Introduction
In most manufacturing companies, the major objectives are earning profits.
To do so they must attain
maximum customer service and minimum inventory investment. (1) Maximum
customer service can be
provided if inventories are raised to very high levels and the plant
is kept flexible, by altering production
levels and varying production schedule, to meet the customers’ changing
demands. But this will increase
inventory investment and decrease the efficiency of plant operation.
To decrease inventory, which means
lower costs, may adversely affect customer service.
From the above, we can see an optimum inventory level is very important
to a manufacturing firm’s
customer service, cost control and profit. Fortunately, modern developed
Information Technology (IT)
makes it possible to give the manufacturing firm a highly effective
and efficient inventory control system,
which can reconcile the conflict between the inventory control and
customer service.
Inventory and Inventory Control
Inventory is materials that a company carries on hand and that usually
represent a sizable portion of the
company’s total assets, so it ties up capital, which can be put to
other uses. The very existence of an
inventory creates costs. (2)
Basically there are three classes of costs in inventory, which can help
us to understand the IT’s
importance more clearly. The first class is order costs, which can
be either those of placing purchasing
orders to buy materials from a vendor or those associated with ordering
a manufactured lot from the
plant. The second class is inventory carrying costs. Inventory carrying
costs are costs of holding an
inventory, and these costs include obsolescence, deterioration, taxes,
insurance, storage, and opportunity
costs. (3) The third one is stockout cost, which is incurred for out
of stock. When the supply chain of an
item is exhausted and a customer wants to buy the item, stockout cost
occurs.
According their different functions, inventories include four categories,
fluctuation inventories, anticipation
inventories, lot-size and transportation inventories. (4) The manufacturing
firms are now facing a changing
market, so sales and products for the products can’t be always predicted
accurately. At this time, we need
fluctuation inventories as stabilization stocks. On the other hand,
we need it as safety stock, because of
the lead times. Anticipation inventories happens when the company can
forecast a peak-selling season,
implement a promotion plan or downsize a production line, because it
must modify the inventories for a
future need. It is practical and cheap to purchase items in larger
quantities than are needed at the moment,
and this results lot-size inventories. Transportation inventories exist
because materials must be moved
from one place to another. (4)
Inventory control refers to the process that keeps recorders of stock
status and issues orders to replenish
stocks. (5) To do this, first we must determine inventory level, which
depends on costs in inventory. Then
after we know when to order, we should decide how many we order. Usually
we have two ways:
Economic Order Quantity (EOQ) and Fixed-Order-Interval System. It is
very important for the company
to keep track of the inventories, which makes the inventory control
more efficient and more effective. We
will explain these in detail later.
IT Tools & Inventory Control
Success in the next century will depend on access to information, not
access to capital," asserts Lew
Pritchett, a retired Procter & Gamble executive. (6) That means
the next century is an information
century. In fact IT have been utilized in inventory control for many
years, but with the widespread
introduction and development of microcomputers around 1980, their use
has increased tremendously.
First, let us talk about how many kinds of IT tools can be used in inventory
control. It includes Bar-code
shipping labels, Electronic commerce links, Electronic Data Interchange,
Web-enabled communications
special software Planning software and Active tracking system, which
of all play an important role in the
inventory control.
Bar-coded shipping labels enable automated receiving and improve inventory
accuracy, produce millions
of dollars in savings for companies that have learned how to take advantage
of them. These Bar-code
shipping labels are most prevalent in the retail industry, because
it is very important for them to control
the inventory. We know that IT inventory control system has a high
fixed cost so it is too costly for a
small business. Fortunately there are many low-cost software packages
that enable suppliers to meet their
shipping label mandates. Monarch Marking Systems, for example, has
more than 500 retailers' bar code
label standards available in its on-line Media Warehouse. Monarch customers
can access the service over
the Web, download the required label formats and check to see that
their printer and media combination
will meet the retailer's requirements.
Electronic-Commerce (EC) links is another kind of IT tool used in inventory
control. Bar codes can
provide a standardized, unique ID number. This number provides a convenient
reference to EC
transactions. EC eliminates transaction costs associated with purchasing,
ordering, delivering and
requesting and making payments, and it drives down costs in inventor
by enabling businesses to integrate
their activities. (7) Higher and higher degrees of integration using
EC can lead to a point where the supplier
is given enough information by the distributors or consumers that it
can make deliveries of replenishment
items with almost no human involvement. This business concept is called
supplier-assisted inventory
management (SAIM). To make EC work, there have to be standards and
coordination between a variety
of contiguous supply chains. Multifunctional software packages for
inventory control and enterprise
resource planning (ERP) often rely on electronic messaging for optimal
performance and are useful for
EC.
