Case study: Manufacturing Supply Chain Logistics & Inventory Control A specialty chemical company with worldwide operations serving the electronics, surface finishing, and decorative industries engaged Daniel Penn Associates to improve its supply chain logistics and inventory control systems. At the time, the company had 14 manufacturing site, six R&D facilities, sales, and distribution centers worldwide and employs 1,300 people.
In their efforts to reduce finished goods inventories and expenses while improving customer service, the company wanted to determine how they could reduce the number of warehouse facilities and service their customers based from fewer locations in North America. At the time, products were manufactured from four facilities and distributed through 22 distribution centers, of which 16 were public warehouses and six were company-owned. Initially, DPA visited with senior managers to define the study objectives in the areas of distribution management and inventory control.
In a nutshell, our analysis was geared to answer three main questions: After thorough evaluations by our consulting team, interviews with all levels of management, analysis, and customer service reviews, we determined the study culminated in a detailed implementation plan outlining the steps for consolidation and optimization the distribution system. The corrective actions identified included: The direct bottom line results to the company included a 35% decrease in freight to public warehouse costs and 35% decrease in public warehouse costs.
Inventory control is the implementation of management’s inventory policies in a manner that assures that the goals of inventory management are met. Wise control of inventory is often a critical factor in the success of businesses in which inventories are significant. The goal of inventory control is to be sure that optimum levels of inventories are available, that there are minimal stockouts (i. e. , running out of stock), and that inventory is maintained in a safe, secure place and is always readily accessible to the proper personnel.
Policies relate to what levels of inventories are to be maintained and which vendors will be supplying the inventory. How and when inventories will be replenished, how inventory records are created, managed, and analyzed, and what aspects of inventory management will be outsourced are also important components of proper inventory management. In the Beginning Prior to the eighteenth century, possessing inventory was considered a sign of wealth. Generally, the more inventory you had, the more prosperous you were. Inventory existed as stores of wheat, herds of cattle, and rooms full of pottery or other manufactured goods.
This phenomenon occurred for good reason. There were a number of concerns for business-people then. Communication was difficult and unreliable, easily interrupted, and often took long periods of time to complete. Stocks were difficult to obtain, and supply was uncertain, erratic, and subject to a wide variety of pitfalls. Quality was inconsistent. More often than not, receiving credit for a purchase was not an option and a person had to pay for merchandise before taking possession of it. The financial markets were not as complex or as willing to meet the needs of business as they are today.
In addition, the pace of life was a lot slower. Because change occurred gradually, it was relatively easy to forecast market needs, trends, and desires. Businesses were able to maintain large quantities of goods without fear of sudden shifts in the market, and these inventories served as buffers in the supply line. Customers had a sense of security, knowing that there was a ready supply of merchandise in storage, and that comfort often helped to minimize hoarding. In the eighteenth and early nineteenth centuries, markets were very specialized. There was often one supplier for each market in each area of business.
Except for the basic necessities of life, there was much local specialization and distinct specialization by region. For example, although there might be more than one grist-mill in a community, there would often be only one general store. If customers were unhappy with their existing supplier, they had to suffer some inconvenience to find an alternate source because of the monopolies that existed. This made it easier for businesses to market their products and allowed them to maintain large stocks if they had the capital to do so. Inventory management was a concern then, as it is now.
Inventories had to be monitored for accuracy and quality. They had to be protected from the elements, from theft, from spoiling, and from changes in the local economy. Tax laws could have an enormous impact on inventory levels. The Early Twenty-First Century Today’s business world shares few similarities with yesterday’s. Communication is quick, easy, reliable, and available through a host of media. Supply is certain and regular in most environments of merchandising and manufacturing. Tax laws are generally consistent and reliable. However, market changes can be abrupt and difficult to forecast.
Global competition exists everywhere for almost everything. Products are available from anywhere in the world, with delivery possible within in one day in many cases. Competition is driving the price of most products down to minimum profit levels. Inventories are managed for minimum stocking levels and maximum turnover. In the twenty-first century, high inventory is a sign of either mismanagement or a troubled economy. It is expensive and wasteful to hold and maintain high inventory levels. Proper utilization of space is also a critical component in today’s business world, whether one is a retailer, wholesaler, or a manufacturer.
Modern retailers and manufacturers are equipped with an array of tools and support mechanisms to enable them to manage inventory. Technology is used in almost every area of inventory management to help control, monitor, and analyze inventory. Computers, especially, play an enormous role in modern inventory management. Inventory Management Systems Ongoing analyses of both inventory management and manufacturing processes have led to innovative management systems, such as just-in-time inventory or the economic-order quantity decision model.
