chapter 18 managing inventory copyright ©2012 pearson education, inc. publishing as prentice hall...
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Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-11
Managing Inventory
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-22
Managing InventoryManaging Inventory
Excess inventory masks a host of Excess inventory masks a host of other problems that a company other problems that a company may have may have
Inventory carrying costs are highInventory carrying costs are high $357 billion annually in inventory $357 billion annually in inventory
carrying costscarrying costs TaxesTaxes DepreciationDepreciation InsuranceInsurance ObsolescenceObsolescence
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-33
Managing Inventory Managing Inventory Involves...Involves...
1.1. Developing an accurate sales forecastDeveloping an accurate sales forecast
2.2. Developing a plan to make inventory Developing a plan to make inventory available when and where customers available when and where customers want itwant it
3.3. Building relationships with quality Building relationships with quality supplierssuppliers
4.4. Setting realistic inventory turnover Setting realistic inventory turnover objectivesobjectives
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-44
5.5. Computing the cost of carrying Computing the cost of carrying inventoryinventory
6.6. Using the most timely and accurate Using the most timely and accurate information system the business can information system the business can afford to provide everyone with vital afford to provide everyone with vital inventory informationinventory information
7.7. Teaching employees how inventory Teaching employees how inventory control systems work so they can help control systems work so they can help manage inventory on a daily basismanage inventory on a daily basis
Managing Inventory Managing Inventory Involves...Involves...
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-55
Pareto’s LawPareto’s Law
Business owners must recognize the Business owners must recognize the importance of importance of Pareto’s LawPareto’s Law (“the (“the 80/20 Rule”): About 80% of a firm’s 80/20 Rule”): About 80% of a firm’s sales are generated by about 20% of sales are generated by about 20% of the items in its inventory the items in its inventory
The goal of inventory control is to The goal of inventory control is to focus the majority of the effort on that focus the majority of the effort on that 20% of the inventory 20% of the inventory
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-66
Inventory Control Inventory Control SystemsSystems Perpetual inventory Perpetual inventory
systemssystems Point-of-sale (POS) systemsPoint-of-sale (POS) systems
Accurate and currentAccurate and current Provide reorder alertsProvide reorder alerts Generate inventory reportsGenerate inventory reports
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-77
Visual inventory systemsVisual inventory systems Partial inventory systemsPartial inventory systems
ABC methodABC method
Inventory Control Inventory Control SystemsSystems
Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-88
ABC MethodABC Method
The ABC technique focuses inventory The ABC technique focuses inventory control efforts on the small percentage control efforts on the small percentage of items that account for the majority of of items that account for the majority of a company’s salesa company’s sales
Categorizes inventory items into three Categorizes inventory items into three classes – A, B, and C – with the goal of classes – A, B, and C – with the goal of establishing different levels of control establishing different levels of control over each classover each class
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ABC MethodABC Method
Dollar usage volume = cost per unit x annual Dollar usage volume = cost per unit x annual quantity usedquantity used
A items A items - items accounting for a large dollar - items accounting for a large dollar usage volumeusage volume (Approximately the top 15% of (Approximately the top 15% of items)items)
B items B items - items accounting for a moderate - items accounting for a moderate dollar usage volume (Approximately the next dollar usage volume (Approximately the next 35% of items)35% of items)
C items C items - items accounting for a low dollar - items accounting for a low dollar usage volume (Approximately the remaining usage volume (Approximately the remaining 50% of items)50% of items)
ABC Inventory Control
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Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-1111
ABC Inventory ABC Inventory ControlControl
A items A items - Strict control; Perpetual inventory - Strict control; Perpetual inventory control systemscontrol systems
B items B items - Moderate control; Periodic control - Moderate control; Periodic control systems using EOQ and reorder point systems using EOQ and reorder point analysisanalysis
C items C items - Minimal control; Simple, - Minimal control; Simple, inexpensive control systems such as the inexpensive control systems such as the two-bin or tag systems. Many businesses two-bin or tag systems. Many businesses carry large levels of safety stock of C items carry large levels of safety stock of C items where carrying costs are lowwhere carrying costs are low