Electronic Data Interchange (EDI) is "the interorganizational exchange
of business documentation in
structured, machine-processable form". (8) Usually the buyers and sellers
are linked by computers and use
computers to exchange orders and other routine information. It replaces
verbal and written
communications with electronic ones. This can not only decrease the
order cost, but also expedite the
communication. Consequently EDI can save money and time, increase inventory
control’s efficiency. For
example, J.C.-Penny through EDI increased 59% sales while reduced 20%
inventory cost in 1987. (9) On
the other hand, many companies require their suppliers to use EDI.
This will facilitate the EDI ’s
development.
Web-enabled communications, such as Internet and Intranet are the other
IT tools, if companies fully
utilized the tools to share supply chain information, the Web is probably
the most exciting
communications tool that's will provide a cost-effective inventory
control. For example, when I worked in
Johnson & Johnson China (JJC), an Intranet was created in 1996,
which enabled JJC ’s sales managers
and main distributors around the China can obtain the information of
JJC ’s production and sales through
Intranet. In JJC the logistics department can know in time the different
product’s national sales situation
and can handle the distributor’s order in 24 hours. So both the JJC
and its distributors can reduce the
inventory level and improve inventory control’s quality, also their
partnership and cooperation can be
intensified.
Some special software, such as continuous planning, forecasting and
replenishment (CPFR) programs are
especially valuable. CPFR is an emerging business practice that takes
advantage of bar code identification
and e-commerce tools to enable timely data sharing. Many leading retailers
are currently conducting trials
in conjunction with the UCC, and early results have shown increased
sales and reduce inventory level.
Other software are ERP (Enterprise Resource Planning), EDN (Energy
Delivery Net) and PDM
(Production Data Management) etc. (10)
Active tracking system is one kind of technology-radio-identification,
which uses radio signals between
strategically placed sensors and tags to locate the position the tag
at any given moment, and offers a
solution for companies to control their assets tightly. (11) This is
especially useful in freight in transit.
So we can see that the IT tools, included Bar-code shipping labels,
Electronic commerce links, etc, can
from different ways reduce inventory level while improve customer service.
(12)
Efficient and Effective IT Inventory control
1. Minimize cost in inventory
(1) Decrease order cost
Traditional order includes paper work and order cycle, which needs some
labor and a relatively long time.
Through EDI, the company can order more easily, rapidly and accurately
than ever, so it can save a lot of
time and money. Because of IT ’s application in inventory control,
order cost has been reduced so low
that many companies neglect it, and this is JIT ’s assumption.
(2) Decrease inventory carrying cost
As product life cycle becomes shorter, the obsolescence gets more rapidly;
as market becomes more
globalized and diversified, the company needs more safety stock in
order to meet customer’s shorter and
shorter delivery schedule. Especially for the current customers who
are picker, so the loss of customer is
bigger than before. (13) Therefore to maintain customer service level,
the company have to increase the
inventory. IT inventory control can well balance the conflict between
the inventory carrying cost and
customer service. So a "just in case" (safety stock) was replaced by
a Just in time (JIT) inventory system.
JIT is one kind of fixed-order interval system, which lets customers
place orders with their suppliers on
set schedule that frequently involve daily or hourly deliveries (reduce
lot-size inventory cost).
Consequently the inventory carrying cost will minimize while the customers’
needs can be satisfied. A
new trend in inventory control is "Just about zero" (JAZ). All these
three inventory control systems can’t
develop without IT. At last it provides a high efficient and effective
inventory and customer service. For
example, Cisco, whose revenues grew by $11 billion last year, nevertheless
kept its inventories flat while
keeping service levels high across more than 8,500 parts and products.
Xerox managed to cut inventories
by 12 days while increasing the number of customers served globally
by 10%. Often this is achieved by
planners using IT tools and aided by advanced logistics techniques,
such as "merge-in-transit," where a
logistics supplier merges parts from two or more suppliers, often to
complete a product, without
warehousing.
(3) Reduce to economic level
IT can help the buyers, suppliers and customer to attain necessary information
easily; this will constitute
an interactive information system, which should minimize the fluctuation
inventories and anticipation
inventories. As a result it provide a more accurate inventory level
to avoid stockout.
(4) Control freight in transit
Usually we forget the inventory "freight in transit". In fact $311 billion
inventory is freight in transit. (14)
Because we lack information about the inventory when it is in the transit
before we can’t control it. By
now shippers, logistics providers and transportation companies can
use IT tools, such as asset tracking
and mobile communications to control freight in transit.
2. Provide more efficient and effective than traditional inventory control
a.Determine an optimum order level
As we have discussed before, what the company plans to invest on inventory
determine the order level.
