1. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 1 Managing Inventory

2. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 2 Managing Inventory Involves... 1. 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.

3. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 3 5. 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...

4. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 4 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.

5. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 5 Inventory Control Systems Perpetual inventory systems Perpetual inventory systems  Point-of-sale (POS) systems  Sales ticket method  Sales stub method  Floor sample method

6. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 6 Visual inventory systems Visual inventory systems Partial inventory systems Partial inventory systems  ABC method  "Just-In-Time" techniques Inventory Control Systems

7. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 7 ABC Method The ABC technique focuses inventory control efforts on the small percentage of items that account for the majority of the firm’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.

8. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 8 ABC Method 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).

9. ABC Inventory Control

10. 100 50 0 Percent of Dollar Usage 75 25 Percent of Items in Inventory A B C 255075100 ABC analysis enables business owners to focus their attention on these items. ABC analysis enables business owners to focus their attention on these items. ABC Analysis

11. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 11 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.

12. Two Bin and Tag Systems

13. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 13 Physical Inventory Count Periodic count Periodic count Cycle counting Cycle counting Electronic data interchange (EDI) Electronic data interchange (EDI) Web-based supply chain management systems Web-based supply chain management systems

14. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 14 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.

15. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 15 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. 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.”

16. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 16 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. 5. Reduced manufacturing costs as a result of improved coordination among departments.

17. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 17 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.

18. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 18 Protecting Inventory from Theft Businesses lose an estimated $400 billion annually to criminals. Businesses lose an estimated $400 billion annually to criminals. Small businesses are more susceptible to crime than large companies. Small businesses are more susceptible to crime than large companies. Two biggest criminal threats to small businesses are employee theft and shoplifting. Two biggest criminal threats to small businesses are employee theft and shoplifting.

19. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 19 Employee Theft The greatest criminal threat to small businesses comes from inside. The greatest criminal threat to small businesses comes from inside. 30 percent of all employees are “hard-core pilferers.” 30 percent of all employees are “hard-core pilferers.” 80 percent of employees are likely to become involved in theft unless preventive security measures are in place. 80 percent of employees are likely to become involved in theft unless preventive security measures are in place. 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.

20. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 20 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

21. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 21 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.

22. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 22 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.  Demonstrate zero tolerance for theft.

23. Causes of Inventory Shrinkage

24. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 24 Shoplifting The most frequent business crime. The most frequent business crime. Businesses, especially retailers, lose $17 to $20 billion per year to shoplifters. Businesses, especially retailers, lose $17 to $20 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.

25. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 25 Types of Shoplifters Juveniles Juveniles Impulse shoplifters Impulse shoplifters Alcoholics, vagrants, and drug addicts Alcoholics, vagrants, and drug addicts Kleptomaniacs Kleptomaniacs Professionals Professionals

26. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 26 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’ job more difficult. Use mechanical devices such as cameras and electronic tags to make shoplifters’ job more difficult.

27. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 27 Apprehending Shoplifters Catching shoplifters is difficult; about 98 percent of the time, shoplifters are successful. Catching shoplifters is difficult; about 98 percent of the time, shoplifters are successful. The chance that a shoplifter will actually go before a judge is just 1 in 100. The chance that a shoplifter will actually go before a judge is just 1 in 100.

28. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 28 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.

29. Chapter 18 Managing Inventory Copyright 2006 Prentice Hall Publishing Company 29 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.