Essentials of Future Inventory Control System
Inventory Control Systems
The function of inventory control systems, which are also called stock control or inventory management systems, is to minimize the total cost of inventory while maintaining optimal inventory levels. Inventory levels are maintained by re-ordering the quantity needed at the right times in order to meet demand.
POM departments keep safety stock or buffer stock as a hedge against shortages, or stock outs. Safety stock is extra inventory in case of unexpected events, such as spikes in demand or longer delivery times.
Managing inventory is important to profit margins because of numerous costs associated with inventory, in addition to the cost of the inventory. Inventory control systems minimize the following three cost categories:
- Cost of holding inventory: warehousing costs, security costs, insurance, losses due to theft or obsolescence, and inventory financing costs based on the interest rate.
- Cost of ordering and shipping: employees’ time spent ordering, receiving, or processing deliveries; and the shipping fees.
- Cost of shortages: production delays and missed sales revenues because of stock outs.
To minimize the sum of these three costs, the POM department has to decide when to order and how much to order. One inventory model that is used to answer both questions is the economic order quantity (EOQ) model. The EOQ model takes all costs into consideration.
Just-in-time (JIT) and lean manufacturing are two widely used methods or models to minimize waste and deal with the complexity of inventory management. Minimizing inventory costs remains a major objective of supply chain management.
JIT inventory management attempts to minimize holding costs by not taking possession of inventory until it is needed in the production process. With JIT, costs associated with carrying large inventories at any given point in time are eliminated. But the tradeoff is higher ordering costs because of more frequent orders.
Because of the higher risk of stock outs, JIT requires accurate and timely monitoring of materials usage in the production. Everything in the JIT chain is interdependent, so coordination and good relationships with suppliers are critical for JIT to work well.
Any delay can be very costly to all companies linked in the chain. Delays can be caused by labor strikes, interrupted supply lines, bad weather, market demand fluctuations, stock outs, lack of communication upstream and downstream in the supply chain, and unforeseen production interruptions.
In addition, inventory or material quality is critical. Poor quality causes delays, for example, to fix products or scrap what cannot be fixed and wait for delivery of the re-order.
JIT was developed by Toyota because of high real estate costs in Tokyo, Japan, that made warehousing expensive. It is used extensively in the auto manufacturing industry. For example, if parts and subassemblies arrive at a workstation exactly when needed, there is no need to hold inventory.
There are no delays in production, and there are no idle production facilities or underutilized workers, provided that parts and subassemblies arrive on schedule and in usable condition. Many JIT systems need to be supported by software. JIT vendors include HP, IBM, CA, and Steven Engineering.
Despite potential cost-saving benefits, JIT is likely to fail in companies that have:
- Uncooperative supply chain partners, vendors, workers, or management
- Custom or non-repetitive production
Lean Manufacturing Systems
In a lean manufacturing system, suppliers deliver small lots on a daily or frequent basis, and production machines are not necessarily run at full capacity. One objective of lean manufacturing is to eliminate waste of any kind; that is, to eliminate anything that does not add value to the final product.
Holding inventory that is not needed very soon is seen as waste, which adds cost but not value. A second objective of lean manufacturing is to empower workers so that production decisions can be made by those who are closest to the production processes. Oracle, Siemens, and other vendors offer demand-driven lean manufacturing systems. Like any IS, JIT needs to be justified with a cost-benefit analysis.
And all JIT success factors apply to lean manufacturing. For example, JIT requires that inventory arrive on schedule and be the right quality. For companies subject to bad weather or labor strikes, lean manufacturing may not be suitable.
Quality Control Systems
Manufacturing quality control (QC) systems can be stand-alone systems or can be part of an enterprise wide total quality management (TQM) effort.
QC systems provide data about the quality of incoming materials and parts, as well as the quality of in-process semi-finished and finished products. These systems record the results of all inspections and compare actual results to expected results.
QC data may be collected by sensors or RFID (radio frequency identification) systems and interpreted in real time, or they can be stored in a database for future analysis. Reports on percentage of defects or percentage of rework needed can keep managers informed of performance among departments.
KIA Motors introduced an intelligent QC system to analyze customer complaints so they could more quickly investigate and make corrections.
Other POM Technologies
Many other areas of POM are improved by information systems and tools. Production planning optimization tools, product routing and tracking systems, order management, factory layout planning and design, and other tasks can be supported by POM subsystems.
For example, a web-based system at Office Depot matches employee scheduling with store traffic patterns to increase customer satisfaction and reduce costs.