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

Copyright 2006 Prentice Hall Publishing CompanyCopyright 2006 Prentice Hall Publishing Company 11Chapter 18 Managing InventoryChapter 18 Managing Inventory

Managing Inventory


Managing Inventory Managing Inventory Involves...Involves...

1.1. Developing an accurate sales forecast.Developing an accurate sales forecast.

2.2. Developing a plan to make inventory Developing a plan to make inventory available when and where customers available when and where customers want it.want it.

3.3. Building relationships with quality Building relationships with quality suppliers.suppliers.

4.4. Setting realistic inventory turnover Setting realistic inventory turnover objectives.objectives.


5.5. Computing the cost of carrying Computing the cost of carrying inventory.inventory.

6.6. Using the most timely and accurate Using the most timely and accurate information system the business can information system the business can afford to provide everyone with vital afford to provide everyone with vital inventory information.inventory information.

7.7. Teaching employees how inventory Teaching employees how inventory control systems work so they can help control systems work so they can help manage inventory on a daily basis.manage inventory on a daily basis.

Managing Inventory Managing Inventory Involves...Involves...


Pareto’s LawPareto’s Law

Business owners must recognize the Business owners must recognize the importance of importance of Pareto’s LawPareto’s Law (“the (“the 80/20 Rule”): About 80% of a firm’s 80/20 Rule”): About 80% of a firm’s sales are generated by about 20% of sales are generated by about 20% of the items in its inventory. the items in its inventory.

The goal of inventory control is to The goal of inventory control is to focus the majority of the effort on that focus the majority of the effort on that 20% of the inventory. 20% of the inventory.


Inventory Control Inventory Control SystemsSystems Perpetual inventory Perpetual inventory

systemssystems Point-of-sale (POS) systemsPoint-of-sale (POS) systems Sales ticket methodSales ticket method Sales stub methodSales stub method Floor sample methodFloor sample method


Visual inventory systemsVisual inventory systems Partial inventory systemsPartial inventory systems

ABC methodABC method "Just-In-Time" techniques"Just-In-Time" techniques

Inventory Control Inventory Control SystemsSystems


ABC MethodABC Method

The ABC technique focuses inventory The ABC technique focuses inventory control efforts on the small percentage control efforts on the small percentage of items that account for the majority of of items that account for the majority of the firm’s sales.the firm’s sales.

Categorizes inventory items into three Categorizes inventory items into three classes – A, B, and C – with the goal of classes – A, B, and C – with the goal of establishing different levels of control establishing different levels of control over each class.over each class.


ABC MethodABC Method A items A items - items accounting for a large - items accounting for a large

dollar usage volumedollar usage volume (Approximately (Approximately the top 15% of items).the top 15% of items).

B items B items - items accounting for a - items accounting for a moderate dollar usage volume moderate dollar usage volume (Approximately the next 35% of items).(Approximately the next 35% of items).

C items C items - items accounting for a low - items accounting for a low dollar usage volume (Approximately dollar usage volume (Approximately the remaining 50% of items).the remaining 50% of items).

ABC Inventory ControlABC Inventory Control

100100

5050

00

PercentPercentof Dollarof DollarUsageUsage

7575

2525

Percent of Items in InventoryPercent of Items in Inventory

A

BC

2525 5050 7575 100100

ABC analysis enables business owners to focus their attentionon these items.

ABC analysis enables business owners to focus their attentionon these items.

ABC AnalysisABC Analysis


ABC Inventory ABC Inventory ControlControl

A items A items - Strict control; Perpetual - Strict control; Perpetual inventory control systems.inventory control systems.

B items B items - Moderate control; Periodic - Moderate control; Periodic control systems using EOQ and reorder control systems using EOQ and reorder point analysis.point analysis.

C items C items - Minimal control; Simple, - Minimal control; Simple, inexpensive control systems such as the inexpensive control systems such as the two-bin or tag systems. Many businesses two-bin or tag systems. Many businesses carry large levels of safety stock of C carry large levels of safety stock of C items where carrying costs are low.items where carrying costs are low.

Two Bin and Tag SystemsTwo Bin and Tag Systems


Physical Inventory Physical Inventory CountCount Periodic countPeriodic count Cycle countingCycle counting Electronic data interchange (EDI)Electronic data interchange (EDI) Web-based supply chain Web-based supply chain

management systemsmanagement systems


Radio Frequency Radio Frequency Identification (RFID)Identification (RFID)

Radio tags attached to individual items Radio tags attached to individual items or to shipments that transmit data to a or to shipments that transmit data to a company’s inventory control system. company’s inventory control system.

Tiny microchip stores a unique electronic Tiny microchip stores a unique electronic product code and a tiny antenna. product code and a tiny antenna.

Provides highly accurate, real-time Provides highly accurate, real-time information constantly and allow owners information constantly and allow owners to locate and track an item at any point to locate and track an item at any point in the supply chain. in the supply chain.


Just-In-Time Just-In-Time TechniquesTechniques JIT attempts to reduce the investment JIT attempts to reduce the investment

required in inventory because it drains a required in inventory because it drains a company’s cash and hides a multitude company’s cash and hides a multitude of problems managers need to address.of problems managers need to address.

Goal: To achieve a smooth flow of Goal: To achieve a smooth flow of materials and inventory through the materials and inventory through the business.business.

Rather than build up costly stockpiles of Rather than build up costly stockpiles of inventory, JIT seeks to get items where inventory, JIT seeks to get items where they are needed “just in time.”they are needed “just in time.”


