PRODUCTION AND OPERATIONS MANAGEMENT

INVENTORY MANAGEMENT
 Inventory refers to goods that are in various stages of being made ready for sale, including:
Finished goods (that are available to be sold)
Work-in-progress (meaning in the process of being made)
Raw materials (to be used to produce more finished goods)
Inventory is generally the largest current asset – items expected to sell within the next year – a
company has.

 Raw materials – Raw materials are the building blocks to make finished goods. Ford
purchases sheet metal, steel bars, and tubing to manufacture car frames and other parts. When
they put these materials into produce and start cutting the bars and shaping the metal, the raw
materials become work in process inventories.
 Work in process – Work in process inventory consists of all partially finished products that a
manufacturer produces. As the unfinished cars make their way down the assembly line, they
are considered a work-in-progress until they are finished.
 Finished goods – Finished goods are exactly what they sound like. These are the finished
products that can be sold to wholesalers, retailers, or even the end users. In Ford’s case, they
are finished cars that are ready to be sent to dealers.
Each of these different categories is important and managing them is key to any business’ survival.
Inventory control is one of the most important concepts for any business especially retailers. Since
they purchase goods from manufacturers and resell them to consumers at small margins, they
have to manage their purchasing and control the amount of cash that is tied up in merchandise.

 The concept of inventory, stock or work-in-process has been extended from manufacturing
systems to service businesses and project.

 The definition: "all work within the process of production- all work that is or has occurred prior to
the completion of production."
 In the context of a manufacturing production system, inventory refers to – raw materials, partially
finished products, finished products prior to sale and departure from the manufacturing system.

 In the context of services, inventory refers to all work done prior to sale, including partially process
information.

 The scope of inventory management concerns the balance between replenishment lead time,
carrying costs of inventory, asset management, inventory forecasting, inventory valuation,
inventory visibility, future inventory price forecasting, physical inventory, available physical space,
quality management, replenishment, returns and defective goods, and demand forecasting.
Balancing these competing requirements leads to optimal inventory levels, which is an on-going
process as the business needs shift and react to the wider environment.
 Inventory management involves a retailer seeking to acquire and maintain a proper merchandise
assortment while ordering, shipping, handling, and related costs are kept in check. It also involves
systems and processes that identify inventory requirements, set targets, provide replenishment

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 techniques, report actual and projected inventory status and handle all functions related to the
tracking and management of material.

 Inventory can be valued in three ways:

The first-in, first-out (FIFO) method says that the cost of goods sold is based on the cost of the
earliest purchased materials, while the carrying cost of remaining inventory is based on the cost of
the latest purchased materials.
The last-in, first-out (LIFO) method states that the cost of goods sold is valued using the cost of
the latest purchased materials, while the value of the remaining inventory is based on the earliest
purchased materials.
The weighted average method requires valuing both inventory and the cost of goods sold based
on the average cost of all materials bought during the period.

 In order to ensure that all accounting records are up-to-date and accurate, businesses manually
take an inventory count at the end of each accounting period, which is typically quarterly or
annually. Companies that do a daily inventory count are considered to take perpetual inventory,
because their count is always current.

 Any difference discovered between the inventory count on the company’s balance sheet and what
actually on-hand is termed “shrinkage.” It’s the inventory that is missing, for whatever reason.
Sometimes the inventory is lost, other times it is stolen.

 Inventory management is the supervision of non-capitalized assets (inventory) and stock items.
A component of supply chain management, inventory management supervises the flow of goods
from manufacturers to warehouses and from these facilities to point of sale. A key function of
inventory management is to keep a detailed record of each new or returned product as it enters
or leaves a warehouse or point of sale.

 The inventory management process

Inventory management is a complex process, particularly for larger organizations, but the basics
are essentially the same regardless of the organization's size or type. In inventory management,
goods are delivered into the receiving area of a warehouse in the form of raw materials or
components and are put into stock areas or shelves.

INVENTORY MANAGEMENT TECHNIQUES

 Inventory management uses several methodologies to keep the right amount of goods on hand
to fulfill customer demand and operate profitably.

 This task is particularly complex when organizations need to deal with thousands of stockkeeping
units (SKUs) that can span multiple warehouses. The methodologies include:

 Stock review is the simplest inventory management methodology and is generally more
appealing to smaller businesses. Stock review involves a regular analysis of stock on hand versus
projected future needs. It primarily uses manual effort, although there can be automated stock
review to define a minimum stock level that then enables regular inventory inspections and
reordering of supplies to meet the minimum levels. Stock review can provide a measure of control
over the inventory management process, but it can be labor-intensive and prone to errors.

