Running Head: INVENTORY SYSTEMS Inventory Systems Summary University of Phoenix QRB/501 Quantitative Reasoning for Business Instructor Joe Krupka September 21, 2010 Inventory Systems Summary In today’s economic recession, business owners are constantly looking for opportunities that would enable them to remain competitive through lowering their overhead cost. Kehrer (2010, ¶ 1) explained, “Bloated overhead is one of the major threats to small business competitiveness”.
For this reason, it can be determined that business analysts are evaluating the different types of inventory management systems that could be applied to help reduce the cost of overhead and increase product turnaround. “Dell has achieved a system that at times leaves them with average inventories for long enough to last only three days. Instead of incurring holding costs, Dell doesn’t order until the demand is in place” (Atkinson, 2005, ¶6). Dell refers to this system as the Just-In-Time inventory system.
The Vendor Managed Inventory system, a concept pioneered by Wal-Mart, is another inventory system that is paving the way for the future with its ability to communicate the demand of the customers directly to the supplier (Wal-Mart’s Focus on EDI, 2010). The summary will briefly describe the Just-In-Time and Vendor Managed Inventory Systems. Following the brief description, will be a comparison that indentifies both the advantages and disadvantages of each inventory system. Inventory Systems Description
Just-In-Time Inventory Management System Dell Computer is a large personal computer (PC) provider. The company adopted the just-in-time inventory system to manage their profitability status and to gain momentum in the computer industry. In the former years Dell struggled with their finances in the computer technology industry because of miss-managed capital. The company maintained a large amount of inventory regardless to customer demands and forecasts. The large amount of inventory Dell retained created a significant decline in finances.
In 1994, Dell introduced a new business plan that entailed a build-to-order process that included a direct sales process to the customers. Using the build by order process Dell sought out methods to eliminate excess large inventory. In the build to order process Dell would only produce the inventory when requested by the customer. The build to order process would afford Dell the opportunity not incur financial losses from overstocked inventory practices. The process would additionally allow Dell to allocate the financial resources to other critical areas.
Over the course of a four-year span the revenue for Dell grew from $2 billion to $16 billion at more than a 50% annual growth rate (Greenberg, 2002). Dell’s stock earnings per share increased 62% in1998 and Dell’s return on invested capital catapulted to 217% (Greenberg, 2002). Dell’s profitability is credited to the management and coordinating of the organization’s activities including the thorough management of the inventory system. In the new process for Dell the inventory system maintenance did not require large expenditures of advanced capital as the former inventory system required.
The process involved targeting long-term corporate/individual customers and predicting the needs of the customers and their budget cycles. Dell developed a customized intranet Website with predetermined specifications and budgets for corporate customers (Greenberg, 2002). To retain high computer demands for individual customers Dell concentrated on using the latest technology products to entice repeat customers with regular upgrades and purchases that require little technical support. The system also requires the clients to pay up front by credit card.
The demand management process enables Dell to match incoming demands to predetermined supplies and the pricing system reflected in real-time demand management. The just-in –time inventory system allows the sales executives, marketing executives, and supply chain associates to ascertain accurate demand trends and to anticipate any supply issues concerning computer equipment surpluses or shortages that could likely to occur (Johnson, 2001). In summary, in the just in time manufacturing system inventories are decreased significantly with real time pricing and in some cases the inventory is zero. Vendor Managed Inventory System
Wal-Mart, Sam’s Club, and Costco are a couple of today’s big businesses that have decided to center their focus on implementing the Vendor Managed Inventory system for their respective organizations. When utilizing the VMI system, the distributor is able to communicate directly to the supplier, via internet or web-based server, and retrieve real-time data of what items are and are not selling (Definition of Vendor Managed Inventory, 2010, p. 1). Being able to identify and communicate this valuable and accurate information, on which products are currently in high demand, is essential to the success of both organizations.
Understanding the consumer demand is important because it allows the organization to properly plan for the needed supply of products in direct relation toward the demand of the consumers during similar periods of time. Hunter, King, and Lowson (1999) stated the following: Under a traditional relationship with the vendor, the delivery of goods to the store is determined ahead of the selling season; no in-season adjustments are made. A VMI relationship models the case where the retailer desires rapid shipment of PoS based reorders.