Benefits of JITBenefits of JIT

1.1. Lower investment in inventory.Lower investment in inventory.2.2. Reduced inventory carrying and handling Reduced inventory carrying and handling

costs.costs.3.3. Reduced costs resulting from obsolete Reduced costs resulting from obsolete

inventory.inventory.4.4. Smaller investment in inventory storage Smaller investment in inventory storage

space.space.5.5. Reduced manufacturing costs as a result Reduced manufacturing costs as a result

of improved coordination among of improved coordination among departments.departments.


JIT IIJIT II

JIT II techniques focus on creating a JIT II techniques focus on creating a closer, more harmonious relationship with closer, more harmonious relationship with a company’s suppliers so that both benefit a company’s suppliers so that both benefit from increased efficiency. from increased efficiency.

JIT II is “empowerment of the supplier JIT II is “empowerment of the supplier within the customer’s organization.” --within the customer’s organization.” --Lance DixonLance Dixon

In a retail environment, JIT II principles are In a retail environment, JIT II principles are called called Efficient Consumer Response Efficient Consumer Response (ECR), (ECR), which enable retailers to replenish their which enable retailers to replenish their inventories constantly and on an as-inventories constantly and on an as-needed basis. needed basis.


Protecting Inventory Protecting Inventory from Theftfrom Theft Businesses lose an estimated Businesses lose an estimated

$400 billion annually to criminals.$400 billion annually to criminals. Small businesses are more Small businesses are more

susceptible to crime than large susceptible to crime than large companies. companies.

Two biggest criminal threats to Two biggest criminal threats to small businesses are employee small businesses are employee theft and shoplifting. theft and shoplifting.


Employee TheftEmployee Theft

The greatest criminal threat to small The greatest criminal threat to small businesses comes from businesses comes from insideinside. .

30 percent of all employees are “hard-30 percent of all employees are “hard-core pilferers.”core pilferers.”

80 percent of employees are likely to 80 percent of employees are likely to become involved in theft unless become involved in theft unless preventive security measures are in place. preventive security measures are in place.

Is more common in small companies, Is more common in small companies, where control and security measures are where control and security measures are less stringent. less stringent.

Is more pervasive than most owners Is more pervasive than most owners think.think.


Reasons For Reasons For Employee TheftEmployee Theft

The trusted employeeThe trusted employee Disgruntled employeesDisgruntled employees Organizational atmosphereOrganizational atmosphere Physical breakdownsPhysical breakdowns Improper cash controlImproper cash control


Factors Encouraging Factors Encouraging Employee TheftEmployee Theft

The need or desire to steal.The need or desire to steal. A rationalization for the act.A rationalization for the act. The opportunity to steal.The opportunity to steal. The perception that there is a The perception that there is a

low probability of being caught.low probability of being caught.


Preventing Employee Preventing Employee TheftTheft

Screen employees carefully.Screen employees carefully. Create an environment of honesty.Create an environment of honesty. Establish a system of internal Establish a system of internal

controls.controls. Create proper checks and balances.Create proper checks and balances. Keep records up-to-date.Keep records up-to-date. Demonstrate zero tolerance for theft. Demonstrate zero tolerance for theft.

Causes of Inventory Causes of Inventory ShrinkageShrinkage


ShopliftingShoplifting

The most frequent business The most frequent business crime.crime.

Businesses, especially retailers, Businesses, especially retailers, lose $17 to $20 billion per year to lose $17 to $20 billion per year to shoplifters.shoplifters.

Shoplifting losses add Shoplifting losses add approximately 3 to 4 percent to approximately 3 to 4 percent to the average price tag. the average price tag.


Types of ShopliftersTypes of Shoplifters

JuvenilesJuveniles Impulse shopliftersImpulse shoplifters Alcoholics, vagrants, and drug Alcoholics, vagrants, and drug

addictsaddicts KleptomaniacsKleptomaniacs ProfessionalsProfessionals


Deterring ShopliftersDeterring Shoplifters

Resources are best spent on Resources are best spent on preventionprevention..

Train employees to spot shoplifters.Train employees to spot shoplifters. Create a store layout that discourages Create a store layout that discourages

shoplifting.shoplifting. Use mechanical devices such as Use mechanical devices such as

cameras and electronic tags to make cameras and electronic tags to make shoplifters’ job more difficult. shoplifters’ job more difficult.


Apprehending Apprehending ShopliftersShoplifters Catching shoplifters is difficult; Catching shoplifters is difficult;

about 98 percent of the time, about 98 percent of the time, shoplifters are successful.shoplifters are successful.

The chance that a shoplifter will The chance that a shoplifter will actually go before a judge is just actually go before a judge is just 1 in 100.1 in 100.


Making a CaseMaking a Case

To make shoplifting charges stick , a To make shoplifting charges stick , a business owner must:business owner must:

1.1. See the person take or conceal the See the person take or conceal the merchandise.merchandise.

2.2. Identify the merchandise as Identify the merchandise as belonging to the store.belonging to the store.

3.3. Testify that it was taken with the Testify that it was taken with the intent to steal.intent to steal.

4.4. Prove that the merchandise was not Prove that the merchandise was not paid for.paid for.


Preventing Preventing ShopliftingShoplifting Principle 1Principle 1: Sharpen the shoplifter's : Sharpen the shoplifter's

awareness that he is being watched.awareness that he is being watched. Principle 2Principle 2: Remove opportunity by : Remove opportunity by

minimizing the shoplifter's minimizing the shoplifter's unattended access to merchandise.unattended access to merchandise.

Principle 3Principle 3: If principles 1 and 2 fail, : If principles 1 and 2 fail, prosecute the shoplifter.prosecute the shoplifter.

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