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 JUST-IN-TIME INVENTORY
 One way to try and reduce the size of your on-hand inventory is to use a just-in-time strategy.
Using a just-in-time approach means that materials are delivered just in time to meet current
customer demand. As a result, you have fewer inventories sitting around, waiting to be produced
or sold.
 To be successful using just-in-time, you have to have an accurate idea of how much you’ll sell in
between product deliveries. If you’re selling 250 pairs of shoes a week and you receive deliveries
every Friday, ideally you’ll receive 250 this Friday, to keep up with demand. However, if demand
picks up or declines in between deliveries, you can end up with problems.
 Having too much inventory is risky because you run the risk of being stuck with merchandise that
is obsolete or past its prime. You may have to mark it down to sell it, thereby reducing your profit
margin.
 But having too little inventory, or running short, is an issue, too. Running out of a product your
customers want can lead to dissatisfaction and lost sales, especially if they opt to buy from
another retailer that has the item in stock. You lose money because you didn’t have the inventory
in stock.
 While the object of just-in-time inventory is to reduce the need to store inventory – ideally, it
would all be sold just as the shipment arrives – keeping accurate track of what you’ll need to meet
demand is challenging, since consumer tastes can change quickly.
 The just-in-time (JIT) inventory system is a management strategy that aligns raw-material orders
from suppliers directly with production schedules.
 Companies employ this inventory strategy to increase efficiency and decrease waste by receiving
goods only as they need them for the production process, which reduces inventory costs.
 This method requires producers to forecast demand accurately.
 The JIT inventory system contrasts with just-in-case strategies, wherein producers hold sufficient
inventories to have enough products to absorb maximum market demand.
 Example: A JIT inventory system is a car manufacturer that operates with low inventory levels but
heavily relies on its supply chain to deliver the parts it requires to build cars, on an as-needed
basis. Consequently, the manufacturer orders the parts required to assemble the cars, only after
an order is received. For JIT manufacturing to succeed, companies must have steady production,
high-quality workmanship, glitch-free plant machinery, and reliable suppliers.
 Example: Famous for its JIT inventory system, Toyota Motor Corporation orders parts only when
it receives new car orders. Although the company installed this method in the 1970s, it took 15
years to perfect it.
 Advantage: JIT inventory systems have several advantages over traditional models. Production
runs are short, which means that manufacturers can quickly move from one product to another.
Furthermore, this method reduces costs by minimizing warehouse needs. Companies also spend
less money on raw materials because they buy just enough resources to make the ordered
products and no more.
 Disadvantage: The disadvantages of JIT inventory systems involve potential disruptions in the
supply chain. If a raw materials supplier has a breakdown and cannot deliver the goods in a timely
manner, this could conceivably stall the entire production process. A sudden unexpected order for
goods may delay the delivery of finished products to end clients.

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 KANBAN INVENTORY SYSTEM

 Kanban is an inventory scheduling system that allows companies to stock only needed
components and arts in the production or distribution process. Lean manufacturing systems use
the Kanban as a technique to keep inventory levels as low as possible. In lean manufacturing, the
process pulls materials through the production or distribution process. The Kanban system
provides a signal for reordering or replenishing stock.

 Kanban inventory is a system of lean manufacturing where production happens with the least
amount of inventory. Instead of stocking huge amounts of inventory, a signal is used to re-order
the inventory as they get used up in the production process.

 For example, bins or reorder cards are methods that signal it is time to repurchase materials or
parts. Companies can use the Kanban system on the production floor to signal replenishment
from inventory stock as well as in the stockroom to signal a repurchase. In a Kanban system, when
a worker reaches the end of a bin, he orders stock internally or passes the information to
purchasing for a stock purchase, but no material moves if the bins remain full.

 History of KANBAN:

An industrial engineer, Taichi Ohno observed how supermarkets handle their inventory. He
wanted to replicate it in his manufacturing process. A lot of waste could be eliminated by keeping
the inventory and labor at the minimum level required. Out of this approach, the Kanban process
was formed for inventory management. Kanban is also very closely related to Just in Time
Methodology which produces the product only based on the demand. Kanban is also related to
Lean Manufacturing methods that eliminate waste and keep processes efficient.

 Benefits: A Kanban system allows a company to reduce inventory levels, which reduces the cost
associated with stocking and storing materials in the organization. Cost reductions occur in the
expense of the inventory itself as well as the cost of warehousing and maintaining inventory.
Companies that use a Kanban system in a lean environment allow actual customer demand to
determine the need for materials and not forecasts of the demand.

 KANBAN is based on 3 basic principles:

 Visualize what you do today (workflow): seeing all the items in context of each other can
be very informative
 Limit the amount of work in progress (WIP): this helps balance the flow-based approach
so teams don t start and commit to too much work at once
 Enhance flow: when something is finished, the next highest thing from the backlog is
pulled into play

 KANBAN promotes continuous collaboration and encourages active, on-going learning and
improving by defining the best possible team workflow.

