main benefits of automated and efficient inventory replenishment systems is that you can quickly respond to reduced inventory levels. Companies are now equipped to pull back on stock in a given product category and ramp up inventory in another as customer needs and interests change.
Minimization of inventory management costs is a primary driver and benefit of just-in-time practices. Inventory management has costs, and when you reduce the amount of holding space and staff required with JIT, the company can invest the savings in business growth and other opportunities, points out the Accounting for Management website. You also have less likelihood of throwing out product that gets old or expires, meaning reduced waste. Coordination
A disadvantage of managing a just-in-time inventory system is that it requires significant coordination between retailers and suppliers in the distribution channel. Retailers often put major trust in suppliers by syncing their computer systems with suppliers so they can more directly monitor inventory levels at stores or in distribution centers to initiate rapid response to low stock levels. This usually means build up of technology infrastructure, which is costly. This coordinated effort is more involving on the whole than less time intensive inventory management systems.
Just-in-time inventory is not without risks. By nature of what it is, companies using JIT intend to walk a fine line between having too much and too little inventory. If company buyers fail to adjust quickly to increased demand or if suppliers have distribution problems, the business risks upsetting customers with stock outs. If buyers over compensate and buy extra inventory to avoid stock outs, the company could experience higher inventory costs and the potential for waste.
Vendor managed inventory
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Vendor Managed Inventory (VMI)
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Vendor Managed Inventory or VMI is a process where the vendor creates orders for their customers based on demand information that they receive from the customer. The vendor and customer are bound by an agreement which determines inventory levels, fill rates and costs. This arrangement can improve supply chain performance but reducing inventories and eliminating stock-out situations. VMI, the vendor specifies delivery quantities sent to customers through the distribution channel using data obtained from Electronic Data Interchange (EDI). There are a number of EDI transactions that can form the basis of the VMI process, 852,855 and the 856. The first is the Product Activity Record, which is known as 852. This EDI transaction contains the sales and inventory information such as key product activity and forecast measures, such as
The EDI 852 information can be sent from the customer to the vendor on a weekly basis or more frequently in high-volume industries. The vendor makes the order decision based on this data in the 852 transmission. The vendor reviews the information that has been received from the vendor and an order determination is made based on existing agreement between the vendor and customer. Many vendors use a VMI software package to assist them in determining order requirements. VMI software can be part of an ERP suite such as SAP or be a standalone option such as products from Blue Habanero, LevelMonitor, NetVMI or others.
The software will verify if the data as accurate and meaningful. It will calculate a reorder point for each item based on the data and any customer information such as promotions, seasonality or new items. The quantity of each item available at the customer is compared with the reorder point for each item at each location. This will determine if an order is needed and the quantities required. The second EDI transaction that is used in VMI is the purchase order acknowledgment, which is known as the 855. This EDI document sent to the customer contains a number of fields including;
Some vendors supply an advance ship notice (ASN) to their customers to inform them of an incoming order, which is know as EDI 856. The ASN differs from the purchase order acknowledgement in both timing and content. The 856 is sent to the customer after the shipment has been made instead of at the time of the purchase order. Advantages of vendor managed inventory
One of the benefits of VMI is that the vendor is responsible for supplying the customer when the items are needed. This removes the need for the customer to have significant safety stock. Lower inventories for the customer can lead to significant cost savings. The customer also can benefit from reduced purchasing costs. Because the vendor receives data and not purchase orders, the purchasing department has to spend less time on calculating and producing purchase orders. In addition, the need for purchase order corrections and reconciliation is removed which further reduces purchasing costs. Cost saving can also be found in reduced warehouse costs.
Lower inventories can reduce the need for warehouse space and warehouse resources. When a business relies on vendor-managed inventory, it’s placing a big bet on that company’s ability to deliver. The vendor has to be able to determine when to send new stock, what specific products to send and in what quantities. This can be beyond the means of a supplier that doesn’t have the software, infrastructure or expertise in place to make that work. If just-in-time inventory turns into way-too-late shipments thanks to poor demand forecasts or a supply-chain breakdown, VMI isn’t going to work.
