The control of inventory systems

INTRODUCTION

It could not be argued that the emmergence of Information Technology has brought business its place present day. The Informatics revolutions have always brought new solutions that come up with new challenges, which keep the need for newer solutions continuous. Information Technology created new businesses being run and managed on the cyberspace called e-business and developed other businesses internally and globally.

Some businesses found that it is essential to join the evolution which needed them some effort to transform the company and convert it into an e-business. Others, who stayed where they were have soon discovered the importance of IT application in every major of its business. Using experts of IT to help the conversion, and by means of IT it includes Data base experts, networking professionals, accounting and inventory control systems applications, web site designers and administrators,…etc. Some businesses do hire some professionals from other IT solutions companies while others assign their own.

Managing of inventory for any business, weather it is small or big, is one of the most important, and often least handled, functions for a business owner. Everything revolves around it: Sales, Customer Service, Accounting, Planning, Purchasing, etc.

Barcodes Inc (2009) defines the inventory control system as “A set of hardware and software based tools that automate the process of tracking inventory. The kinds of inventory tracked with an inventory control system can include almost any type of quantifiable good, including food, clothing, books, equipment, and any other item that consumers, retailers, or wholesalers may purchase.”

The paper in hand is considering a general purpose of design and implementation of an Inventory System developed around the standards which then can be customized according to the requirements of any company. The system would help companies overcome main challenges that are facing them by managing the Control Stock activities such as selling, buying goods and reports handling.

However, the main purpose of the system is to apply the item’s information as input data and produce the purchase information as an output. On the Other hand, the system will support printing some functional reports according to the company’s requirements.

Therefore, when studied companies’ general requirements – regarding control stock issues, it concluded that companies’ goals and satisfactions are achievable within the given time limitations. However, control of inventory system, which typically represents 45% to 90% of all expenses for a business, is needed to ensure that the business has the right goods on hand to avoid stock-outs, also to prevent shrinkage and uncertain accounting. Many businesses have fair enough of their limited resources, capital, tied up in their major assets and inventory. Worse than that, they may have their capital tied up in the wrong kind of inventory. Inventory may be old, worn out, shop-worn, obsolete, or the wrong sizes or colours, or there may be an imbalance among different product lines that reduces the customer appeal and concerns of the total operation.

This project would spot the light upon common problems faced during the application of Inventory Control System and would suggest some solutions to overcome these problems. So we can say to any business “Control it before it controls you”.

As in this paper we are concerned about the inventory control systems, we are going to investigate the role of inventory in general and inventory control systems in specific.

In the literature review we are going to analyze some findings from journals, articles and web sites that mostly describe the role of inventory control systems and their problems.

In the second part which is Methodology the data collection and research methods which would be basically: face-to-face interviews with three businesses that vary in services, size and needs but share the need to have an effective inventory control system. As well as observing those companies to highlight the main issues to be addressed. We would also consider the findings from journals and some case studies to help us understand the challenges in depth. We would also analyze the collected data in order to get the full view of the issue.

Next, we are going to address the challenges that have immerged from data collection of these businesses. Those challenges would definitely vary as every company has its individual needs as they provide different services. But they do all meet at one point where there is a need for an effective inventory control system whether there is one used before or not.

The next section of this paper is concerned about the proposed system which would suggest a system designed to ease the process of inventory control and prevent the problems that occurred before. This would be explained via a conceptual design as well as a data flow diagram which has three main actors: supplier, customer and bank.

Later, we would explain the results of applying the proposed system, as some solutions would benefit some businesses than the others as every company would be treated separately. This section would also include some findings from resources describing the benefit that some companies gained upon application of inventory control systems.

Discussion is the next section which would concentrate on evaluating the findings from results and linking them with the previous findings from the literature review. One could say how beneficial the use of applying the ICS and how many losses would be eliminated to be added to margins.

LITREATURE REVIEW

Manuel L. Alcuaz Jr (2008) describes the inventory saying “Inventory is a major headache for most retailers. Some don’t have any information on their inventory movement or levels. As a result they experience many and frequent stock outs, while millions of pesos are tied up in slow-moving or non-moving inventory. The problem can be due to the sheer number of items, the complexity of items, or having very many locations.”

This shows the consequences of having no reliable inventory systems, as the supplier would suffer from stock outs he would have to ship in more stock to cover the needs whereas there is enough stock but this all is due to system failures or errors.

Rover Data Systems, Inc (2008) published a paper says “Control it before it controls you”. The paper discussed different points on the importance of inventory control system for different businesses. It addressed four types of businesses. First, manufacture to stock business that builds to stock according to a plan then waits for orders to come. Second, manufacture to order business that waits for orders to come, then builds a customer specific product. Third, distributers which purchases and stocks product, then sells to customer and finally the kitter that purchases and keeps detailed inventory on hand, then quickly assembles or packs to deliver to the customer when ordered.

