Inventory Management
Inventory Management
Inventory refers to raw materials, finished goods and work-in-progress (WIP) that form part of a business’s assets which will be ready or are ready for sale. Inventory turnover is the primary revenue generation source, hence making inventory an important asset for most businesses. Holding large quantities of inventory is undesirable for most businesses since the holding costs are high. The holding costs of inventory include storage costs, spoilage obsolescence costs, insurance costs, inventory tracking, etc. However, possessing very little inventory is not good either since the business runs the risk of not meeting the customer demands, hence loss of customers (Shim, 2003).
Inventory management refers to the activities and strategies employed to make sure that a business maintains an optimum inventory of each item. Maintaining optimum inventory helps in reducing the costs associated with inventory, whilst ensuring the customer’s demands are met. Thus, inventory management serves the objective of providing seamless production, and high customer satisfaction levels at the least cost possible. Inventory problems can contribute to business failures and/or losses since inventory forms the largest portion of current assets for many companies.
A case in point for successful inventory management in manufacturing is Toyota and Dell. Both companies have successfully used the just-in-time (JIT) method to manage their inventories. In the JIT strategy of inventory management a company plans to receive raw materials when they are needed, in the quantity required and in a location where they are needed. In the service industry, Mc Donalds and Amazon.com have also implemented successful inventory management.
Both Dell and Toyota currently manage the raw materials, work-in-progress and finished goods as part of their inventory. Finished goods consist of both sellable vehicle parts and vehicles in case of Toyota and computer parts and computers in case of Dell. Toyota Production System is characterized by the JIT method in which raw materials are received from suppliers only when an order has been received and the product or part is ready to be produced. This philosophy allows Toyota to lower inventory costs by keeping minimum stock possible (Toyota, 2014). The strategy also ensures that Toyota can quickly adapt to demand changes without necessary having to hold large quantities of inventory. For Toyota, the important success factors have been; for each node in production a small quantity of raw material inventory is kept to facilitate production for any product. The used parts are replenished after use. Another success factor is that of accuracy in forecasting, this is important so that the correct quantity of raw material is ordered for any job to be done.
Like Toyota, Dell also leverages on the JIT method to achieve success in its manufacturing processes. However, Dell’s approach to just-in-time is slightly different in that it leverages on their suppliers to attain the JIT goal. The success factors to Dell’s JIT include; dependable suppliers who meet the company’s demands in a short lead time, a seamless system which allows Dell to send its inventory requirements to suppliers so that they are delivered in time to meet the short lead times. Lastly, is the supplier’s willingness to keep inventory, thus freeing Dell this responsibility.
Indeed proper inventory management characterized by the successful implementation of the JIT strategy in both Toyota and Dell has continuously led to the outstanding performance of both companies. In the two companies JIT system promotes total quality management, waste elimination, reduction of inventory held by coordinating with suppliers to supply quality materials as and when ordered in the right quantities and proactively identifying any problems in the production process. The overall benefits of using such a pull system in inventory management rather than a push system is that the company is able to save on costs of holding inventory and costs associated with wastage. This system of inventory management gives the company a competitive edge against its competitors.
Operation Layouts
Facility layout refers to the arrangement of the various manufacturing aspects in a manner that is appropriate in order to achieve the production results desired. Facility layout considers the space available, safety of users, the final product and the operation convenience. An effective facility layout minimizes the cost of movement of equipment, material and manpower. An efficient facility layout increases the productivity of the manufacturing unit.
Process Layout
For its manufacturing purposes Dell uses the process layout since it’s more suitable for the company’s manufacturing strategy. In this facility layout the workstations area grouped together in accordance to the activities to be performed. The workstations produce a considerable quantity of output which is then sent to the next area in bulk. This layout increases the economies of scale. Dell Inc. uses the process facility layout in its manufacturing units. The choice for this layout is due to its flexibility which perfectly matches to the strategy of the company to manufacture computers on order based on the requirements of the customer.
Cell Layout
The company also uses this layout in the manufacturing low demand products. In this layout the processes are arranged in a manner that the beginning and end of the flow of materials are near each other. This layout facilitates quick rebalancing of tasks.