Even with return policies in effect, a business risks being taken advantage of by a supplier looking to make its numbers. For example, a vendor might ship an excessive amount of product at the end of the quarter and book it as revenue to boost its sales figures regardless of the customer’s needs. The customer may return the unneeded merchandise, but the vendor already has gotten what it wants out of the transaction. In addition, VMI may require a company to share sensitive information with the supplier, which can leave it in a delicate position should the relationship between the parties ever falter.
A vendor-managed inventory system can be bad for a business when it keeps the business from seeking better-suited or lower-cost options. Because VMI links the supply chain together so closely, it serves as a disincentive to make a change that necessitates changing the company’s inventory management system. As a result, a business may find its inventory savings negated by settling for higher-priced or inferior goods.
Customer preferences can change in a heartbeat, with favorites falling out of style and new items becoming more in demand. If your vendor doesn’t supply a wide enough range of products and your contract prevents you from going to the competition, you may be stuck with items your customers don’t want and no way to fix the problem. Make sure your contract doesn’t bind you so tightly to your vendor that you both sink together when the market changes.
The manufacturer can gain some benefits from vendor managed inventory as they can gain access to a customers point of sale (POS) data makes their forecasting somewhat easier. Manufacturers can also work their customers promotional plans into forecasting models, which means enough stock will be available when their promotions are running. As a manufacturer has more visibility to their customers inventory levels, it is easier to ensure that stock-outs will not occur as they can see when items need to be produced.
manufacturing resource planning (MRP II) is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer “what-if” questions and extension of closed-loop MRP. This is not exclusively a software function, but the management of people skills, requiring a dedication to database accuracy, and sufficient computer resources. It is a total company management concept for using human and company resources more productively.
MRP is a comprehensive system used for planning and scheduling materials requirement. It assists in improving the materials handling capability of an organization. But it has certain disadvantages. Some of the advantages and disadvantages of MRP have been discussed below
Some of the key benefits that can be derived from using an MRP system are: Reduced per unit cost of production thus enabling an organization to price its products competitively Low inventory levels, especially for in-process materials
Following are the disadvantages of an MRP system:
High costs and technical complexities in implementation. In addition, organizations, which use an MRP system need to spend considerable effort on installing necessary equipment (computers), training personnel, modifying the software to serve their specific needs, validating, testing, and eliminating possible errors, and maintaining the software. The time required for planning and implementing an MRP system is generally very long. Data entry and file maintenance requires considerable inputs in the form of training and education of the personnel. Dependence on forecast values and estimated lead-time can sometimes be misleading. The implementation of an MRP system can be effective only when there is a high degree of accuracy in the organization’s operations. It requires high commitment from the top management of an organization.
The management should educate its executives on the importance of MRP as a strategic planning tool. The success of an MRP system, like that of any other system depends on proper implementation and right application. Managers can derive more benefits if they use the MRP system as a management-planning tool. MRP needs enormous human efforts and care in continuously collecting the required information for the system. However, many organizations prefer to adopt MRP systems, as the advantages of the system outweigh its disadvantages. Are you searching Operations Management expert for help with Advantages and Disadvantages of an MRP system questions?
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Economic order quantity (EOQ) is the order quantity of inventory that minimizes the total cost of inventory management. Two most important categories of inventory costs are ordering costs and carrying costs. Ordering costs are costs that are incurred on obtaining additional inventories. They include costs incurred on communicating the order, transportation cost, etc. Carrying costs represent the costs incurred on holding inventory in hand. They include the opportunity cost of money held up in inventories, storage costs, spoilage costs, etc. Ordering costs and carrying costs are quite opposite to each other. If we need to minimize carrying costs we have to place small order which increases the ordering costs. If we want minimize our ordering costs we have to place few orders in a year and this requires placing large orders which in turn increases the total carrying costs for the period. We need to minimize the total inventory costs and EOQ model helps us just do that.
