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

Copyright Copyright ©©2009 Pearson Education, Inc. Publishing as Prentice Hall2009 Pearson Education, Inc. Publishing as Prentice Hall 11Chapter 18 Managing InventoryChapter 18 Managing Inventory

Managing Inventory


Managing InventoryManaging Inventory

Excess inventory masks a host of Excess inventory masks a host of other problems that a company other problems that a company may have may have

Inventory carrying costs are highInventory carrying costs are high $400 billion annually in inventory $400 billion annually in inventory

carrying costcarrying cost TaxesTaxes DepreciationDepreciation InsuranceInsurance ObsolescenceObsolescence


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

1.1. Developing an accurate sales forecastDeveloping 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 itwant it

3.3. Building relationships with quality Building relationships with quality supplierssuppliers

4.4. Setting realistic inventory turnover Setting realistic inventory turnover objectivesobjectives


5.5. Computing the cost of carrying Computing the cost of carrying inventoryinventory

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 informationinventory 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 basismanage 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

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 a company’s salesa company’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 classover each class


ABC MethodABC Method

Dollar usage volume = cost per unit x Dollar usage volume = cost per unit x annual quantity usedannual quantity used

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

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

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ABC Inventory ABC Inventory ControlControl

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

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

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 items carry large levels of safety stock of C items where carrying costs are lowwhere carrying costs are low

Two Bin and Tag SystemsTwo Bin and Tag Systems


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Physical Inventory Physical Inventory CountCount Periodic countPeriodic count Cycle countingCycle counting


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 JIT attempts to reduce the

investment required in inventory investment required in inventory because it drains a company’s cash because it drains a company’s cash and hides a multitude of problems and hides a multitude of problems managers need to addressmanagers 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 businessbusiness


Just-In-Time Just-In-Time TechniquesTechniques

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

Heart of JIT philosophy is Heart of JIT philosophy is eliminating waste in a business – eliminating waste in a business – whatever form it may take whatever form it may take Shiego Shingo’s Eight WastesShiego Shingo’s Eight Wastes

The Eight WastesThe 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 acquiringtoo many items too early or” just in case.”

Inventory – Any raw material, work-in-process, or finished goods to which no value is being added.

Transportation – Unnecessary movement of goods between processes.

Motion – Wasted movements by people or unnecessary movement of equipment.

Waiting – People or parts that wait for a bottleneck in the process to be cleared.

Overprocessing – Using more expensive resources than a task requires or including features for which customers must pay but do not want or value.

Defects – Failure to complete a task correctly the first time.

Talent – Failure to maximize people’s mental, creative, and physical abilities.


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Benefits of JITBenefits of JIT

1.1. Lower investment in inventoryLower investment in inventory2.2. Reduced inventory carrying and handling Reduced inventory carrying and handling

costscosts3.3. Reduced costs resulting from obsolete Reduced costs resulting from obsolete

inventoryinventory4.4. Smaller investment in inventory storage Smaller investment in inventory storage

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

of improved coordination among of improved coordination among departmentsdepartments


When JIT Works BestWhen JIT Works Best

Reliable deliveries of parts and Reliable deliveries of parts and suppliessupplies

Short distances between Short distances between customers and vendorscustomers and vendors

Consistent quality of vendors’ Consistent quality of vendors’ productsproducts

Stable and predictable demandStable and predictable demand


JIT IIJIT II

JIT II techniques focus on creating a closer, JIT II techniques focus on creating a closer, more harmonious relationship with a more harmonious relationship with a company’s suppliers so that both benefit 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 ecalled efficient consumer response fficient 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

$652 billion annually to criminals$652 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

Dishonest employees steal 5.7 times Dishonest employees steal 5.7 times more merchandise than do shoplifters more merchandise than do shoplifters

Average time required to catch an Average time required to catch an employee who is stealing: 18 months employee who is stealing: 18 months

How discovered? Usually by accident!How discovered? Usually by accident!


Employee TheftEmployee Theft

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

Is more pervasive than most Is more pervasive than most owners thinkowners think

30% of workers steal from their 30% of workers steal from their employers at some point in their employers at some point in their careers careers


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

low probability of being caughtlow probability of being caught


Preventing Employee Preventing Employee TheftTheft

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

controlscontrols Create proper checks and balancesCreate proper checks and balances Keep records up-to-dateKeep records up-to-date Demonstrate zero tolerance for theft Demonstrate zero tolerance for theft

Causes of Inventory Shrinkage

Employee Theft48.4%

Shoplifting33.0%

Administrative errors14.4%

Vendor fraud4.2%

Source: 2006 National Retail Security Survey, National Retail Federation.


ShopliftingShoplifting

The most frequent business crimeThe most frequent business crime One out of 11 adults in the U.S. has One out of 11 adults in the U.S. has

shoplifted shoplifted Retailers lose $13.5 billion per Retailers lose $13.5 billion per

year to shopliftersyear to 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 shopliftersTrain employees to spot shoplifters Create a store layout that discourages Create a store layout that discourages

shopliftingshoplifting Use mechanical devices such as Use mechanical devices such as

cameras and electronic tags to make cameras and electronic tags to make shoplifters’ jobs more difficult shoplifters’ jobs more difficult


Apprehending Apprehending ShopliftersShoplifters Catching shoplifters is difficultCatching shoplifters is difficult

On average, caught just once every On average, caught just once every 48 times they steal48 times they steal

Turned over to the police just 50% of Turned over to the police just 50% of the time the time

Result: The chance that a shoplifter Result: The chance that a shoplifter will actually go before a judge is just will actually go before a judge is just 1 in 1001 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. SeeSee the person take or conceal the the person take or conceal the merchandisemerchandise

2.2. IdentifyIdentify the merchandise as the merchandise as belonging to the storebelonging to the store

3.3. TestifyTestify that it was taken with the that it was taken with the intent to stealintent to steal

4.4. ProveProve that the merchandise was not that the merchandise was not paid forpaid for


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

awareness that he is being watchedawareness 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 merchandiseunattended access to merchandise

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


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