INVENTORY MANAGEMENT
1. INTRODUCTION
DEFINATION AND MEANING
Inventory is a list of goods and materials, or those goods and materials themselves, held available in stock by a business. Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials.
The reasons for keeping stock
All these stock reasons can apply to any owner or product stage.
Buffer stock is held in individual workstations against the possibility that the upstream workstation may be a little delayed in providing the next item for processing. Whilst some processes carry very large buffer stocks, Toyota moved to one (or a few items) and has now moved to eliminate this stock type.
Safety stock is held against process or machine failure in the hope/belief that the failure can be repaired before the stock runs out. This type of stock can be eliminated by programmes like Total Productive Maintenance
Overproduction is held because the forecast and the actual sales did not match. Making to order and JIT eliminates this stock type.
Lot delay stock is held because a part of the process is designed to work on a batch basis whilst only processing items individually. Therefore each item of the lot must wait for the whole lot to be processed before moving to the next workstation. This can be eliminated by single piece working or a lot size of one.
Demand fluctuation stock is held where production capacity is unable to flex with demand. Therefore a stock is built in times of lower utilisation to be supplied to customers when demand exceeds production capacity. This can be eliminated by increasing the flexibility and capacity of a production line or reduced by moving to item level load balancing.
Line balance stock is held because different sub-processes in a line work at different rates. Therefore stock will accumulate after a fast sub-process or before a large lot size sub-process. Line balancing will eliminate this stock type.
Changeover stock is held after a sub-process that has a long setup or change-over time. This stock is then used while that change-over is happening. This stock can be eliminated by tools like SMED.
Where these stocks contain the same or similar items it is often the work practice to hold all these stocks mixed together before or after the sub-process to which they relate. This ‘reduces’ costs. Because they are mixed-up together there is no visual reminder to operators of the adjacent sub-processes or line management of the stock which is due to a particular cause and should be a particular individual’s responsibility with inevitable consequences. Some plants have centralized stock holding across sub-processes which makes the situation even more acute.
The basis of Inventory accounting
Inventory needs to be accounted where it is held across accounting period boundaries since generally expenses should be matched against the results of that expense within the same period. When processes were simple and short then inventories were small but with more complex processes then inventories became larger and significant valued items on the balance sheet. This need to value unsold and incomplete goods has driven many new behaviours into management practise. Perhaps most significant of these are the complexities of fixed cost recovery, transfer pricing, and the separation of direct from indirect costs. This, supposedly, precluded “anticipating income” or “declaring dividends out of capital”. It is one of the intangible benefits of Lean and the TPS that process times shorten and stock levels decline to the point where the importance of this activity is hugely reduced and therefore effort, especially managerial, to achieve it can be minimised.
LIFO V/S FIFO
When a dealer sells goods from inventory, the value of the inventory reduces by the cost of goods sold(CoG sold). This is simple where the CoG has not varied across those held in stock but where it has then an agreed method must be derived. For commodity items that one cannot track individually, accountants must choose a method that fits the nature of the sale. Two popular methods exist: FIFO and LIFO accounting (first in – first out, last in – first out). FIFO regards the first unit that arrived in inventory the first one sold. LIFO considers the last unit arriving in inventory as the first one sold. Which method an accountant selects can have a significant effect on net income and book value and, in turn, on taxation. Using LIFO accounting for inventory, a company generally reports lower net income and lower book value due to the effects of inflation. This generally results in lower taxation. Due to LIFO’s potential to skew inventory value, UK GAAP and IAS have effectively banned LIFO inventory accounting.
SUPPLY CHAIN MANAGEMENT
A supply chain is a network of facilities and distribution options that performs the functions of procurement of materials, transformation of these materials into intermediate and finished products, and the distribution of these finished products to customers. Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.
Supply chain management is typically viewed to lie between fully vertically integrated firms, where the entire material flow is owned by a single firm and those where each channel member operates independently. Therefore coordination between the various players in the chain is key in its effective management. Cooper and Ellram [1993] compare supply chain management to a well-balanced and well-practiced relay team. Such a team is more competitive when each player knows how to be positioned for the hand-off. The relationships are the strongest between players who directly pass the baton (stick), but the entire team needs to make a coordinated effort to win the race.
Below is an example of a very simple supply chain for a single product, where raw material is procured from vendors, transformed into finished goods in a single step, and then transported to distribution centers, and ultimately, customers. Realistic supply chains have multiple end products with shared components, facilities and capacities. The flow of materials is not always along an arborescent network, various modes of transportation may be considered, and the bill of materials for the end items may be both deep and large.