Inventories vary in the ways they are being managed, although we are considering the automated inventory control system, it is worthy to understand the problems of inventory in general. Weber (2008) explains these key symptoms of an inventory as follows:

A company has too many of the wrong items and production shortages.
Frequent overnight shipments.
The perpetual levels on the computer are always wrong.
Large end-of-the-year write-offs.
Congested plant floors.
If someone’s looking for an item, the whole crew has to go out and search.
Responsibility for inventory levels is unclear.

Hence, they could be all categorized as management problems. I think that these problems could all have been prevented if they was a strict and organized management that highlights the role of every single employee. Such as the problem of congestion of items, overnight shipments could have been eliminated if there was even one employee doing his job as should be. But, we cannot ignore the fact that use of an automated system would accelerate the pending jobs. In other words, the business would need to have focused strategies considering the inventory levels.

This leads us to Naples (2008) who claims the responsibility on the f managers to improve inventory not inventory employees who only have to perform certain jobs. He defines the manager’s role in inventory as follows:

Maintain the correct staff level; Make sure all department personnel receive required training.
Hold department meetings to discuss problems and ways to improve.
Become as proficient as possible with the inventory-control system.
Control and work to reduce unsold special order parts, non-stock parts and excess inventory.
Control parts inventory obsolescence. This is the most volatile influence on holding expenses as obsolescence increases, the inventory holding expenses become more punitive. Any profits made from items that are selling will be lost to holding costs for items that are not selling.
Optimize settings to reduce inventory depth, build inventory width, and reduce the likelihood of excess stock and obsolescence.

I would have to agree with Naples, especially that he was more precise than Weber. Because, even with the availability of an inventory Control system there needs to be the right application, control and planning of this system. So they have to be trained and listened to highlight their problems with the system and put together the suggested solutions.

Mawson (2009) says “retailers need to be focused more than ever on putting good stock control systems in place to ensure they do not overpay suppliers, and to reduce the risk of having items stolen off shelves. A report into loss prevention has found that too many retailers simply accept shrinkage as a fact of life, a fact that could cost them up to 3% of revenue, and all too many think that theft plays a bigger role than systems, a thought that could well be flawed.”

I believe that many retailers focus their efforts on internal and external theft by paying for CCTVs and security systems, where the main issue is often process failure which drags into leakage and shrinkage where nobody knows where these amounts are gone. All what it needs from retailers and businesses is to focus on inventory control systems and consider them as an investment.

Inventory Control Systems are -as any other systems- not error free. According to Sahin and Dallery (2009) considering the thousands of items may come in and go out the system in a working day the Possible errors such as defects that affect the physical flow and the associated information flow can therefore be crucial.

A survey held by Hollinger and Davis (2001) shows that among errors causing perturbation on the physical flow, internal and external theft, administrative errors and fraud made by vendor accounted for 1.8% of sales in US retail industry in 2001; assuming an annual sales base of $1.8 trillion this costs US retailers $33 billion.

In other words this huge amount of cash can lost all around the world, it only is a crisis affecting retailers and is continuing to happen annually. This is due to either simply bad data or technical errors in the inventory systems that have been relying on worn-out systems thinking that they are saving money by keeping the same system. Whereas, making the right decision by a strict system update policy can save more amounts than what is being lost.

A paper published 2002 by SCORE (Counsellors to America’s Small Business) suggest that inventory control systems range from eyeball systems to reserve stock systems to perpetual computer-run systems. It concerned with three forms of inventory that is Raw materials, In-process or semi-finished goods, and Finished goods. The Eyeball System is the standard inventory control system for the vast majority of small retail and many small manufacturing operations and is very simple in application but in this approach the manager have to check the store and record any stock shortage which is very difficult. Reserve Stock (or Brown Bag) System is much more systematic than the eyeball system as it keeps full control over the stock and ensure that the new shipment should arrive just as the last of the reserve stock is being used. In Perpetual Inventory Systems a programmed instruction referred to commonly as a trigger, automatically transmits an order to the appropriate vendor once supplies fall below a prescribed level.

Floyd D. Hedrick (2006) suggests several proven methods for inventory control, which used for small business. The methods from simplest to most complex are Visual control, Tickler control, Click sheet control, and Stub control. Today as business grows computer-based system is used and is enhanced by the fact that company accounting and billing procedures can also be handled on the computer. Point-of-sale terminals relay information on each item used or sold. The manager receives information printouts at regular intervals for review and action. Off-line point-of-sale terminals relay information directly to the supplier’s computer who uses the information to ship additional items automatically to the buyer/inventory manager.

