Inventory Management
Manufacturing companies take raw materials and turn them into finished products. Merchandising companies buy product and resell it. Both types of companies must manage their inventory. If you order too much, you risk obsolescence, spoilage, or inability to sell. If you order too little, you may lose sales you could have made and risk upsetting your customers. This section will help you understand how companies manage their inventory to minimize overall costs.
ABC Technique
The ABC analysis is an inventory categorization technique often used in material management wherein accuracy and control decreases from A to C.
Key Points
- items: very tight control and accurate records; items: less tightly controlled and good records; items: simplest controls possible and minimal records.
- The 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 analysis suggests that inventories of an organization are not of equal value.
Key Terms
- Just in Time: Just in time (JIT) is a production strategy that strives to improve a business return on investment by reducing in-process inventory and associated carrying costs.
- ITEMS: very tight control and accurate records
- ITEMS: less tightly controlled and good records
- ITEMS: simplest controls possible and minimal records
The analysis suggests that inventories of an organization are not of
equal value. Thus, the inventory is grouped into three categories (,
, and ) in order of their estimated importance.
items are very important for an organization. Because of the high
value of these 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.
items are important, but of course less important, than items and
more important than items. Therefore, items are intergroup items.
items are marginally important.
The following is an example of the Application of Weighed Operation
based on class in the electronics manufacturing company with
active parts.
ABC analysis Actual distribution of ABC class in the electronics manufacturing company with active parts.
Using this distribution of class and change total number of the parts to .
ABC techniques Distribution of ABC class
- Uniform Purchase: When you apply equal purchasing policy to all components, example weekly delivery and re-order point (safety stock) of two-week supply assuming that there are no lot size constraints, the factory will have a delivery in four weeks and the average inventory will be weeks supply.
- Weighed Purchase: In comparison, when weighed purchasing policy applied based on class, example class monthly (every four weeks) delivery with re-order point of three-week supply, class -weekly delivery with re-order point of two-week supply, class weekly delivery with re-order point of one-week supply, total number of delivery in four weeks will be and average inventory will be week supply.
By applying weighed control based on classification, required man hours and inventory level are drastically reduced.