Total inventory costs = Ordering costs + Holding costs
By taking the first derivative of the function we find the following equation for minimum cost EOQ = SQRT(2 × Quantity × Cost Per Order / Carrying Cost Per Order)
ABC Ltd. is engaged in sale of footballs. Its cost per order is $400 and its carrying cost unit is $10 per unit per annum. The company has a demand for 20,000 units per year. Calculate the order size, total orders required during a year, total carrying cost and total ordering cost for the year.
EOQ = SQRT(2 × 20,000 × 400/10) = 1,265 units
Annual demand is 20,000 units so the company will have to place 16 orders (= annual demand of 20,000 divided by order size of 1,265). Total ordering cost is hence $64,000 ($400 multiplied by 16). Average inventory held is 632.5 ((0+1,265)/2) which means total carrying costs of $6,325 (i.e. 632.5 × $10).
businesses require an efficient inventory system to maximize profit. The Economic Order Quantity model is a commonly used element of a continuous
review inventory system. It is based on a formula that calculates the most economical number of items a business should order to minimize costs and maximize value when re-stocking inventory. Small business owners should evaluate the advantages and disadvantages of this inventory model before implementing it.
Storing inventory may be expensive for small business owners. The main advantage of the EOQ model is the customized recommendations provided regarding the most economical number of units per order. The model may suggest buying a larger quantity in fewer orders to take advantage of discount bulk buying and minimizing order costs. Alternatively, it may point to more orders of fewer items to minimize holding costs if they are high and ordering costs are relatively low.
Maintaining sufficient inventory levels to match customer demand is a balancing act for many small businesses. Another advantage of the EOQ model is that it provides specific numbers particular to the business regarding how much inventory to hold, when to re-order it and how many items to order. This smooths out the re-stocking process and results in better customer service as inventory is available when needed.
The EOQ model requires a good understanding of algebra, a disadvantage for small business owners lacking math skills. Additionally, effective EOQ models require detailed data to calculate several figures. For example, the key formula of the model calculates the square root of 2DS/H, where D is the number of units purchased annually, S is the fixed ordering charge, and H is the holding cost per unit. Rent or mortgage payments, utility costs and property taxes are required just to calculate H.
The EOQ model assumes steady demand of a business product and immediate availability of items to be re-stocked. It does not account for seasonal or economic fluctuations. It assumes fixed costs of inventory units, ordering charges and holding charges. This inventory model requires continuous monitoring of inventory levels. The effectiveness of the basic EOQ model is most limited by the assumption of a one-product business, and the formula does not allow for combining several different products in the same .
What is ERP? It means enterprise resource planning, which itself means planning the resources in an enterprise (business). So, this abbreviation simply means, that this is a way of using the resources in a company more effectively. Notice, that this is not some kind of software, this is an ideology. Some companies build applications, that work according to this ideology, called ERP solutions. But there is something more there… the developers of such solutions build their application implementing some best business practices in it, and this is one of the most valuable features of ERP systems. The so called know-how is the most common thing that many of the small businesses out there lack. And this could be the difference between the successful, fast flowing company and the average company. At some point of the life cycle of an enterprise, the need of such a system becomes inevitable. The earlier managers understand this, the better.
As the company grows, its control becomes more and more difficult task. An integrated solution, like ERP software, could be really helpful in this situation. Every small company, that wants to grow big just needs to use an ERP system. Some big corporations even would not do business with you, if you hadn’t such a software implemented and working in your business. Such a solution is a proof for higher quality and that you are running your enterprise well and effectively.
There are many many benefits coming from these systems, later we’ll talk about them more. ERP solutions are from the group of integrated systems, which means that they are built to integrate any part of your business. Initially the manager in a small company can coordinate the different departments relatively easy, but when the company starts to grow, the same happens with the size and number of departments. The coordination between them becomes really hard and expensive. At some point of time a crisis of control is inevitable. ERP systems can be managers’ best friend then, because this is one of their main purpose – to integrate your business.