To simplify the concept, supply chain management can be defined as a loop: it starts with the customer and ends with the customer. All materials, finished products, information, and even all transactions flow through the loop. However, supply chain management can be a very difficult task because in the reality, the supply chain is a complex and dynamic network of facilities and organizations with different, conflicting objectives.
Supply chains exist in both service and manufacturing organizations, although the complexity of the chain may vary greatly from industry to industry and firm to firm.
Unlike commercial manufacturing supplies, services such as clinical supplies planning are very dynamic and can often have last minute changes. Availability of patient kit when patient arrives at investigator site is very important for clinical trial success. This results in overproduction of drug products to take care of last minute change in demand. R&D manufacturing is very expensive and overproduction of patient kits adds significant cost to the total cost of clinical trials. An integrated supply chain can reduce the overproduction of drug products by efficient demand management, planning, and inventory management.
Traditionally, marketing, distribution, planning, manufacturing, and the purchasing organizations along the supply chain operated independently. These organizations have their own objectives and these are often conflicting. Marketing’s objective of high customer service and maximum sales dollars conflict with manufacturing and distribution goals. Many manufacturing operations are designed to maximize throughput and lower costs with little consideration for the impact on inventory levels and distribution capabilities. Purchasing contracts are often negotiated with very little information beyond historical buying patterns. The result of these factors is that there is not a single, integrated plan for the organization—there were as many plans as businesses. Clearly, there is a need for a mechanism through which these different functions can be integrated together. Supply chain management is a strategy through which such integration can be achieved.
Supply Chain Management (SCM) is the process of planning, implementing, and controlling the operations of the supply chain with the purpose to satisfy customer requirements as efficiently as possible. Supply chain management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point-of-origin to point-of-consumption.
According to the Council of Supply Chain Management Professionals (CSCMP),
A professional association that developed a definition in 2004, Supply Chain Management “encompasses the planning and management of all activities involved in sourcing and procurement, conversion, and all logistics management activities”. Importantly, it also includes coordination and collaboration with channel partners, which can be suppliers, intermediaries, third-party service providers, and customers. In essence, Supply Chain Management integrates supply and demand management within and across companies.
According to Cohen & Lee (1988)
Supply Chain Management is “The network of organizations that are having linkages, both upstream and downstream, in different processes and activities that produces and delivers the value in form of products and services in the hands of ultimate consumer.” Thus a shirt manufacturer is a part of supply chain that extends up stream through the weaves of fabrics to the spinners and the manufacturers of fibers, and down stream through distributions and retailers to the final consumer. Though each of these organizations are dependent on each other yet traditionally do not closely cooperate with each other. An integrated supply chain management streamlines processes and increases profitability by delivering the right product to the right place, at the right time, and at the lowest possible cost.
According to Ganeshan & Harrison (2001)
Supply Chain Management is a “systems approach to managing the entire flow of information, materials, and services from raw materials suppliers through factories and warehouses to the end customer.”
Supply chain event management (abbreviated as SCEM) is a consideration of all possible occurring events and factors that can cause a disruption in a supply chain. With SCEM possible scenarios can be created and solutions can be planned.
Some experts distinguish supply chain management and logistics management, while others consider the terms to be interchangeable. From the point of view of an enterprise, the scope of supply chain management is usually bounded on the supply side by your supplier’s suppliers and on the customer side by your customer’s customers.
Supply chain management is also a category of software products.
2. SIEMENS
SIEMENS is one of the world’s largest companies and Europe’s largest engineering firm. Siemens has six major business divisions: Communication and Information; Automation and Control; Power; Transportation; Medical; and Lighting. Siemens’ international headquarters are located in Berlin and Munich, Germany. Siemens AG is listed on the Frankfurt Stock Exchange, and has been listed on the New York Stock Exchange since March 12, 2001. Worldwide, Siemens and its subsidiaries employ 480,000 people in 190 countries and reported global sales of €87.325 billion in fiscal year 2006
HISTORY
Siemens was founded by Werner von Siemens on October 1, 1847, based on the telegraph he had invented that used a needle to point to the sequence of letters, instead of using Morse code. The company – then called Telegraphen-Bauanstalt von Siemens & Halske – opened its first workshop on October 12.
In 1848, the company built the first long-distance telegraph line in Europe; 500 km from Berlin to Frankfurt am Main. In 1850 the founder’s younger brother, Sir William Siemens (born Carl Wilhelm Siemens), started to represent the company in London. In the 1850s, the company was involved in building long distance telegraph networks in Russia. In 1855, a company branch headed by another brother, Carl von Siemens, opened in St Petersburg. In 1867, Siemens completed the monumental Indo-European (Calcutta to London) telegraph line.
In 1881, a Siemens AC Alternator driven …
