Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-1 Managing Inventory

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-2 Managing Inventory Excess inventory masks a host of other problems that a company may have Excess inventory masks a host of other problems that a company may have Inventory carrying costs are high Inventory carrying costs are high  $357 billion annually in inventory carrying costs Taxes Taxes Depreciation Depreciation Insurance Insurance Obsolescence Obsolescence

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-3 Managing Inventory Involves Developing an accurate sales forecast 2. Developing a plan to make inventory available when and where customers want it 3. Building relationships with quality suppliers 4. Setting realistic inventory turnover objectives

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Computing the cost of carrying inventory 6. Using the most timely and accurate information system the business can afford to provide everyone with vital inventory information 7. Teaching employees how inventory control systems work so they can help manage inventory on a daily basis Managing Inventory Involves...

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-5 Pareto’s Law Business owners must recognize the importance of Pareto’s Law (“the 80/20 Rule”): About 80% of a firm’s sales are generated by about 20% of the items in its inventory Business owners must recognize the importance of Pareto’s Law (“the 80/20 Rule”): About 80% of a firm’s sales are generated by about 20% of the items in its inventory The goal of inventory control is to focus the majority of the effort on that 20% of the inventory The goal of inventory control is to focus the majority of the effort on that 20% of the inventory

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-6 Inventory Control Systems Perpetual inventory systems Perpetual inventory systems  Point-of-sale (POS) systems Accurate and current Accurate and current Provide reorder alerts Provide reorder alerts Generate inventory reports Generate inventory reports

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-7 Visual inventory systems Visual inventory systems Partial inventory systems Partial inventory systems  ABC method Inventory Control Systems

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-8 ABC Method The ABC technique focuses inventory control efforts on the small percentage of items that account for the majority of a company’s sales Categorizes inventory items into three classes – A, B, and C – with the goal of establishing different levels of control over each class Categorizes inventory items into three classes – A, B, and C – with the goal of establishing different levels of control over each class

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-9 ABC Method Dollar usage volume = cost per unit x annual quantity used A items - items accounting for a large dollar usage volume (Approximately the top 15% of items) A items - items accounting for a large dollar usage volume (Approximately the top 15% of items) B items - items accounting for a moderate dollar usage volume (Approximately the next 35% of items) B items - items accounting for a moderate dollar usage volume (Approximately the next 35% of items) C items - items accounting for a low dollar usage volume (Approximately the remaining 50% of items) C items - items accounting for a low dollar usage volume (Approximately the remaining 50% of items)

ABC Inventory Control Chapter 18 Managing Inventory Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-10

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall ABC Inventory Control A items - Strict control; Perpetual inventory control systems A items - Strict control; Perpetual inventory control systems B items - Moderate control; Periodic control systems using EOQ and reorder point analysis B items - Moderate control; Periodic control systems using EOQ and reorder point analysis C items - Minimal control; Simple, inexpensive control systems such as the two-bin or tag systems. Many businesses carry large levels of safety stock of C items where carrying costs are low C items - Minimal control; Simple, inexpensive control systems such as the two-bin or tag systems. Many businesses carry large levels of safety stock of C items where carrying costs are low

Two Bin and Tag Systems Chapter 18 Managing Inventory Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall 18-12

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Physical Inventory Count Periodic count Periodic count Cycle counting Cycle counting

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Radio Frequency Identification (RFID) Radio tags attached to individual items or to shipments that transmit data to a company’s inventory control system Radio tags attached to individual items or to shipments that transmit data to a company’s inventory control system Tiny microchip stores a unique electronic product code and a tiny antenna Tiny microchip stores a unique electronic product code and a tiny antenna Provides highly accurate, real-time information constantly and allow owners to locate and track an item at any point in the supply chain Provides highly accurate, real-time information constantly and allow owners to locate and track an item at any point in the supply chain

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Just-In-Time Techniques JIT attempts to reduce the investment required in inventory because it drains a company’s cash and hides a multitude of problems managers need to address JIT attempts to reduce the investment required in inventory because it drains a company’s cash and hides a multitude of problems managers need to address Goal: To achieve a smooth flow of materials and inventory through the business Goal: To achieve a smooth flow of materials and inventory through the business

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Just-In-Time Techniques Rather than build up costly stockpiles of inventory, JIT seeks to get items where they are needed “just in time” Rather than build up costly stockpiles of inventory, JIT seeks to get items where they are needed “just in time” Heart of JIT philosophy is eliminating waste in a business – whatever form it may take Heart of JIT philosophy is eliminating waste in a business – whatever form it may take  Seven wastes

Chapter 18 Managing Inventory Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Seven wastes that JIT tries to eliminate

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Benefits of JIT 1. Lower investment in inventory 2. Reduced inventory carrying and handling costs 3. Reduced costs resulting from obsolete inventory 4. Smaller investment in inventory storage space and production 5. Reduced manufacturing costs as a result of improved coordination among departments

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall When JIT Works Best  Reliable deliveries of parts and supplies  Short distances between customers and vendors  Consistent quality of vendors’ products  Stable and predictable demand

