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Requirements for effective inventory management.pptx
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- 2. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Inventory: All the raw material, work in process and goods available for sale that a company owns. Inventory Management: Inventory management refers to the process of ordering, storing, using, and selling a company's inventory. This includes the management of raw materials, components, and finished products, as well as warehousing and processing of such items INVENTORY AND INVENTORY MANAGEMENT
- 3. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Management has two basic functions concerning inventory. One is to establish a system to keep track of items in inventory, and the other is to make decisions about how much and when to order. To be effective, management must have the following: 1. A system to keep track of the inventory on hand and on order. 2. A reliable forecast of demand that includes an indication of possible forecast error. 3. Knowledge of lead times and lead time variability. 4. Reasonable estimates of inventory holding costs, ordering costs, and shortage costs. 5. A classification system for inventory items. REQUIREMENTS FOR EFFECTIVE INVENTORY MANAGEMENT
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- 5. © Michael Allison,Trinity Grammar School. Author’s permission required for external use A business wants to know exactly how much stock it has at any one time This could be done by performing a physical stocktake every day… Why can’t this be done? Takes too much time Costs too much money PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 6. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Because they can’t do a physical stocktake every day, businesses have had to come up with systems to tell them: How much stock is on hand at the beginning of the period? How much stock is bought during the period? How much stock is sold during the period? How much stock is on hand at the end of the period? There are two main systems that have developed: Periodic Inventory System Perpetual Inventory System PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 7. © Michael Allison,Trinity Grammar School. Author’s permission required for external use So how many units were sold during July? Periodic Inventory System • Stock is counted at the beginning of the period and at the end of the period using a physical stocktake • The difference must be how much stock was sold during the period. 1 July Counted 90 units with a stocktake 31 July Counted 92 units with a stocktake Invoices show 77 units bought in July Stocktake 1 July Stocktake 31 July PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 8. © Michael Allison,Trinity Grammar School. Author’s permission required for external use So how many units were sold during July? 1 July Counted 90 units with a stocktake 31 July Counted 92 units with a stocktake Invoices show 77 units bought in July Stocktake 1 July Stocktake 31 July Opening balance 90 + Units bought 77 = 167 - Units at end 92 = Units sold 75 PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 9. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Not many businesses use the Periodic Inventory System today What’s the problem with using this system? Requires a stocktake at the beginning and end of the period (takes much time and money) Business never knows how much stock it has on hand at any on time Makes re-ordering stock difficult (when to order, how much to order?) Business may run out of stock (or hold too much) Business has to wait until the end of the period until it knows: How much stock was bought during the period How much stock was sold during the period How much stock is left at the end of the period PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 10. © Michael Allison,Trinity Grammar School. Author’s permission required for external use A better system is needed – businesses can’t wait until the end of each period to know how much stock they have bought, sold or left in the store For example: Rebel Sport only does a stocktake twice per year – yet Rebel always knows how much stock it has on hand A customer can ring up Rebel and ask if they have a particular shoe in stock (and how many pairs) and get an answer within a minute Customer calls Rebel at 9:24am today Do you have a size 9 blue Nike Free runner? We have 14 pairs in stock… PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 11. © Michael Allison,Trinity Grammar School. Author’s permission required for external use So how then does Rebel know how much stock it has every minute of every day... Instead of using a Physical Inventory System which only determines how much stock is on hand at the end of the month with a physical stocktake, it uses the… What does the word “perpetual” mean? Perpetual Inventory System “Continuing or continued without intermission or interruption; ceaseless” (from dictionary.com) PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 12. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Perpetual Inventory System • A system which involves keeping records of all stock movements throughout the reporting period as they occur • A system of recording stock that never stops – it records movements of stock continuously and without ceasing • The firm uses Stock Cards to record these continual movements of stock Sale of stock Purchase of stock Record movement of stock immediately Sale of stock Sale of stock Purchase of stock Record movement of stock immediately Record movement of stock immediately Record movement of stock immediately Record movement of stock immediately PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 13. © Michael Allison,Trinity Grammar School. Author’s permission required for external use How does the Perpetual Inventory System work? Business Supplier Customers 9:00am Firm starts the day with 5 units of stock 9:37am Supplier delivers 3 units 10.39 am Customer buys 3 units 11.17am Supplier delivers another 2 units So stock balances are updated continuously (or perpetually) so the firm knows how much stock is always on hand… 10.01 am Customer buys 2 units Unit Unit Unit Unit Unit Unit Unit Unit Unit Unit Lastly, a physical stocktake is done on the last day of the period to make sure there are exactly 5 units on hand PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 14. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Advantages of the Perpetual Inventory System: Greater stock control – the firm knows how much stock it has at any one time so it can make better decisions about when to re-order and in what quantity Slow-moving and fast-moving stock can be identified – continuous records give the firm precise information on which stock is selling well and which stock is not selling and shouldn’t be sold anymore Re-ordering of stock is efficient – the firm can identify a set re-order point (e.g. 5 units) and re-order more stock as soon as this limit is reached Profit determination – the firm can determine its profit during a period without doing a stocktake by identifying its cost of sales Stock losses and gains identified – having a perpetual stock record tells the firm how much stock it should have so that stock losses or stock gains can be identified from the stocktake PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 15. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Disadvantages of the Perpetual Inventory System: Additional record-keeping – inventory balances must be updated after each and every transaction involving stock Higher costs – extra staff and equipment required to continuously monitor stock There is still a need for a physical stocktake anyway at the end of the period – the perpetual inventory system will most often be incorrect due to stock loss, theft, inaccurate record-keeping etc. and a stocktake is performed to reconcile how much stock is on hand PERIODIC VS PERPETUAL INVENTORY SYSTEM
- 16. © Michael Allison,Trinity Grammar School. Author’s permission required for external use Bank transactions such as customer deposits and withdrawals Two-bin system – two containers of inventory; reorder when the first is empty Universal product code (UPC) – bar code printed on a label that has information about the item to which it is attached Point-of-sale (POS) system – electronically record items at time of sale EXAMPLES OF PERPETUAL INVENTORY SYSTEM