March 04, 2009

Inventory Management

After spending sometime reading the content page on KBAM (Knowledge based asset management) homepage. I realise Knowledge management and Asset management is only an umbrella term for a huge number of other management ideas/tools. For example, asset management alone has 7 separate ideas from facilities management, security management to resource utlisation, all of which are important in ensuring that, resources (such as building, knowledge, man power, machines, raw materials etc etc) are used in the most efficient manner. This high level of effciency is important for successful companies because being highly lean, effcient means less wastage, and product and services can be produced/provided at lower cost.

I am particular interested in one area - inventory management. Inventory exists in companies (esp in manufacturing) because it is often difficult to predict how much demand there will be at a future time. If we do not have some spare stock sitting in our warehouse, we risk losing sales and make disatisfied customers. Inventory, which can be raw material, work in progress, and finished good , provides a buffer that balances the discontinuity between supply and customer demand. I guess the general philosophy is it is better to play safe, to have excess stock sitting in the warehouse rather than not to have enough.

But there is the JIT (just in time) philosophy which goes against the idea of inventory. It argues inventory makes the job of supplier easier but it adds no value to end customer, plus it ties up working capital which can be better utlised in e.g. investing in new technology, paying off debt. The JIT philosophy, although make good sense, seem to require a very good system of managing supply orders, fulfilling customer orders, inventory levels etc in order to avoid problem with unbalanced supply and demand. I think I would read up more about it to see how it works.

To achieve JIT philosophy, there seem to be tools that help to gather and organise supply, production , and inventory information so that they can be translated into specific orders, times of orders, times of receipts etc. Right now these tools such as MRP(Material requirement planning), MRP II (master production planning), DRP (distribution requirement planning) are just names to me, but I think they are used to manage inventory.

Right now I have no idea why this is important to me or how I may use this knowledge. It just seem interesting to me because of two reasons. First I can relate it to my previous work experience as a salesperson. At that time, I remember the many occasions when there were many customers demanding a particular Television or Fridge but we simply did not have the stock sitting in our warehouse. A sales opportunity wasted. It wasn't even our own fault because we have no say in our warehouse. So you can imagine our disappointment after successfully persuaded customer to buy something only to find out we have nothing to sell them. Since this happened so much in our job, we developed the habit to check stock before we sell something (I have a small trick for this :P). But this means we often have to, 1) only sell product that are available but not the one best suited for customer, 2) Go extra effort to convince customer to change their choice of product. I believe if the problem with inadequate supply is addressed we could have increase our turnover significantly.

The second reason comes from the business simulation we did in FACS module. In that simulation I was the commercial manager responsible for getting the right amount of contract. I remember it was quite tricky determining our production capacity and use that information so that at the end of each year we have no working capital tied up in the inventory. Then there was issue of determining how much raw material to purchase at each quarter so that we don't either have too much raw material (tied up money) or too small raw material (we have nothing to make). The general feeling I had at the time was managing supply chain is quite tricky. It seemed like if every body (production, finance, marketing directors) just try to optimise their own departments, there would be a huge problem with supply chain.

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  1. I have always liked the Just In Time system because it saves up on storing cost, makes space available in the factory, makes routing more easier and creates less confusion. I read a lot about Just in Time in this book The Goal by Eliyahu. I hope I havent got his name wrong. Its talks about just creating what is needed. Not to produce more than the demand because if one over produces then there is not only storing problems along with some other problems but also in frustration due to no demand one can sell the order below the cost price too. It happened in facs module if u remember when one of the other teams over produced and sold us the goods at a very low price. What I fear about Just In Time is what if our suppliers deliver the goods very late to us. It can completely make our cycle go haywire. For example in your warehouse there was no goods to be sold even when u had a customer waiting for you.

    04 Mar 2009, 23:01

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