Inventory Systems Summary: Learning Team A Michelle Grace, Scot Breland, Marie J. Charles, and Nate Kirkland QRB/501 Quantitative Reasoning for Business 1 July 2010 Dr. Robert Kalle Inventory Systems Summary: Learning Team A Learning Team A met to discuss details of the assignment to analyze, compare, and contrast four inventory systems in preparation for future assignments (Breland, Charles, Grace, & Kirkland). The analysis presented describes four inventory systems as described and analyzed by each team member.
Also included in the inventory systems analysis are four comparisons presenting the advantages and disadvantages of each inventory system with an overall ranking provided in summary. Learning team interactions via team meeting and daily communications and research conducted from various sources provide the foundation for the analysis and recommendations. Inventory Systems Inventory System One: Just-In-Time Description. Just-In-Time (JIT) is an inventory system that companies use to deliver a finished product to customers in the quickest time possible to reduce the overall ordering and inventory holding cost (Atkinson, 2005).
The system proves to be most effective for companies that lose money for holding a product in its inventory for an extended period of time and that have the capability of lowering its ordering cost to make to profit. Advantages. Dell computers are a prime example of how using JIT reduced cost and improved the overall performance of their company. According to Atkinson, a computer loses value at a fast rate as it sits in inventory; therefore it is financially smart to supply customers with products as they are ordered.
For every computer that sits in Dell warehouse over a span of seven days, one percent of its value is lost (Atkinson, 2005). To show how low inventory saved Dell money overtime a case study was conducted. According to Atkinson, ten years of data was pulled from www. themanufacturer. com that showed how many weeks worth of inventory a firm has by dividing the inventory turnover by 52 (Atkinson, 2005). Dell’s Inventory Turnover Data YearInventory TurnoverWeek’s Inventory 19924. 7910. 856 19935. 1610. 078 19949. 45. 532 19959. 85. 306 199624. 22. 149 199741. 71. 247 199852. 400. 992 199952. 400. 992 200051. 1. 012 200163. 50. 819 This chart shows that in 1993 Dell carried over ten week’s worth of inventory. By 2001 the company carried less than a week’s worth of inventory. The company initially lost ten percent per computer by allowing the computers to sit but by continually cutting its inventory, reduced its cost by nine percent (Atkinson, 2005). Disadvantages. According to Beard & Butler, companies that use JIT may experience a few disadvantages with the system such as “uncooperative suppliers, a distance between the supplier and manufacturer, and overstressed workers” (Beard & Butler, 2000, pg 1).
Other reasons why companies may have difficulty implementing JIT are due to the following: management may be unwilling to switch to JIT because of the initial costs involved, manufacturers in remote areas may not be able to arrange for frequent deliveries of inventory in small batches, as JIT theory dictates, and the manufacturing process itself may not be suited to JIT treatment, such as when some component of the finished product needs to be cured or dried between processes (Beard & Butler, 2000). Inventory System Two: Vendor Managed Inventory Description.
Vendor Managed Inventory (VMI) is a supply process where the vendor creates replenishment orders based on customer purchases from in-store stocks. The vendor and the customer agree to inventory levels, fill rates, and inventory costs. The VMI supply and inventory system improves supply chain performance by reducing inventories and eliminating stock-out. The vendor specifies delivery quantities through distribution channels through the use of and Electronic Data Exchange. Electronic Exchange Data is sent to the customer on a weekly basis or more frequently depending on overall volume.
Vendors use Electronic Data Exchange software packages to determine quantity sold, quantity on-hand, quantity on order, quantity received, and forecast quantity (Murray, 2010). Advantages. One of the main benefits of VMI is that the vendor is responsible for supplying the customer. Because the vendor supplies the customer, the customer requires less stock and warehousing requirements. Lower inventories can equate to lower costs for operations. Additionally, since the vendor receives data and not purchase orders purchasing departments experience significant operational costs savings.
Finally, purchase order reconciliation is also removed (Murray, 2010). Disadvantages. The main disadvantage to VMI is that significant control is relinquished to the vendor. Customers are reliant on an outside party to successfully manage supply transactions removing significant oversight. A lesser disadvantage is that since VMI is managed through electronic means exclusively, VMI is subject to compute and other electronic malfunctions. (Murray, 2010). Inventory System Three: Perpetual Inventory Method Description. Perpetual Inventory Method (PIM) is known to be used by many financial institutions.