Just-in-time inventory is a process developed by the Japanese based on a process invented by Henry Ford. David Wren (1999) descibes how the process started: Just-in-time inventory usually requires a dominant face—a major partner that has the resources to start the process and keep it organized and controlled—that organizes the flow and communication so that all the parties in the supply process know exactly how many parts are needed to complete a cycle and how much time is needed in between cycles.
By having and sharing this information, companies are able to deliver just the right amount of product or inventory at a given time. This requires a close working relationship between all the parties involved and greatly minimizes the amount of standing or idle inventory. In the economic-order quantity decision model, an analysis is made to determine the optimum quantity of product needed to minimize total manufacturing or production costs. In other words, through a complex analysis, management attempts to determine the minimum amount of product needed to do the job and still keep the cost of inventory as low as possible.
This analysis considers the amount of time needed to generate an order; to process, manufacture, organize, and ship each product; to receive, inventory, store, and consume each product; and to process the paperwork upon receipt through the final payment process. This is a more independent process than just-in-time inventory; by allowing for a variety of suppliers to participate, it ensures competitiveness. Many companies today employ a mixture of both processes in order to maintain independence yet still have a close relationship with suppliers.
Retailers, for example, work closely with suppliers to maintain the lowest possible inventories but still have enough products to satisfy customer demand. Often, companies have access to information about each other’s inventory levels, allowing management to further analyze inventories to ensure that each is carrying the correct amount of stock to satisfy market needs and maintain minimum levels. The Inventory Process Inventory is generally ordered by computer, through a modem, directly from a supplier or manufacturer.
The persons ordering the product have an inventory sales or usage history, which enables them to properly forecast short-term needs and also to know which products are not being sold or consumed. The computer helps management with control by tying in with the sales or manufacturing department. Whenever a sale is made or units of a product are consumed in the manufacturing process, the product is deleted from inventory and made part of a history file that can be reviewed manually or automatically, depending on how management wishes to organize that department.
The supplier and the buyer often have a close working relationship; the buyer will keep the supplier informed about product changes and developments in the industry in order to maintain proper stock levels, and the supplier will often dedicate equipment and personnel to assist the buyer. Even though small companies may work closely with larger suppliers, it is still very important that these small companies manage their inventory properly. Goods need to be stored in a suitable warehouse that meets the needs of the products; some products require refrigeration, for example, while others require a warm and dry environment.
Space is usually a critical factor in this ever-shrinking world: It is important to have enough space to meet the needs of customers and keep the warehouse from becoming overcrowded. Inventory needs to be monitored to prevent theft and inaccuracies. Taking physical inventory—physically checking each item against a list of items on hand—is a routine that should be performed a number of times a year. At the very least, inventories should always be checked each year just before the end of the fiscal year and compared against ” book” or quantities listed as on hand in the computer or manual ledger.
Adjustments can then be made to correct any inaccuracies. Taking inventory more than once a year, and thus looking at stocks over shorter periods of time, often results in discovering accounting or processing errors. It also serves as a notice to employees that management is watching the inventory closely, often deterring pilferage. Alarm systems and closed-circuit television are just a few of the ways inventories can be monitored. Making sure that everyone allowed into inventory management systems has and uses his or her own password is critical to effective inventory control.
By having redundant systems, management can also compare the two to make sure there is a balance. If they go too far out of balance, management is alerted. In the End Inventory control: Inventory control is concerned with minimizing the total cost of inventory. In the U. K. the term often used is stock control. The three main factors in inventory control decision making process are: The cost of holding the stock (e. g. , based on the interest rate). The cost of placing an order (e. g. , for row material stocks) or the set-up cost of production.
The cost of shortage, i. e. , what is lost if the stock is insufficient to meet all demand. The third element is the most difficult to measure and is often handled by establishing a “service level” policy, e. g, certain percentage of demand will be met from stock without delay. The ABC Classification The ABC classification system is to grouping items according to annual sales volume, in an attempt to identify the small number of items that will account for most of the sales volume and that are the most important ones to control for effective inventory management.
Reorder Point: The inventory level R in which an order is placed where R = D. L, D = demand rate (demand rate period (day, week, etc), and L = lead time. Safety Stock: Remaining inventory between the times that an order is placed and when new stock is received. If there are not enough inventories then a shortage may occur. Safety stock is a hedge against running out of inventory. It is an extra inventory to take care on unexpected events. It is often called buffer stock. The absence of inventory is called a shortage. Compute EOQ for each quantity discount price.