Large businesses nowadays are obliged to depend on accurate and up-to-date inventory systems by means of installing the RFID (Radio Frequency Identification) so they can have accurate inventory counts and to avoid the massive loss. The Freightliner-Western Star Trucks as the leading heavy-duty truck manufacturer in North America in a published case study (2008) has proven the reliability of the Motorola RFID. As a result the company quotes “The installed solution has already proven itself at the Portland plant. Labor costs associated with inventory control have been reduced significantly, as have data errors and mis-ships.” (Motorola Inc, 2008).

Tracking the case study- considering the uniqueness of each corporate- by installing the RFID system can prevent the errors and avoid several problems that where found in businesses and specially considering small businesses that lack the experience of decision making knowing their priorities in investment.

Jon Schreibfeder (2008) wrote “Effective Inventory Management allows a distributor to meet or exceed customers’ expectations of product availability with the amount of each item that will maximize net profits.” He thinks that there is a relationship between the inventory management and the distribution of goods and of course on the customer. Indeed he sees that customers may depend on you to have some of your slow-moving products always on the shelf just in case they need them. The availability of these products contributes to your reputation as a “reliable supplier” and helps to differentiate you from your competitors. It is true that this view shows the importance of having an effective inventory control system, but there are many other important views. For example in assembly line industry any shortage in the row material will cause shutting down the whole line, which means losing time, effort, and money.

A paper published by Claudio, Zhang and Zhang (2007) proposed a hybrid system, which combines a make-to-order push system with a make-to-stock pull system in food industry. The paper suggests “The make-to-stock strategy will be applied to those customers who come in requesting a product at the time of arrival, and the make-to-order will be applied to those customers who can give information in advance about their needs”. The hybrid system is designed to overcome the most important problems that faced food industry which is competition and how to deliver the service to the customer fast and in a good quality.

Edward A. Silver, (2005) published a paper with the title “Inventory Management: A Tutorial, Canadian Publications, Practical Applications and Suggestion for Future Research”. This paper first presents a tutorial overview of inventory management. This includes a categorization, by a number of dimensions, of inventory problems and associated models. Relevant Canadian contributions to fundamental and applied theory are listed within the dimensions. Then substantial evidence is provided of widespread Canadian applications of inventory management. The paper points out the continuing gap between theory and practice, followed by a number of suggested research topics to help bridge the gap.

Zipkin, P.H. had published his book “Foundations of Inventory Management” McGraw-Hill, (2000). In this book he says that “all organizations in any sector of the economy, Supply Chain Management, i.e., the control of the material flow from suppliers of raw material to final customers, is a crucial problem. The strategic importance of this area is today fully recognized by top management. The total investment in inventories is enormous, and the control of capital tied up in raw material, work-in-progress, and finished goods offers a very important potential for improvement.” This book suggests a wide range of different inventory models that can be used when developing inventory control systems to give a significant competitive advantage.

METHODOLOGY

The aims of this research experiment is to spot the light on the most common problems that face small businesses in keeping track of their inventories for a better resource management. It is going to highlight the reasons behind not applying inventory systems and gathering needed information about the business goals and resources to apply a suitable inventory system.

– Data Collection methods

Interviews

The research would conduct a live interview with a small business owner Eng. Ali Al-Asfoor from ARC fabrication and welding services. Which is a small establishment started 2008 providing fabrication and welding services for individuals and corporate.

Another interview would be held with Mr. Adel Al-Shaer an inventory manager at Hajji Hassan Al-A’ali business group. It is considered one of the largest business groups in Bahrain providing building and pre-cast services.

The third interview would take place with Mr. Hassan Ali an inventory manager at Al Jabiria Technical School, which is a public school as an example of inventory systems in the general sector.

Observation

A full working day was held at Al-Jabiria Technical school by the assistance of one of the teachers there to report the process of inventory tracking system.

CHALLENGES

Managing inventory by implementing inventory software is an essential part of successful and well-organized business organization, to manage inventory in more effective and efficient manner. In Today’s competitive business world, business managers should know the fundamental operations of the business better. Therefore powerful inventory software helps to easily manage total inventory and invoicing system to maximize the inventory management benefits. Powerful inventory tracking software allows you to access the relevant information of the products including:

Accurate information of received goods.
Movement of goods within or between locations.
Total sales or purchase order of goods.
Removal or other disposition of goods.
Status of remaining goods.
Information of inventory items.