Product Layout
Unlike Dell that uses the process layout, Toyota employs the product layout in its manufacturing units. In this layout different workstations are grouped together in accordance to the products worked on each workstation. In this layout parts or products are manufactured in an assembly line. In an assembly line the ready made parts are moved from one workstation to another where assembly is done and moved down the line till the whole product is complete.
Supply Chain Performance metrics
Costs as a supply chain performance metric refer to both the ordering costs and the holding costs. For both Dell and Toyota that use the JIT system, the holding cost becomes a key metric in evaluating their supply chains. The holding cost is ideally meant to be very minimal in a JIT system. The holding costs include the capital cost tied up in the inventory, the storage space, insurance and the tracking costs.
Time or flow rate as a performance metric in the supply chain management refers to the conversion rate of the inventory. It is a ratio based on inventory level to average cycle time for the inventory. It is a measure of how long inventory is held in a warehouse. For both Toyota and Dell the time the products are held up in the warehouse is limited to few days since the orders are manufactured as received.
The manufacturing companies can and indeed most of them have embraced the lean production philosophy. This philosophy implemented successfully can assist both companies to increase their efficiencies. Both Dell and Toyota have successfully embraced this technology which has seen their supply chain management become more competitive (Srinivasan, 2012).
Service Companies: Mc Donalds and Amazon.Com
Mc Donald’s does not own any distribution center; it fully relies on its suppliers. The main inventory that the restaurant manages is mainly raw food stuffs and any finished foods. The company also employs the JIT method of inventory management of its finished goods. The restaurant cooks most of its hamburgers on order. This strategy ensures that finished goods do not stay in the storage for long.
Amazon.com manages the following types of inventories; raw materials, work in progress (i.e. semi-finished products), finished goods awaiting delivery, inventory in transit, buffer inventory (safety stock to meet cater for uncertainties in demand) and anticipatory inventory. To avoid holding huge inventories in its warehouses Amazon outsourced some of the warehousing activities. By outsourcing some of the non-core activities the company was able to fully concentrate on its core business. To further improve its supply chain Amazon successfully incorporates the drop shipment model. This model mirrors JIT in that it enables the company not to hold any stock in its warehouse(Srinivasan, 2012). In this model Amazon receives orders from customers which it passes to the manufacturers/ wholesaler who then ships the goods to the customer directly. This model reduced Amazon’s inventory to only the frequently purchased items.
The operational efficiency of Mc Donald’s attribute to an efficient and reliable supply chain has continually given the company a competitive edge over its competitors. By adopting the JIT system the company makes all burgers on order, this reduces the burgers held in its stores. To meet the customer demands in this system the restaurant has continually incorporated new technologies to reduce the duration it takes to prepare burgers. By preparing burgers on order, the quality of their buggers improved since the buggers were fresh. The JIT burger preparation allows the restaurant scale up or down to meet its demand.
On the other hand Amazon too derives high operation efficiency from its improved warehouse management systems and layouts. Also outsourcing some inventory and the drop shipping model have improved its internal efficiencies by enabling the company to concentrate on its core capabilities.
Functional Layouts
In the delivery of its services, Mc Donald’s employs the functional layout. In this facility layout, different tasks are grouped in accordance to their functionality. This layout is used in the back office in the preparation of food. However in the customer area the restaurant use the retail layout, which can be changed to match customer behavior.
Warehouse layout
This facility layout is mainly used by Amazon. It addresses the tradeoffs between material handling and space. Amazon successfully implemented this layout in its warehouses thus facilitating speedy access to the ordered items. Thus this layout helped increase customer satisfaction.
References
Just-in-Time — Philosophy of complete elimination of waste. (2014, January 1). Retrieved November 26, 2014, from http://www.toyota-global.com/company/vision_philosophy/toyota_production_system/just-in-time.html
Amasaka K (2002) “New JIT”: A new management technology principle at Toyota International Journal of Production Economics, Volume 80, Issue 2, Pages 135-144
Shim, J. (2003). Operations Management. New York: Barron's Educational Series.
Srinivasan, M. (2012). Building Lean Supply Chains with the Theory of Constraints. Purchasing and Supply Management, 58-59.