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall JIT II JIT II techniques focus on creating a closer, more harmonious relationship with a company’s suppliers so that both benefit from increased efficiency JIT II techniques focus on creating a closer, more harmonious relationship with a company’s suppliers so that both benefit from increased efficiency JIT II is “empowerment of the supplier within the customer’s organization” – Lance Dixon JIT II is “empowerment of the supplier within the customer’s organization” – Lance Dixon In a retail environment, JIT II principles are called efficient consumer response (ECR), which enable retailers to replenish their inventories constantly and on an as-needed basis In a retail environment, JIT II principles are called efficient consumer response (ECR), which enable retailers to replenish their inventories constantly and on an as-needed basis

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Protecting Inventory from Theft Businesses lose an estimated $92 million per day to criminals Businesses lose an estimated $92 million per day to criminals Small businesses are more susceptible to crime than large companies Small businesses are more susceptible to crime than large companies The biggest criminal threat to small businesses is employee theft The biggest criminal threat to small businesses is employee theft

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Employee Theft The greatest criminal threat to small businesses comes from inside The greatest criminal threat to small businesses comes from inside Dishonest employees steal 6.6 times more merchandise than do shoplifters Dishonest employees steal 6.6 times more merchandise than do shoplifters Average time required to catch an employee who is stealing: 18 months Average time required to catch an employee who is stealing: 18 months How discovered? Employee tip! How discovered? Employee tip!

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Employee Theft Is more common in small companies, where control and security measures are less stringent Is more common in small companies, where control and security measures are less stringent Is more pervasive than most owners think Is more pervasive than most owners think 30% of workers steal from their employers at some point in their careers 30% of workers steal from their employers at some point in their careers

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Reasons for Employee Theft The trusted employee The trusted employee Disgruntled employees Disgruntled employees Organizational atmosphere Organizational atmosphere Physical breakdowns Physical breakdowns Improper cash control Improper cash control

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Factors Encouraging Employee Theft The need or desire to steal The need or desire to steal A rationalization for the act A rationalization for the act The opportunity to steal The opportunity to steal The perception that there is a low probability of being caught The perception that there is a low probability of being caught

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall Preventing Employee Theft Screen employees carefully Screen employees carefully Create an environment of honesty Create an environment of honesty Establish a system of internal controls Establish a system of internal controls  Create proper checks and balances  Keep records up-to-date Use technology to reduce theft Use technology to reduce theft Watch for signs of theft Watch for signs of theft Set up a hot line Set up a hot line Demonstrate zero tolerance for theft Demonstrate zero tolerance for theft

Source: 2010 National Retail Security Survey, National Retail Federation. Causes of Inventory Shrinkage Copyright ©2012 Pearson Education, Inc. publishing as Prentice HallChapter 18 Managing Inventory18-27

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Shoplifting The most frequent business crime The most frequent business crime  One out of 11 adults in the U.S. has shoplifted Retailers lose $11.7 billion per year to shoplifters Retailers lose $11.7 billion per year to shoplifters Shoplifting losses add approximately 3 to 4 percent to the average price tag Shoplifting losses add approximately 3 to 4 percent to the average price tag

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Types of Shoplifters Juveniles Juveniles Impulse shoplifters Impulse shoplifters Alcoholics, vagrants, and drug addicts Alcoholics, vagrants, and drug addicts Kleptomaniacs Kleptomaniacs Professionals Professionals

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Deterring Shoplifters Resources are best spent on prevention Resources are best spent on prevention Train employees to spot shoplifters Train employees to spot shoplifters Create a store layout that discourages shoplifting Create a store layout that discourages shoplifting Use mechanical devices such as cameras and electronic tags to make shoplifters’ jobs more difficult Use mechanical devices such as cameras and electronic tags to make shoplifters’ jobs more difficult

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Apprehending Shoplifters Catching shoplifters is difficult Catching shoplifters is difficult  On average, caught just once every 48 times they steal  Turned over to the police just 50% of the time  Result: The chance that a shoplifter will actually go before a judge is just 1 in 100

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Making a Case To make shoplifting charges stick, a business owner must: 1. See the person take or conceal the merchandise 2. Identify the merchandise as belonging to the store 3. Testify that it was taken with the intent to steal 4. Prove that the merchandise was not paid for

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall Preventing Shoplifting Principle 1: Sharpen the shoplifter's awareness that he is being watched Principle 1: Sharpen the shoplifter's awareness that he is being watched Principle 2: Remove opportunity by minimizing the shoplifter's unattended access to merchandise Principle 2: Remove opportunity by minimizing the shoplifter's unattended access to merchandise Principle 3: If principles 1 and 2 fail, prosecute the shoplifter Principle 3: If principles 1 and 2 fail, prosecute the shoplifter

Chapter 18 Managing Inventory Copyright ©2012 Pearson Education, Inc. publishing as Prentice Hall All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright ©2012 Pearson Education, Inc. Publishing as Prentice Hall