This project is on the design and development of an inventory management system which is part of the supply-chain Management. This system will attempt to solve issues with current inventory management systems in order to give businesses a better competitive edge.
The literature review will provide a detailed overview about Inventory management; why business need to manage their inventory, benefits and objectives of inventory management and best practice in inventory management. It will go on to further discuss what inventory management system is all about, a detailed explanation of the benefits, future of inventory management systems and talk about success of inventory management system.
In the review, various factors for implementing efficient inventory management systems were listed in order to understand fully how to design and develop a software solution for a company that would provide the best services and effective solution to their current problems. The report also discussed some challenges faced by most inventory management system in providing businesses with an effective solution.
As part of the literature review, a case study was carried out on Sahad Stores, a distribution company in Nigeria and a detailed investigation into their existing system was accomplished highlighting the problems of the current system. Based on knowledge gained from the literature review, a proposed solution was presented to resolve the issues with the company’s current system of inventory management.
An inventory is basically a detailed list of all the items in stock. Inventory consists of raw materials, work-in-process and finished goods. In today’s highly competitive market, businesses need to maintain an appropriate level of stock to meet the customer demands at any time. Inventory management is part of the supply chain management.
Over the past years, the concept of supply chain management SCM has been given a considerable attention. This is an approach to view the supply chain as a whole rather than as a set of separate processes (Weele, 2002). Mentzer, Dewitt, Keebler, Min, Nix, Smith and Zacharia defined Supply chain management SCM “as the systematic and strategic coordination of the traditional business operations”. The main aim of supply chain management SCM is to improve the long term performance of each firm as well as the whole supply chain (Mentzer, Dewitt, Keebler, Min, Nix, Smith and Zacharia, 2001).
Inventory management involves “system and processes of maintaining the appropriate level of stock in a warehouse” (Barcodes, 2010). These activities includes identifying necessary inventory requirements, and creating replenishment processes, tracking and monitoring the usage of items/stock, reconciling inventory balances as well as reporting inventory status.(Barcodes , 2010). It is basically the process of efficiently controlling the amount of stock in order to avoid excess inventory. Reliable inventory management will therefore minimise the cost associated with inventory (Barcodes, 2010).
Inventory management involves a wide scope of processes ranging from inventory forecasting , replenishment, demand forecasting as well as quality management (Wikipedia, 2009).
According to Stylus Systems, The 3 main objectives in inventory management are (Stylus, 2008):
In a report by Stylus, he highlighted the following as some of the benefits of inventory management (Stylus, 2008):
Presently, there are two major approaches to inventory management
Inventory refers to a detailed list of all the items in store or warehouse. According to Inman, Inventory refers to the items that are stored in warehouses or distribution centres in excess of what the store needs (Inman, 2010).
The following are the reason why business keeps more inventory than they currently need (Inventory Management, 2010).
According to Edwars Silver (Silver, 2008), inventory management involves knowing the following Questions:
In an effort to maximise their return on investment (ROI) and avoid excess inventory, many businesses invest a fortune in inventory management systems.
In a report by Philip Slater (Slater, 2009), he stated that most of these systems fails to render expected services and rather result in excess inventory. This is because software can only optimise the values it has and not what it could be and as a result, it neglects some important external influences like changes in the management process. He stated that “World’s best practice inventory management demands that the inventory management system is optimised not just the inventory”. Inventory management therefore goes beyond software system and as stated by Philip Slater (Slater, 2009) inventory management involves combination of ‘know-how, process and reporting’ that collectively provide a means of maximizing availability while minimizing cash investment. In the report, he stated five level of world’s best practice inventory management that when fully implemented, can enable businesses to reduce their inventory investment or cost. These levels are:
Capitalisation and system optimisation goes hand-in-hand. For an effective system, the management is therefore required to possess the “know-how”, measures, policy development, and reporting required to take the business to level 5 (System Optimization) and not just the software alone(Slater, 2009).
According to business link in an article, an organisation has an efficient inventory control only when they have the “right amount of stock in the right place and at the right time” (Business link, 2006). Inefficient Inventory control can leads slower sales and disappointed customers.
Inventory control basically deals with reducing the total cost of inventory. Inventory control is very relevant for businesses, especially businesses dealing with a large variety of products. As site by Hossein Arsham, Inventory management or control can be used to streamline warehouse processes in order to track orders and shipment (Arsham, 2006). Other important applications of inventory management systems are in manufacturing, shipping, and receiving. As stated by Arsham, there are three main factors in inventory control decision making process (Arsham, 2006).