Two Bin and Tag Systems
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Chapter 18 Managing InventoryChapter 18 Managing Inventory Copyright Copyright ©©2012 Pearson Education, Inc. publishing as Prentice Hall2012 Pearson Education, Inc. publishing as Prentice Hall 18-18-1313
Physical Inventory Physical Inventory CountCount Periodic countPeriodic count Cycle countingCycle counting
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Radio Frequency Radio Frequency Identification (RFID)Identification (RFID)
Radio tags attached to individual items Radio tags attached to individual items or to shipments that transmit data to a or to shipments that transmit data to a company’s inventory control system company’s inventory control system
Tiny microchip stores a unique electronic Tiny microchip stores a unique electronic product code and a tiny antenna product code and a tiny antenna
Provides highly accurate, real-time Provides highly accurate, real-time information constantly and allow owners information constantly and allow owners to locate and track an item at any point to locate and track an item at any point in the supply chain in the supply chain
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Just-In-Time Just-In-Time TechniquesTechniques JIT attempts to reduce the JIT attempts to reduce the
investment required in inventory investment required in inventory because it drains a company’s cash because it drains a company’s cash and hides a multitude of problems and hides a multitude of problems managers need to addressmanagers need to address
Goal: To achieve a smooth flow of Goal: To achieve a smooth flow of materials and inventory through the materials and inventory through the businessbusiness
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Just-In-Time Just-In-Time TechniquesTechniques
Rather than build up costly Rather than build up costly stockpiles of inventory, JIT seeks stockpiles of inventory, JIT seeks to get items where they are to get items where they are needed “just in time”needed “just in time”
Heart of JIT philosophy is Heart of JIT philosophy is eliminating waste in a business – eliminating waste in a business – whatever form it may take whatever form it may take Seven wastesSeven wastes
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Seven wastes that JIT tries to eliminate
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Benefits of JITBenefits of JIT
1.1. Lower investment in inventoryLower investment in inventory2.2. Reduced inventory carrying and handling Reduced inventory carrying and handling
costscosts3.3. Reduced costs resulting from obsolete Reduced costs resulting from obsolete
inventoryinventory4.4. Smaller investment in inventory storage Smaller investment in inventory storage
space and production space and production 5.5. Reduced manufacturing costs as a result Reduced manufacturing costs as a result
of improved coordination among of improved coordination among departmentsdepartments
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When JIT Works BestWhen JIT Works Best
Reliable deliveries of parts and Reliable deliveries of parts and suppliessupplies
Short distances between Short distances between customers and vendorscustomers and vendors
Consistent quality of vendors’ Consistent quality of vendors’ productsproducts
Stable and predictable demandStable and predictable demand
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JIT IIJIT II
JIT II techniques focus on creating a closer, JIT II techniques focus on creating a closer, more harmonious relationship with a more harmonious relationship with a company’s suppliers so that both benefit company’s suppliers so that both benefit from increased efficiency from increased efficiency
JIT II is “empowerment of the supplier JIT II is “empowerment of the supplier within the customer’s organization” – within the customer’s organization” – Lance DixonLance Dixon
In a retail environment, JIT II principles are In a retail environment, JIT II principles are called ecalled efficient consumer response fficient consumer response (ECR), (ECR), which enable retailers to replenish their which enable retailers to replenish their inventories constantly and on an as-inventories constantly and on an as-needed basis needed basis
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Protecting Inventory Protecting Inventory from Theftfrom Theft Businesses lose an estimated $92 Businesses lose an estimated $92
million per day to criminalsmillion per day to criminals Small businesses are more Small businesses are more
susceptible to crime than large susceptible to crime than large companies companies
The biggest criminal threat to The biggest criminal threat to small businesses is employee small businesses is employee theft theft
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Employee TheftEmployee Theft
The greatest criminal threat to small The greatest criminal threat to small businesses comes from businesses comes from insideinside
Dishonest employees steal 6.6 times Dishonest employees steal 6.6 times more merchandise than do more merchandise than do shoplifters shoplifters
Average time required to catch an Average time required to catch an employee who is stealing: 18 months employee who is stealing: 18 months
How discovered? Employee tip!How discovered? Employee tip!
