The First Steps to Inventory Management

Authors: Geoff Relph, Witek Brzeski, Gail Bradbear

Holding inventory is often interpreted as carrying an asset but also means carrying risk in terms of obsolescence, deterioration and quality faults. In financial terms inventory impacts the balance sheet, cash flow and profit & loss accounts. Operationally inventory affects production efficiencies and on-time delivery. In his book “The Goal” Goldratt identifies inventory as a key component for measuring business performance in a manufacturing environment.

In short, good inventory management is essential to achieving business objectives and building competitive advantage. Yet the traditional techniques most often used to manage inventory do not always provide optimal solutions. Driven by a greater emphasis on customer service and cost control and the advent of new technologies, inventory management is rapidly moving to a higher level of sophistication.

This paper is the first in a series of three that looks at the alternative options available to optimise inventory held at an aggregate and part level by considering the steps necessary to move towards inventory optimisation. The intent of these papers is to provide a simple guide to enable managers within manufacturing industries to advance their organization to the next level of inventory management. So, whether you are an experienced inventory manager with
a deep understanding of inventory matters working with a sophisticated stock system or a relative beginner in an organization with no system at all, there should be something of value for you and your organization here.

The focus of this paper is on the basics and looks at the first steps to inventory management through achieving inventory control and instigating a simple 3-class management system. The second Paper titled “Professional Inventory Management” introduces further inventory management principles, such as the use of 6 or more classes and the analysis of safety stock that extend the options for managers to improve inventory performance. The third and last paper “Advanced Inventory Management” looks at K-Curve theory and the impact of system parameters on stock levels. Each paper is structured along similar lines and contains background theory, the requirements for operating at the level under discussion, a worked example using data from the manufacturing industry and a concluding summary.

The First Steps to Inventory Management

In this, the first of a three part series, we start with the basic concepts required to achieve inventory control and lay the foundations for a simple 3-class inventory system.

What is Inventory?

All operations keep inventory, which refers to the stored materials that exist within an organization and applies to raw materials, purchased parts, work in progress and finished goods. The terms inventory and stock are used interchangeably, as is the case here, although by definition inventory is usually referred to in value (pounds, dollars) and stock in quantity (kg, 100s, metre). Inventory primarily arises because of differences in the timing or rate of supply and demand and is used to balance these. Inventory may also occur due to economic batch sizes for an operation, WIP, product seasonality and investment for new product ranges.

Inventory Control, Management and Planning

Inventory control refers to the events or activities that affect inventory during the process of transforming input resources and materials to output goods. Different stock items are however controlled in different ways, for example in an assembly operation nuts and bolts are not treated in the same way as high value, long lead time parts. Control is a necessary step on the road to optimising inventory and requires that relevant business processes are in place to enable materials to be tracked through the system and accurate data records maintained. In this way the quantity and location of physical stock are tied to system data records.

Poor inventory control, often due to manual intervention, leads to self-perpetuating errors. The resulting vicious circle must be broken before control can be gained.

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