Advantages and Disadvantages of Inventory Management Systems

Advantages and Disadvantages of Inventory Management SystemsINVENTORYThe term inventory derives from the French word inventaire and the Latin word inventariom which simply means a count of things which are found. The term inventory includes reals which are in defense little form, or are in process, in the destroyed packaging, spares and the others which are receiveded in each(prenominal)ege to meet all the unexpected submits or distribution in the future. This term usually refers to the stock at hand at a particular period of succession of all those strongs which are in raw form, those goods which are in progress of manufacture, all the finished products, merchandise purchased products for resale of those products, real products which can be seen, touched, measured or are countable. In a connection with the financial statements and records of accounting, the reference whitethorn be to the amount designate to the stock or the pile of goods owned by an enterprise at a parti cular period of time. Inventory controls transit and handling. The raw materials whitethorn be transported thousands of kilometers before they are converted into an end product. At the be time, materials which are in transit, may take a period of some(prenominal) days or months. During this process of transit, materials carry someones inventory. These Inventories avail to isolate the provider, the producer and the consumer. Inventories permit the acquirement of raw materials in economic lot sizes as hale as processing of these raw materials into finished goods in the most economical quantities. Raw material inventories distinguish the supplier of raw materials from the user of these raw materials. Finished goods inventories distinguish the user of the nett goods from the producer of the goods. Inventories are held to facilitate product display and service to guests, batching in fruit in establish to take advantage of longer production runs and provide flexibility in produ ction scheduling.There are quadruplet types of inventoriesProduction inventoriesMRO inventoriesIn process inventoriesFinished goods inventoriesObjectives of inventory managementTo run into a continuous supply of raw materials and supplies to facilitate unhandled production.To maintain inevitable metre of finished goods for smooth sales function and efficient customer service.It permits the acquirement of raw materials in economic lot sizes as well as processing of these raw materials into finished goods is the most economical metre known as economic lot size.It reduces the dependencies of one another and enables the disposals to rate of business their operations without getting dependent on each other.It helps to reduce those be which have been occurred during the material handling.It helps to utilize people and materials reasonably.It controls display of the products and services provided to the corresponding customers.INVENTORY SYSTEMAn inventory outline facilitates the organizational structure and the operate policies for maintaining and controlling materials to be inventoried. This establishment is responsible for lay outing and receipt of materials, clock the establishliness organisation and keeping record of what has been enjoin, how much ordered and from whom the order placement has been done.There are two models of inventory arrangement-The amend order sum of money arrangementThe fixed order periodic systemFIXED ORDER QUANTITY SYSTEMThe fixed order cadence system is also known as the Q system. In this system, whenever the stock on hand reaches the order fountainhead, a fixed measuring rod of materials is ordered. The fixed quantity of material ordered each time is actually the economic order quantity. Whenever a fresh consignment arrives, the total stock is maintained deep down the maximum and the minimum limits. The fixed order quantity system is a method that facilitates for a predetermined amount of a given material to be ordered at a particular period of time. This method helps to limit reorder mistakes, conserve space for the storage of the finished goods, and hinder those unnecessary expenditures that would tie up funds that could be better use elsewhere. The fixed order quantity may be bridged to an automatic reorder point where a particular quantity of a good is ordered when stock at hand reaches a take which is already determined.Advantages individually material can be procured in the most economical quantity. buy and inventory control people automatically gives their attention to those items which are undeniable just now when are needed.Positive control can easily be handled to maintain the inventory investment at the desired level notwithstanding by calculating the predetermined maximum and minimum values.DisadvantagesSometimes, the orders are located at the irregular time periods which may not be at ease to the producers or the suppliers of the materials.The items cannot be grouped and ordered at a time since the reorder points occur irregularly.If there is a case when the order placement time is very high, there would be two to three orders unfinished with the supplier each time and there is likelihood that he may supply all orders at a time.EOQ may give an order quantity which is much lower than the supplier minimum and there is ever a probability that the order placement level for a material has been reached but not noticed in which case a stock out may occur.The system assumes stable impost and definite admit time. When these change significantly, a new order quantity and a new order point should be fixed, which is quite cumbersome.FIXED ORDER terminus SYSTEMIn this system, the stock position of each material of a product is checked at regular intervals of time period. When the stock level of a given product is not sufficient to sustain the operation of production until the next scheduled tested, an order is placed destroying the supply. The frequency of reviews varies from organization to organization. It also varies among products within the same organization, depending upon the importance of the product, predetermined production schedules, securities industry conditions and so forth. The order quantities vary for different materials.Every order quantity in their method is obtained by the conjoining formula.AdvantagesThe ordering and inventory cost are low. The ordering cost is considerably reduced though follow up naturalise for each delivery may be necessary.The suppliers go forth also offer attractive discounts as sales are guaranteed.The system works well for those products which exhibit an irregular or seasonal usage and whose purchases essential be planned in advance on the rear end of sales estimates.Dis advantagesThe periodic testing system tends to peak the purchasing work around the review dates.The system demands the establishment of rather inflexible order quantities in the interest of administrative efficien cy.It compels a periodic review of all items this itself makes the system somewhat inefficient.Distinction between Q system and P systemPoint of differenceQ systemP systemInitiation of orderStock on hand reaches to reorder pointBased on fixed review period and not stock level detail of orderAny time when stock level reaches to reorder pointOnly after the predetermined periodRecord keeping endlessly each time a withdrawal or addition is doOnly at the review periodOrder quantity ceaseless the same quantity ordered each timeQuantity of order varies each time order is placedSize of inventoryless than the P systemLarger than the Q systemTime to maintain high due to perpetual record keepingLess than due to only at the review periodExamplesFixed order quantity systemA painter can order 200 gallons or more(prenominal) for $4.75 per gallon, with all other factors in the computation remaining the same. He must compare the total cost of taking this approach to the total costs under the EOQ. Using the total cost formula, the painter would find TC = PD + HQ/2 + SD/Q = (5 3,500) + (3 187)/2 + (15 3,500)/187 = $18,061 for the EOQ. Ordering the higher quantity and receiving the price discount would yield a total cost of (4.75 3,500) + (3 200)/2 + (15 3,500)/200 = $17,187. In other words, the painter can save $875 per class by taking advantage of the price break and making 17.5 orders per grade of 200 units each.Fixed order period systemDaily demand for a product is 10 units with a standard deviation of 3 units. The review period is 30 days, and lead time is 14 days. At the moment of the review time, there are 150 units in inventory. For a 98% service level, how many units should be ordered?Solution= 10 units= 3 unitsT= 30 daysL= 14 daysz= 2.05 units.