Advantages & Disadvantages of ERP (Enterprise Resource Planning) Systems
In order to understand computer networks better, it would be helpful to have an overview of the applications running on the network. ERP or Enterprise Resource Planning is an important enterprise application that integrates all the individual department functions into a single software application. ERP Systems make it easier to track the workflow across various departments. They reduce the operational costs involved in manually tracking and (perhaps) duplicating data using individual & disparate systems. In this article, let us have a look at the advantages and dis-advantages of implementing ERP (Enterprise Resource Management) Software Systems.
Bar codes consist of bars and spaces that vary in width. The bars and spaces on a bar code correspond to numbers and letters that represent descriptive data. Scanners scan the bar code to find the corresponding description of the item, including the make and model of an item and its price. Many stores and shops commonly use bar code technology for stock inventory. It’s also used to scan when a customer wants to purchase it. There are advantages and disadvantages regarding the use of bar code technology.
In the blink of an eye, scanning a bar code instantly displays the product name, type of product and price. Bar codes also have a 12-digit product number that when entered also produces the same information. However, if a cashier has a long line of impatient customers, entering the product details of each item is time-consuming, especially in grocery stores where each customer usually purchases multiple items. Although bar codes are a huge advantage when it comes to time, it can also be a disadvantage if the bar code on the product doesn’t correspond to the right product, or the bar code scanner isn’t working
Inventory is a huge component of any goods and services business. Keeping track of inventory can be a tedious, time-consuming and difficult task to do without a bar code scanner. With a bar code scanner, shop owners simply scan the bar code on the items and keep track of the store’s inventory that way. When an individual purchases an item, the scanner transmits this information to the computer and it’s calculated on the stock inventory via computer technology. The major disadvantage here is if the cashier sees a number of items that look or seem the same and scans one item multiple times to save time. Each item and type of item has a unique bar code and must be scanned separately. As a result, this could affect inventory.
Labels make it easy for bar code scanners and computers to recognize the product item and vendor name. But when a label is damaged or non-existent, it poses problems. Damaged labels make it difficult for the cashier to scan. Even the 12-digit number on the label may be damaged to the point where it is not legible. When this occurs, the checkout process is significantly delayed while the same product is sought out and brought to the cashier for scanning. In addition, some products, such as fruits and vegetables at grocery stores, don’t have labels, which potentially cause delay. However, cashiers are usually trained to remember the 12-digit number corresponding to items without labels.
While bar code technology drastically reduces the time and energy spent on inventory and checkout procedures, it is costly. Businesses that want to implement bar code equipment and technology have to withstand the growing pains of doing so. This includes training employees, installing the equipment, expensive printers and the time spent entering codes for labels. However, despite the disadvantages with start-up, the bar code technology benefits businesses in the long run. CONCLUSION ON THE ABOVE INVENTORY MANAGEMENT TOOLS
One should start by saying that inventory management is the active control program that facilitates the management of sales, purchases and disbursements. The inventory management is all about special software that would reduce the costs and human efforts required to create invoices, purchase orders, various receiving lists, or payment receipts. The inventory management attempts to coordinate all the efforts in the warehouse, retail and other product lines in order to develop better controls of the processes that go inside the organization. Speaking about a particular software, I would like to note that one of the many is available at http://www.advanceware.net/modules.asp. The software is said to provide all the needed inventory management tools in just one package. The website provides a demo version of the software where one is able to explore the shipping module.
The software allows the company to print serial numbers on an invoice, set a default tax rate, generate several types of reports, receive and process various customer/vendor returns, and place/process customer orders in various currencies. As for the inventory management in the workplace I would like to note that because I work in the hotel industry, the inventory management is different here than in other industries. The inventory that hotel manages is the room space available for rental.
One should understand that because hotel industry sells services the improper inventory management might mean that the hotel will not fill up all the rooms. Thus, the inventory management for the hotel industry should focus on the timeliness with respect to room occupation and marketing. The inventory management should also account for the food, towels, bed sheets, and other items required for the daily hotel operations. The inventory management should assure that the hotel rooms are filled right after they are freed, otherwise, the hotel would lose out since unlike tangible inventory, the service hotel industry offers cannot be s
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