Operation Management

1.1 Introduction

Inventory management is the direction and control of activities with the purpose of getting the right inventory in the right place at the right time in the right quantity in the right form at the right cost. It determines when to order products, how much to order, identify source of supply in each stocking location. Inventory management includes all activities of forecasting and replenishment.

Since inventory is an important element in operation, activities controlling the level of inventory generally would affect significantly to a company. Thus, Inventory are held in order to manage and hide from the customer the fact that manufacture/supply delay is longer than delivery delay, and also to ease the effect of imperfections in the manufacturing process that lower production efficiencies if production capacity stands idle for lack of materials. (www.wikipedia.com/inventorymanagement)

The various activities listed are used to control inventory and planned for replenishment. They are process pooling, Kanban, classical Economic order quantity, part-delivery part production order quantity model, backorder model and quantity discount model.

On top of the various replenishment policies, the counting systems for inventory are periodic system, perpetual system and the 2 bin storage system. The counting system helps to maintain and estimate the remaining actual number of stock left in the physical warehouse excluding the factor of emergency, loss and spoilage due to wear and tear.

In order to be able to keep track of the inventory, Stock Keeping Unit (SKU) is used by company. It is a unique combination of all the components that are assembled into the purchasable item. Therefore any change in the packaging or product is a new SKU. This level of detailed specification assists in managing inventory. Technology such as electronic product code is assigned to each inventory, then company can use Radio frequency identification to keep track on inventory flowing through the supply chain. In this way, it could improve the service level and efficiency of the chain.

The decision required to made under inventory management includes the technology employed, the different kind of inventory policy to manage inventory level to the optimal at the right time without incurring additional cost and how certain factors would affect the supply chain due to inventory management.

2. Literature Review

In the context of todayÐ'ÐŽÐ'¦s economy, the more challenging industry to emphasise importance of inventory management would be the retail and grocery industry. This particular industry display and hold some of the inventory goods that are perishables and have specific shelf life time. For example in terms of Supermarket, perishables are the driving force behind the profitability and represent of the last competitive advantage against Wal-mart super centre. Thus having an optimum inventory management became very significant for companies or supermarket to maximise their profitability and efficiencies.

In search for the best ideal model or equation to solve and cater while at the same optimise the trade-off between lowest total cost and higher customer service level; most articles read would specified their objectives and necessary assumption then conclude with a suggested model. For instance, I will then focus on inventory management in terms of retail outlets and grocery industry with analysis on the positive and negative factor affecting inventory management. In addition, I would discuss the use of modern technology like Radio frequency ID to monitor and better manage inventory as whole.

2.1 Summary 1--- Inventory management in dense retail outlets and grocery industry

Firstly, the important success factor for inventory management in dense retail outlets and grocery industry is information sharing between the required parties to improve retail product freshness of perishables. With information sharing, the retailer is informed of the product age prior to placing an order and hence, can utilize this information in its decision-making. As many unsold inventory remaining after the lifetime elapses will be discarded or outdated due to the fact that some of the products are perishable. (Ketzenberg, 2006) Hence, decision made upon inventory planning would have to take into consideration of age of products as one distinguishing characteristics of perishables is that they have finite lifetime.

The benefits of information sharing would be maximized when (1) the variability of demand is high (2) product lifetimes are short (3) cost of product is high (4) satisfied LIFO issuing policy. In particular, Perishable inventory theory was introduced to determine reasonable and appropriate methods for both issuing and replenishing of inventory.

While issuing problem focuses on the order in which units of each age category are withdrawn from inventory to satisfy demand, it is not always controllable by retailers. Thus the value of information passed and shared in the supply chain becomes a crucial factor. Inventories are shared upstream where retailer shares its age-dependent inventory state, replenishment policy and demand information with supplier and at the same time there is also a reverse flow of information sharing is encouraged. (Ferguson, 2006)

Secondly, dense retail outlets should provide strategic benefits of convenience and speed to customers, yet desires to provide high product variety by increasing product density. It would be most desirable to create a one stop area to offer customer more opportunity to choose. (ketzenberg, 2006) Efficient consumer response (ECR) is then use as a benchmark to reduce total system costs, inventories and physical assets while improving the customerÐ'ÐŽÐ'¦s choice.

Arising from ECR, Efficient Store Assortments was implemented to address the optimum use of store and shelf space to provide a complete, easy to shop, assortment of products the consumer wants. (Ketzenberg & Metters & Vargas, 2006). Following factors regarding inventory management would then be considered:

Ð'Ñ"Ð"‚ Assortment Ð'ÐŽX deciding which products should be stocked,

Ð'Ñ"Ð"‚ Allocation Ð'ÐŽX how much shelf space to give each product in the assortment,

Ð'Ñ"Ð"‚ Replenishment Ð'ÐŽX when and how much to reorder.

2.2 Summary 2--- Positive and negative