IT inventory control has greatly reduce the inventory cost, so it help
us choose a reasonable cost-effective
order level.
b.When to order
Usually we have two methods to decide when to order, EOQ and Fixed-Order-Interval
System. EOQ =
(2AB/I) ½, while A = Annual usage in dollars, B = Order cost, I = Inventory
carrying cost. IT inventories
control decreases B and I, and A is constant in a specific case, so
EOQ can increases while induce the
lot-size inventory, which decreases inventory cost again. JIT is one
kind of Fixed-Order-Interval System.
As IT inventory control develops, it evolves JAZ that adapts to the
more competitive markets.
c.Keep track of inventory
In inventory control, scanners can tell and record the bar-code shipping
labels, which can create a timely
detailed information. A special radio-based warehouse identification
system directly links the scanners to
the company’s computer. Through EDI, this information is provided to
the buyers, suppliers and
customers, so each of them can keep good track of the inventory. For
the freight in transit, which includes
products moving in railcars, truck trailers, or vessels etc, this kind
of radio-based identification is more
useful, which lets the company manage the inventory better.
Discussion
IT tools can help to inventory control, and this case will deepen understanding
of this question. An EDI
electronic data interchange setup feeds information on sales of Gerber
products to the company, which
uses Manugistics Group Inc.'s supply-chain management software to schedule
new deliveries. The idea is
to reduce inventory costs at both ends and give store managers an incentive
to buy from Gerber. But the
need to write code that translates all of the EDI messages into a common
format has slowed down
Gerber's ability to add grocers. Custom-built software for sending
alerts and other messages to Gerber's
inventory planner’s meets only their minimum needs. So Gerber pushed
Manugistics to come up with a
product that automates both steps. Later in June 1998, Manugistics
plans to be the first user to go live
with new data transformation and messaging software that Manugistics
developed with Swedish vendor
Frontec AMT. (15)
From this case, we can see IT tools is very important in an efficient
and effective inventory control
system. Actually we have found several problems. How to develop a specific,
practical IT tools
(software) is a key to win a specific customer. At the same time, because
the IT inventory has high fixed
cost, small business can’t afford to invest on it. Although there as
some cheap IT tools, they are too few
to provide to the small business. Finally I want to say IT should support
inventory control not lead
inventory control, we can’t overemphasize IT tools’ importance on inventory
control. (16)
Summary
IT tools used in inventory control have been widely developed, and they
provide a high quality, low cost
inventory control system. IT inventory control improve the inventory
management on both the top and
the bottom lines. On the top line, efficient IT inventory control results
in increased revenues, through
improved speed and customer satisfaction; on the bottom lines, it reduces
the inventory cost and improve
asset management.
Reference:
1.G. W. Plossl, and O. W. Wight, Production and Inventory Control, Prentice-Hall,
Inc,
Englewood Cliffs, NJ, pp. 1, 1967
2. James W. Prichard, and Robert H. Eagle, Modern Inventory Management,
John Wiley and
Sons, Inc, pp. 2, 1965
3.James C. Johnson, and Donald F. Wood, Contemporary Logistics,
Prentice Hall Upper Saddle River, NJ, pp. 601, 1996
4.G. W. Plossl, and O. W. Wight, Production and Inventory Control, Prentice-Hall,
Inc,
Englewood Cliffs, NJ, pp. 49-51, 1967
5.Robert G. Brown, Decision Rules for Inventory Management, Holt, Rinehart
and Winston,
pp. 230, 1967.
6.Burnell John. Making Information Part of the Package, Automatic I.D.
News. 15(1), pp.
39-42. Jan 1999.
7.Bushnell. Rick, E-Commerce in the Supply Chain: What it can do. Automatic
I.D. News,
14(2), pp.56, Nov 1998.
8.Douglas M. Lambert and James R. Stock, Strategic Logistic Management,
Richard D.
Irwin Inc., pp. 532.
9.Martha C. Cooper, Richard H. Goodspeed, and Charles B. Lounsbury,
Logistics as an
Element of Marketing Strategy Both Inside and Outside the Firm, Proceedings
of Annual
Conference of the Council of Logistics Management, 1, pp. 69-70. 1988
10.Miller. Ed, Supply-Chain Management Tools, CAE, Computer-Aided Engineering,
18(2), pp. 54, Feb 1999.
11.Roberts. Bill, Keeping an Eye on the Goods, Electronics Business,
25(2), pp. 32, Feb
1999.
12.Onlinger. Chuck, A Special Breed, As/400 Systems Management. 26(3),
pp. 62-64. Mar
1998.
13.Oliver. Richard W, The End of Inventory, Journal of Business Strategy.
20(1), 8-11. Jan
1999.
14.While. Phil, The forgotten inventory, World Trade, 11(7), pp. 30, Jul 1998.
15.Stedman Craig, Gerber Tightens Inventory Control, Computer World,
32(23), pp. 57-58,
Jun 8, 1998
16.Burnell John, Technology Should support not Lead, Automatic I.D.
News, 15(2), 36-37,
Feb 1999