 A goal of the kanban system is to limit the buildup of excess inventory at any point in production.
Limits on the number of items waiting at supply points are established and then reduced as
inefficiencies are identified and removed. Whenever a limit is exceeded, this points to an
inefficiency that should be addressed.

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 How KANBAN works: A supermarket only restocks items based on the quantity it hopes to sell.
The Kanban methodology uses terminology such as downstream and upstream to indicate where
the pull typically happens. For instance, in order to manufacture a part, an inventory may be
required. The team that manufactures the new part will be called upstream and it orders from the
downstream only the amount of inventory that is required to manufacture the part.
 The manufacturing companies followed a similar approach while engaging a few more
rules on how the Kanban system works:
 Orders for parts are placed upstream for exact quantities required by downstream.
 Upstream produces only the quantity ordered by downstream. The sequence specified by
the Kanban is also followed.
 Items will be accompanied by Kanban.
 Defective items are removed and never processed as part of the order.
 As the inventory gets used up, Kanban is reduced to reflect the actual quantity.

 In contexts where supply time is lengthy and demand is difficult to forecast, often the best one
can do is to respond quickly to observed demand. This situation is exactly what a kanban system
accomplishes, in that it is used as a demand signal that immediately travels through the supply
chain. This ensures that intermediate stock held in the supply chain are better managed, and are
usually smaller. Where the supply response is not quick enough to meet actual demand
fluctuations, thereby causing potential lost sales, a stock building may be deemed more
appropriate and is achieved by placing more kanban in the system.

 Taiichi Ohno stated that to be effective, kanban must follow strict rules of use. Toyota, for
example, has six simple rules, and close monitoring of these rules is a never-ending task,
thereby ensuring that the kanban does what is required.

 Toyota's Six Rules: Toyota has formulated six rules for the application of kanban:
1. Each process issues requests (kanban) to its suppliers when it consumes its supplies.
2. Each process produces according to the quantity and sequence of incoming requests.
3. No items are made or transported without a request.
4. The request associated with an item is always attached to it.
5. Processes must not send out defective items, to ensure that the finished products will be
defect-free.
6. Limiting the number of pending requests makes the process more sensitive and reveals
inefficiencies.

 Kanban Cards

 A Kanban card together with the bag of bolts that it refers to

 Kanban cards are a key component of kanban and they signal the need to move materials
within a production facility or to move materials from an outside supplier into the production
facility. The kanban card is, in effect, a message that signals a depletion of product, parts, or
inventory.
 When received, the kanban triggers replenishment of that product, part, or inventory.
Consumption, therefore, drives demand for more production, and the kanban card signals
demand for more products—so kanban cards help create a demand-driven system.

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 Three-bin system
 An example of a simple kanban system implementation is a "three-bin system" for the supplied
parts, where there is no in-house manufacturing.
 One bin is on the factory floor (the initial demand point), one bin is in the factory store (the
inventory control point), and one bin is at the supplier.
 The bins usually have a removable card containing the product details and other relevant
information, the classic kanban card.
 When the bin on the factory floor is empty (because the parts in it were used up in a
manufacturing process), the empty bin and its kanban card are returned to the factory store
(the inventory control point).
 The factory store replaces the empty bin on the factory floor with the full bin from the factory
store, which also contains a kanban card. The factory store sends the empty bin with its kanban
card to the supplier. The supplier's full product bin, with its kanban card, is delivered to the
factory store; the supplier keeps the empty bin. This is the final step in the process. Thus, the
process never runs out of product—and could be described as a closed loop, in that it provides
the exact amount required, with only one spare bin so there is never oversupply. This 'spare'
bin allows for uncertainties in supply, use, and transport in the inventory system. A good
kanban system calculates just enough kanban cards for each product.

 Electronic kanban/Virtual Kanban/ E-kanban system

 Many manufacturers have implemented electronic kanban (sometimes referred to as e-
kanban systems. These help to eliminate common problems such as manual entry errors
and lost cards.
 E-kanban systems can be integrated into enterprise resource planning (ERP) systems,
enabling real-time demand signaling across the supply chain and improved visibility.
 Data pulled from E-kanban systems can be used to optimize inventory levels by better
tracking supplier lead and replenishment times.

 Special Considerations: Kanban Scheduling for Just-in-Time (JIT)

Kanban is a Japanese scheduling system that's often used in conjunction with lean manufacturing
and JIT. Taiichi Ohno, an industrial engineer at Toyota, developed kanban in an effort to improve
manufacturing efficiency. The system highlights problem areas by measuring lead and cycle times
across the production process, which helps identify upper limits for work-in-process inventory, in
order to avoid overcapacity.