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Employee TheftEmployee Theft
Is more common in small Is more common in small companies, where control and companies, where control and security measures are less security measures are less stringent stringent
Is more pervasive than most Is more pervasive than most owners thinkowners think
30% of workers steal from their 30% of workers steal from their employers at some point in their employers at some point in their careers careers
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Reasons for Reasons for Employee TheftEmployee Theft
The trusted employeeThe trusted employee Disgruntled employeesDisgruntled employees Organizational atmosphereOrganizational atmosphere Physical breakdownsPhysical breakdowns Improper cash controlImproper cash control
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Factors Encouraging Factors Encouraging Employee TheftEmployee Theft
The need or desire to stealThe need or desire to steal A rationalization for the actA rationalization for the act The opportunity to stealThe opportunity to steal The perception that there is a The perception that there is a
low probability of being caughtlow probability of being caught
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Preventing Employee Preventing Employee TheftTheft
Screen employees carefullyScreen employees carefully Create an environment of honestyCreate an environment of honesty Establish a system of internal controlsEstablish a system of internal controls
Create proper checks and balancesCreate proper checks and balances Keep records up-to-dateKeep records up-to-date
Use technology to reduce theftUse technology to reduce theft Watch for signs of theftWatch for signs of theft Set up a hot lineSet up a hot line Demonstrate zero tolerance for theft Demonstrate zero tolerance for theft
Source: 2010 National Retail Security Survey, National Retail Federation.
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Causes of Inventory Shrinkage
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Chapter 18 Managing Inventory 18-27
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ShopliftingShoplifting
The most frequent business crimeThe most frequent business crime One out of 11 adults in the U.S. has One out of 11 adults in the U.S. has
shoplifted shoplifted Retailers lose $11.7 billion per Retailers lose $11.7 billion per
year to shopliftersyear to shoplifters Shoplifting losses add Shoplifting losses add
approximately 3 to 4 percent to approximately 3 to 4 percent to the average price tag the average price tag
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Types of ShopliftersTypes of Shoplifters
JuvenilesJuveniles Impulse shopliftersImpulse shoplifters Alcoholics, vagrants, and drug Alcoholics, vagrants, and drug
addictsaddicts KleptomaniacsKleptomaniacs ProfessionalsProfessionals
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Deterring ShopliftersDeterring Shoplifters
Resources are best spent on Resources are best spent on preventionprevention
Train employees to spot shopliftersTrain employees to spot shoplifters Create a store layout that discourages Create a store layout that discourages
shopliftingshoplifting Use mechanical devices such as Use mechanical devices such as
cameras and electronic tags to make cameras and electronic tags to make shoplifters’ jobs more difficult shoplifters’ jobs more difficult
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Apprehending Apprehending ShopliftersShoplifters Catching shoplifters is difficultCatching shoplifters is difficult
On average, caught just once every On average, caught just once every 48 times they steal48 times they steal
Turned over to the police just 50% of Turned over to the police just 50% of the time the time
Result: The chance that a shoplifter Result: The chance that a shoplifter will actually go before a judge is just will actually go before a judge is just 1 in 1001 in 100
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Making a CaseMaking a Case
To make shoplifting charges stick, a To make shoplifting charges stick, a business owner must:business owner must:
1.1. SeeSee the person take or conceal the the person take or conceal the merchandisemerchandise
2.2. IdentifyIdentify the merchandise as the merchandise as belonging to the storebelonging to the store
3.3. TestifyTestify that it was taken with the that it was taken with the intent to stealintent to steal
4.4. ProveProve that the merchandise was not that the merchandise was not paid forpaid for
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Preventing Preventing ShopliftingShoplifting Principle 1Principle 1: Sharpen the shoplifter's : Sharpen the shoplifter's
awareness that he is being watchedawareness that he is being watched Principle 2Principle 2: Remove opportunity by : Remove opportunity by
minimizing the shoplifter's minimizing the shoplifter's unattended access to merchandiseunattended access to merchandise
Principle 3Principle 3: If principles 1 and 2 fail, : If principles 1 and 2 fail, prosecute the shoplifterprosecute the shoplifter
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