PIM system maintains an up-to-date record of accurate level of goods at hands by ensuring that stocks are accounted for at all times (Dey-Chowdury, 2008). The process includes details of all recording purchase and sales receipts, and issues and running balances of all stocks. Advantages. As a result of the current balance calculates through PIM when adding the inventory of accounts of goods received to the subtraction of accounts used, a physical count of the stocks is not necessary; therefore, perpetual inventory system allows a financial institution to know at hand when to order more during the process Disadvantages.
Like any other system uses to perform inventory, PIM has its disadvantages. First, PIM result counts on inventory may be inaccurate as a result of the process basing the outcome on goods at hands other than goods from the beginning to the end of the period , such as probability vs. accuracy. Second, the system can be very costly to implement. Because not all businesses can afford to use this method to maintain financial inventory count, mainly well-known company such as Bank of America uses PIM (Rossfuerman Website, 2010). Inventory System Four: First In First Out
Description. First In First Out (FIFO) is a method of inventory control in which the stock of a given product first placed in store is used before more recently produced or acquired goods or materials (Bloomsbury, 2007). The FIFO inventory method is widely used in the foodservice industry due to a major advantage that will be further discussed below. Advantages. Because the first item in is the first item out in the FIFO inventory method, it is the preferred control method for the foodservice industry as it ensures that perishable items are used and sold before they expire.
Also, because older items are used first, the newer products remaining in inventory allows inventory managers to utilize the prices of the most recently purchased items as a standard to value the ending inventory. In addition, the cost of goods sold(COGS) is based on the prices of the older items, and over time as prices are increasing the FIFO method yields a high value and low COGS for ending inventory items resulting in the lowest cost of goods sold, the highest profits. Disadvantages.
In comparing the FIFO inventory method to JIT, PIM and VMI, the main weakness for companies using FIFO is the fact that this method consistently has the highest inventory balance. Ranking Learning Team A met to discuss details of the assignment to analyze, compare, and contrast four inventory systems in preparation for future assignments and provided ranking as follows: Just In Time received the number one ranking, Vendor Managed Inventory received the number two ranking, Perpetual Inventory Method received the number three ranking, and First in First Out received the number four ranking (Breland, Charles, Grace, & Kirkland, 2010).
Just in Time and Vendor Managed Inventory were the top two systems based on the speed by which products were delivered to the customer and savings in reduced inventory and warehousing requirements (Breland, Charles, Grace, & Kirkland, 2010). Conclusion The analysis presented describes four inventory systems with some historical data prepared by each team member. Each inventory system was analyzed by presenting the advantages and disadvantages of each inventory system.
Based on the comparison of each inventory system the learning team scored each system from one to four with one being viewed as the best inventory system. Based on team scoring, Learning Team A recommends the Just in Time inventory system based on speed by which supplies and products reach the customer and reduced warehousing requirements. References Atkinson, C. (2005). Inventory Management Review. Retrieved 28 June 2010 from https://www. inventorymanagementreview. org/justintime/ Author, UN. (2010). Observing physical inventory.
Retrieved on June 27, 2010 from http://rossfuerman. com/Documents/Supplement%20for%20ch. %204%20re%20confirmations%20and%20observing%20inventory. PDF Beard, L. , & Butler, S. (2000). Introducing JIT Manufacturing: It’s Easier Than You Think. Business Horizons, 43(5), 61. Retrieved from Business Source Complete database. Breland, S. , Charles, M. , Grace, M. , & Kirkland, N. , (June, 2010). Inventory Systems Summary, [Student Outline]. Learning Team Meeting. Meeting conducted at the University of Phoenix, Temple Terrace, Fl campus.
Dey-Chowdhury, S. (2008). Perpetual inventory method . Economic & Labour Market Review. Retrieved 27 2010 from http://ehis. ebscohost. com/ehost FIFO. Bloomsbury Business Library – Business & Management Dictionary [serial online]. January 2007;:3064. Available from: Business Source Complete, Ipswich, MA. Accessed June 29, 2010. Murray, Martin. (2010). Logistics/Supply Chain Vendor Managed Inventory (VMI). About. com. Retrieved 28 June 2010 from http://logistics. about. com/od/forsmallbusinesses/a/VMI. htm? p=1