CHAPTER II THEORETICAL FOUNDATION

Transcription

1 CHAPTER II THEORETICAL FOUNDATION 2.1. Inventory Management The writer observes the difficulty from the inventory and the important function from the inventory it characterizes which creates system flexibility in operation from retailer. Some of the function from the inventory 4 ; The primary function is to separate the production process and the distribution process. At the time when demand is fluctuated, compose an inventory it is the best decision to be made. Beside that the function from the inventory is to prevent from stock out based from the demand condition which is also impact the production process and distribution unbalanced. The reason to keeping inventory is to maintain or fulfill the demand from customer continuously.. To anticipating from inflation. Inventory means to avoid the shifting of price and inflation. Keep the inventory also the best decision to choose, but still the company has to consider about the cost and the risk for maintenance the inventory To acquire a discount, base since retail with large quantities from supplier it will force the price decreased. But, unfortunately if the companies purchase large quantities it will also increased the cost of storage, damaged cost, insurance cost, and etc Maintain the economies production, if the efficiency from purchasing goods to the inventory it will make the efficiency of purchasing. as a result the set up cost will not increase Operation managers establish system for managing inventory. In this section, we briefly examine two ingredients of such system; 1. How inventory items can be classified (called ABC analysis). 2. How accurate inventories records can be maintained. We will look at inventory control in the service sector. 4 Heizer, J., and Render, B., 2006, Operations Management, New Jersey: Pearson Education. 5

2 Record Accuracy Good inventory policies are meaningless if management does not know what inventory on hand. Accuracy of records is critical ingredient in production and inventory systems. Record accuracy allows organizations to focus on those items that are needed, rather than settling for being sure that some of everything is in inventory. Only when an organization can determine accurately what it has on hand can determine accurately what is on hand can make it precise decisions about ordering, scheduling, shipping. To ensure accuracy, incoming and outgoing record keeping must be good, as must be stockroom will have limited access, good housekeeping, and storage areas that hold fixed amount of inventory. Bins, shelf space, and parts will be labeled accurately Cycle Counting Even though an organization may have made substantial efforts to record inventory accurately, these records must be verified through continuing audit. Such audits are known as Cycle Counting. Historically, many firms performed annual physical inventories. This practices often meant shutting down the facility and having inexperienced people count parts and material. Inventory records should instead be verified via Cycle Counting. Cycle counting uses inventory classifications developed through ABC analysis. With cycle counting procedure, items are counted, records are verified, and inaccuracies are periodically documented. The cause of inaccuracies is then traced and appropriate remedial action taken to ensure integrity of the inventory system. A items will be counted frequently, perhaps once a month; and B items will be counted less frequently, perhaps once a quarter, and C items will be counted perhaps once every six months. Retailer Company determined has 500 A items, 1,750 B items, and 2,750 items. Company policies is to count all A items every month (every 20 working days), all B items every quarter (every 60 working days), and all C items every 6 months (every 120 working days). How many items should be counted each day? 6

3 Table 2.1 Example cycle counting items number of items class quantity cycle counting policy counted per day A 500 each month (20 working days) 500/20= 25/day B 1,750 every quarter (60 working days) 1,750/60= 29/day C 2,750 every 6 months (120 working days) 2,750/120= 23/day total 77/day In example 2, the particular items to be cycle-counted can be sequentially or randomly selected each day. Another option is to cycle-count items when they are reordered. Cycle counting also has the following advantages; Eliminates the shutdown, and interruption of production necessary for annual physical inventory. Eliminates annual inventory adjustments. Trained personal audit the accuracy of inventory Allows the cost of the errors to be identified and remedial action to be taken. Maintain accurate inventory records Control of Service Inventories Management of service inventories deserves special consideration. Although we may think of the service sector of our economy as not having inventoried, that is not the case. For instance, extensive inventory is held in wholesale and retail business, making inventory management crucial and often factor in a managers advancement. In the food industries business for example, control of inventory can make the difference between success and failure. More over, inventory that is transit or idle in warehouse is lost value. Similarly, inventory damaged or stolen prior to sale is a loss. In retailing, inventory that is uncounted for between and time of sale is known as shrinkage. Shrinkage occurs from damage and theft as well as from sloppy paperwork. Inventory theft is also known as pilferage. Retail inventory loss of 1% of sales is considered good, with loses in many stores exceeding 3%. Because the impact on profitability is substantial, inventory accuracy and control are critical. Applicable techniques include the following; 7

4 Good personnel selection, training, and discipline. These are never easy but very necessary in retail operations, where employees have access to directly consumable merchandise. Tight control of incoming shipments. This task is being addressed by many firms through the use of barcode and radio frequency ID system that read every incoming shipment and automatically checks tallies against purchase order. When properly designed, these systems are hard to defeat. Each item has it own stock keeping unit (SKU), pronounced skew. Effective control of all goods leaving the facility. This job accomplished with barcodes on items being shipped, magnetic strips on merchandise, or via direct observation. Direct observation can be personnel stationed at exist. Successful retail operation requires very good store level control with accurate inventory in its proper location. One recent study found that customer and clerks could not find 16% of the items at one of the US largest retailer not because the items were out of stock, but they were misplaced. From the estimation major retailers lose 10%-25% of overall profits due to poor or inaccurate inventory records Reorder Points Now that we have decided how much to order, we will look at the second inventory question, when to order. Simple inventory models assume that receipt of an order is instantaneous. In other words, they assume (1) that a firm will place an order when the inventory level for that particular item reaches to zero and (2) that will receives the ordered items immediately. However, the time between placement and receipt of an order, called lead time, or delivery time, can be as short as few hours or as long as a months. Thus the when to order decision is usually expressed in terms of reorder points (ROP) the inventory level should be placed (see Figure 2.1) 5 Raman, A., Dehoratius, N., and Ton, Z., 2001, Execution: The Missing Link in Retail Operations, California Management Review, Vol. 43, No. 3, pp

5 Q* Inventory level (units) Slope = units / day ROP (units) Time (days) Lead time = L Figure 2.1 the reorder point curve Fixed-Period (P) System The same fixed amount is added to inventory every time an order for an item is placed. We saw that orders are event triggered. When inventory decreases to the reorder point (ROP), a new order for x units is placed. To use the fixed quantity model, inventory must be continuously monitored. This is called a perpetual inventory system. Every time an inventory is added to or withdrawn from inventory, records must be updated to make sure the ROP has not been reached. In a fixed time period inventory is ordered at the end of a given period. Then, is on hand inventory counted. Only the amount necessary to bring total inventory up to prespecified target level is ordered. 9