MerchantOS argued that “the easiest way to manage inventory is with a computer inventory management s
ystem” (Merchant, 2010). The systems below help to reduce the time spent in managing inventory:
These systems ensure accurate inventory records through the use of electronic and wireless technologies that provide error free data. These systems are very efficient in that they:
There are several method of inventory control which include (Hedrick, 2010):
Today, the growth of businesses has provided a necessity to develop a more complicated and highly analytical form of inventory management. The above inventory management systems became difficult and inefficient. As a result, computer systems to control inventory was introduced. These systems include:
The last method for inventory control is carried out by an external agency. As sited by Floyd Hedrick, it involves removal of unwanted products from stock which can be returned to the manufacture. This however has to occur after an agreement and frequent scheduled visit by the manufacturer’s representative to the large retailer in order to record stock count and writes the reorder (Hedrick, 2010).
The main aim of the above systems was to provide a more efficient system that will be able to identify the cost of each inventory (Hedrick, 2010). According to the report, two main control values are used:
The Economic Order Quantity (EOQ) is a formula that is used mainly for calculating the annual cost for ordering an item. It is widely used by most businesses and involves the actual cost of placing an order, the cost of carrying inventory as well as the annual sales rate. (Hedrick, 2010).
An Inventory management system is a system that automates all the processes involved in inventory management. These system are a vital part of any successful business and is basically used to efficiently track inventory using both hardware and software tools. The types of inventory tracked with an inventory management system includes almost any type of quantifiable products like clothing, household products, food, as well as equipment (Barcodes inc, 2010 ). These inventory management systems can influence the overall efficiency of a company’s performance resulting in profits. An overview of the whole system is as shown in the diagram below:
The diagram above show an over view of the whole inventory management system indication how numerous branches. It shows how the inventory management system manages inventory, sales as well as Employee information.
Through the end of 1980’s, sales and accounting related modules were the main focus of majority of software solution for retailer, manufacturers, and wholesalers. During the early 1990’s, many distributors began to notice the relevance of an effective way of controlling and managing their largest investment of corporate assets which is inventory. This lead to the development of comprehensive inventory management modules and systems by several software companies (Schreibfeder, 2009).
Presently, many businesses rely on modern inventory management systems to automate and integrate all aspects their business operations from order management, shipping management, billing systems, to inventory control all in one software package (Schreibfeder, 2009).
Tim Cosby reported that, inventory management systems must have ability to “track sales and availability, communicate with suppliers in near real-time and receive and incorporate other data like seasonal demand” (Cosby, 2007). This means that the system must tell the storeowner for example when its stock level is low so as to reorder and how much to purchase.
Information technology provided a way to convert sales and purchasing into a strategic business operation. Businesses now are faced with the challenge of finding out how to use these technologies to gain value and competitive advantage. Inventory management system can deliver these advantages (Stylus Systems, 2008).
Modern inventory management systems now depend on barcodes, and potentially RFID systems to enable automatic identification of objects. According to a case study at Wal-Mart, for products selling between 1 and 15 units a day, RFID was able to reduced Out of Stocks by up to 30% (Mathieu, 2007).
In order to record an inventory transaction accurately, “the inventory management system uses abarcode scanneror RFID reader to identify products automatically, and then collects additional information on the specific product from the operators via fixedwireless terminals, or mobile computers” (Mathieu, 2007). Mathieu defined RFID (RadioFrequencyIdentification) as” a data collection technology that uses electronic tags also known as electronic label to store data and can be used to identify items just like bar codes”.
The main difference between RFID and bar codes is that RFID uses wireless technology to transmit information into the system and can be inserted within packages and does not have to be close to the scanner. On the other hand, barcodes require line of sight and closure to the scanner for information to be read.
As stated by Mathieu, RFID tagged cartons rolling on a conveyer belt can be read many times faster than bar-coded boxes (Mathieu, 2007).
Large software companies like IBM, Microsoft, SAP, and Oracle have already designed effective inventory management systems for large businesses. These software solutions cost thousands to millions of dollars. They have now turned to focus on smaller businesses. Some of the popular inventory (supply chain) management systems produced by Microsoft include Great Plains and Solomon, which are now joined together and called Microsoft Dynamics GP (Quittner, 2008).
Inventory management is very relevant for today’s businesses in order to ensure quality control in businesses which presently is centred mostly on customer satisfaction. Inefficient inventory control or management can therefore cause customer dissatisfaction when they run out of stock of an item the customer needs. In order to avoid this, most businesses are willing to invest large amount of money in acquiring an effective and efficient inventory management systems.
A good inventory management system will be able to alert the retailer when it is time to reorder. It is also an important way automatically tracking moving inventory.
An efficient inventory management system helps to minimize the risk of error. For example, if a business orders large quantity of goods, and say 10,000 are missing. Manual counting each goods is likely to result in error but these errors can be avoided using an automated inventory management system. In retail stores, an inventory management system can also be used to track theft of retail merchandise, providing valuable information about store activities (Schreibfeder, 2009).
Inventory management systems must be designed to reflect and support company’s strategic plan as well as adapt to market changes due to worldwide marketing or new technology. It should also provide relevant information to efficiently monitor inventory movements, coordinate and integrate internal processes like accounting or billing, manage people and equipment and communicate with customers.