Therefore, the vendor tries to accommodate the retailer by carrying inventory based upon the pre-season plan and hoping there is a match between reorders and stock, i. e. little forecast error. (p. 185) The VMI system has proven to be a valuable and vital instrument by helping identify consumer demand statistics that would in return contribute to a more precise and efficient supply plan, while lowing overhead. The key to the success of this inventory management system is the joint responsibility relationship absorbed between the vendors and the distributors in conjunction with their ability to develop a collaborative forecast.
Advantages of Inventory Systems Advantages of the Just-In-Time Inventory Management System 1. Major capital is no longer held up in inventory and the funds can be allocated to other resources. 2. Storage space can be used for other resources rather than inventory. 3. Products are sent to customers in a timely fashion and response times from customers are faster. 4. With direct sales the customers select what they want from the latest technology therefore defect rates are reduced, and customer satisfaction is increased. Advantages of the Vendor Managed Inventory System . Planning and resupply cost will be reduced because the vendor has absorbed majority of the responsibility in this system. 2. Overall sales will increase due to the distributor having the right products during the right season. 3. The vendor will ensure that the distributor’s products are shipped within a timely manner due to the true partnership developed and the understanding of “I don’t succeed, if they don’t succeed”. 4. The real-time point of sale information assists the vendor and the distributor in figuring out an accurate forecast for each season. 5.
In this system, the vendor has the ability to see the distributor’s current stock levels. This will enhance the ability to identify which products are of higher priority. 6. Purchase orders are derived from seasonal forecasts. This will ultimately cut overhead cost and increase inventory turnaround. 7. Human errors are dramatically reduced to the ability to transfer information from computers to web-servers. This will increase the speed and productivity of processing data. (Benefits of Vendor Managed Inventory, 2010, p. 1) Disadvantages of Inventory Systems
Disadvantages of the Just-In-Time Inventory Management System 1. If a company wants to initially covert to the just in time (JIT) inventory system the process could cause a major reorganization of their business systems because of the complexity of the conversion. 2. The conversion is expensive to introduce. 3. JIT manufacturing exposes companies to associated risks with the supply chain users. Additionally with no back-up inventory stock to rely on, any disruptions from just one supplier could force production to halt with short notice.
Disadvantages of the Vendor Managed Inventory System 1. Detailed testing and evaluations have to be conducted to guarantee the accuracy of data being sent from the distributors’ systems to the vendors’ systems. 2. If the vendor or distributor one is partnering with financially goes under, they are also affected and could potentially go under as well. 3. In this inventory management system, the distributor has to immediately identify any changes in the consumer base, big event, or promotions. If this is not done properly then it may alter ordering patterns hich would affect sales. 4. If an ordering error or overstocking occurs there has to be an agreement between the vendor and distributor of who would absorb the majority of the responsibility of the stock in each scenario. (Potential Pitfalls of Vendor Managed Inventory, 2010, p. 1) Conclusion Managing a successful inventory and planning system can be a highly complex but is necessary task to run a successful business. Inventory management is instrumentality linked toward achieving business goals by allowing the financial resources to be allocated properly.
It is critical that businesses incorporate strategies for a good inventory tracking system to maintain information about the firm’s activities and to ensure accuracy in delivery of the products to customers. This is one of the main reasons retail organizations have put an emphasis on seasonal forecasting to aid the different types of inventory management systems. Possessing the knowledge of an estimate of how many units of an item should be in stock for a particular season could mean the difference in turning around on-hand inventory four times instead of only three.
In properly maintaining inventory management systems, organizations are able to reduce existing overhead cost, know the product in demand from consumer along with current levels of on-hand inventory, and see a quick turnaround of their investments. The key to figuring out if the current inventory management system that has been implemented is the best for that organization would be to conduct internal and external audits to evaluate the accuracy of the current inventory data and cross-reference that information through a physical on-hand count of goods.
Once the information has been gathered communicate with an external consultant to see even if it would be cost effective to implement a new inventory management system.