According to Invatol, inventory management system must be able to integrate the following processes in order to ensure continuity between functions (Invatol, 2003):
These processes however vary from business to business depending on how the businesses carry out its processes, and on the market demand.
As cited by David Essex (Essex, 2009), he stated that the following are some of the advantages that businesses achieve while using inventory management software:
For any successful business, inventory management must be a critical aspect of its business. The most important aspect of an efficient inventory management is to achieve accurate data in terms of figures and facts and to implement policies to protect this information (Inventory Management, 2007).
A successful inventory management system will provided businesses with proper inventory control that reduces overall operating cost leading to customer satisfaction as well as give a competitive advantage. As sited by Alan Smith, a well-structured inventory management system should be able to adjust to an existing system (Smith, 2009)
Success in manufacturing industry entails producing the right products, in the right quantities, at the right time, with good quality, and at a price the customer is willing to pay.
Success in the manufacturing industry requires producing the right products, in the right quantities, at the right time, with good quality, and at a price the customer is willing to pay. The flexibility to respond to compliance standards and the ever-changing needs of customers, such as providing real-time visibility into global operations, is also imperative for success. Meeting these demands requires the ability to make quick decisions based on accurate data.
Successful inventory management has to do with balancing the cost of keeping inventory with the benefits gained from inventory. Some of the reasons for inventory management include (Hedrick, 2003):
However, the degree of success in addressing these issues varies within the functionality of inventory as well as the type of business.
A successful inventory management system will accelerate the process of tracking and removing from inventory those items that needed by customer. This process minimises the lead-time for order fulfilment (Merchantos, 2010).
Ideally, in order to avoid late re-order times, inventory software should be able to adjust the order quantity and delivery lead time to match that of the supplier’s performance.
During the late 1990s, there was a large amount of businesses investing in integrated order and inventory system which were basically designed to reduce the amount of inventories as well as manage stock level (replenish stock). There were a wide range of system integration options based on the business needs and financial ability (Gale Group, 2002).
However, these “stand-alone” systems do not integrate well with each other. In 1996, a study by the International Mass Retail Association (IMRA), concluded that stand alone warehouse Management System (WMS) for example which perform only individual business operations will become obsolete because of their lack of integration well with other systems (Gale Group, 2002).
Presently, organisations can no longer compete effectively in isolation of their suppliers and other entities. The future success of many businesses depends on the co-ordination and co-operation of efforts, thereby making supply Chain management important. JIT and VMI are the two of the philosophies that have been used to update supply chain relationships and management (David, 2004).
The trend now in inventory management is to strives to improve not just specific aspect of the supply chain but system-wide (the entire supply chain) efficiency through automatic replenishment programs (ARPs) like the vendor managed inventory (VMI). In this system, the vendors are responsible for inventory replenishment or restocking of inventory for their retailers. They get retailers warehouse or point of sale information and use it to track retailer’s inventory thereby placing the whole responsibility for inventory management of the shoulders of the vendors (Gale Group, 2002). Popular Automatic replenishment programs (ARP) includes continuous replenishment planning (CRP) and vendor managed inventory (VMI). CRP and VMI are similar but differ in the sense that VMI also decides what and when to ship. Another widely used ARP is the efficient consumer response (ECR) used within the grocery industry and quick response (QR) programs which are common in the apparel industry (Daugherty, Myers, Matthew, Autry and Chad, 1999).
Future inventory management systems will be able to integrate all business processes for the whole supply chain. Another future development would be the use of RFID with GPRS to track inventory.
Inventory Adjustment as the name implies is implemented as a stock adjuster with the main objective of synchronising the system with the actual stock on hand.
According to Jon Schreibfeder, in a case study with a large food distributor, he stated that the company began a program to achieve effective inventory management. As part of the program, they were cycle counting products and entering inventory adjustments as they find any miss match between the quality of a product in their warehouse and the inventory maintained by their computer system (Schreibfeder, 2009). In his analysis, Schreibfeder stated that the company was able to adopt a system that improved their future inventory accuracy that is methods of handling stock in order to prevent additional stock discrepancies. They did this by carefully analysing the reasons for inventory adjustments (Schreibfeder, 2009). This I believe was because most inventory adjustments are the result of problems encountered in the normal handling of materials.
The reason to make inventory Adjustments are basically the same for most businesses irrespective of the systems and operative methodologies they are using but the way these inventory adjustments are made will affect the inventory cost differently. The main reasons why inventory adjustments are required are (Schreibfeder, 2009):
Some inventory management system like FoodConnex implement inventory adjustment modules. According to FoodConnex, inventory adjustment can be categorized as follows (Solutions, 2009):
Based on the information presented, every inventory adjustment should be considered as an opportunity for businesses to improve which can result to greater corporate profitability.
Several inventory management systems now include many new features designed to help distributors effectively manage their inventory. However, after implementing such systems, many businesses still continue to face the same challenges they experience with their old system. These challenges include (Schreibfeder, 2000):
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