If any organization does not implement an automated computerized system – manage and monitor the activities of their stock-ins and out; it cannot predict what items are available in stock and their precise quantities. Sometime, the working staff may forget or misplace the original price of the product causing them not to know the minimum allowed price to sell. This would definitely slow up the process of the business and this would affect other activities performance that cannot be controlled and lots of information that could not be clear or available, as the types of information listed above.

As a result of business analysis and workflow observations, unfortunately, many companies are facing problems with their current systems whether it was a manual or a half automated system. Our main concern is to build the new system as a solution for these problems.

Moreover, we had a number of meetings with some companies’ staff and representatives to discuss some ideas regarding the modifications and the improvements needed to be made. In addition, we had the chance to track the job workflow these companies, and at the same time we were able to take some notes while observing. As a result, we concluded that the major current problems are:

Many of the current manual systems contain some sensitive functions that were implemented manually, especially the calculation functions. As a result of this, accuracy leaking may appear during these mathematical processes. Consequently, using the mathematical functions in the designed system and turning all these manual process to an automated system will guarantee the desired accurate results. This case was obvious in Arc fabrication and welding services, which was relying on manual calculations that lead to data leakage which probably cause loss in amounts that would be increasing if an automated inventory system was not applied.
Approximately, all of the current manual systems did not support printed documents where the reports are printed separately by employees who are in charge of HR activities. This process leads to less efficient performance and wastage in employee’s time. Actually, printed reports and other documents are one of the main functions in any inventory system. Regarding user satisfaction, the new designed system will support documents printing process in such a way that ensures simplicity, reliability and efficiency. Adel Alshaer head of inventory at Hajji Hassan Al’Ali group said “We had to do the quantity surveying and register them into our system which is depending on spread sheets then deliver the calculations and then do reports upon the findings which needs extra effort and time from us.”
On the other hand, regarding the current automated systems, time is a critical limitation that faces both employees and managers. As a result of business analysis, many current automated systems contains some system debugs which need the system support team to be involved deeply in running the system functions. Thus, this involvement is a very time consuming task which may affect the system performance and cause some prohibited delays in the system’s critical processes. Therefore, there is an urgent and essential need for a dependable inventory system that would cost less time by being accurate with reduced technical debugs.

PROPOSED SYSTEM

The main goal of the system is to make a business able to have a closer look onto their stock, have more control on activities concerning maintaining of inventory, and controlling the related financial issues. This system is expected to solve the problems that any business may face while maintaining inventory. Plus, the system will assist the purchasing department to keep ideal level of stock and to avoid any financial expenses that may occur as result of implementing improper policy of maintaining inventory.

Listed below, some points that explain the main objectives and features of this system:

Manage the company inventory system in effective manner.
Facilitate to generate report to analysis total sales and purchase of the items.
Facilitate to keep the total sale/purchase order of the products.
Facilitate with customizable options that are easy to use.
Display inventory data in a friendly user interface way.
Keep track the customer records for customer relationship management (CRM).
Save time with automatically calculating totals and doing tasks.
Keep high level of security at shopping time, counting time and upon the display of information by providing accurate inventory quality information.
Provide information on the availability of stock items and the status of stock requisition by creating a series of databases that will store product and/or item information effectively.
Reduction of errors in transactions.
Reducing manual system usage.
Ability to run in different environments as a result of fast growing companies.

Contextual Diagram

The context diagram of any system shows the external entities and the flow of data between those entities and the whole system. The following figure1 shows this regarding the designed Inventory System.

The square is a representation of the system boundary. The system boundary defines what is inside and outside the system which is shown in Figure2.

The system basically will work like this:

First the supplier will receive an order. Any useful information about the order will be entered in the system by the user who will save it in the order database. Then the user should view the stock information which related to the order in hand by using a search engine throw the purchasing department. The search technique could be modified to fit the organization. If the stock is not available the order will be cancelled. If the stock is available an invoice will be created and give it or send it to the customer. Finally, when the customer pays the money, reports will be sent to the bank. The system also will have access to CRM database for customer relationship support. See figure3.

RESULTS

The system helps the organization to keep track on its suppliers, customers and the item movement; be it stock-in or out, or between different branches, or to-from the customers. The ICS gives business the ability to have a closer look to their stock, have more control on the activities concerning maintaining of inventory, and controlling the related financial issues. Plus, it provides the business with asset management solution to increase warehouse and business productivity.

ICS resolve also the following problems:

What you sold?
What you need to order?
What should be left in stock?

The impact of ICS use on the selected businesses:

As three companies were chosen, had several problems with their inventory and stock management; the problems were explained in the “Challenges” section. The proposed system suggested solutions upon the mentioned challenges and its suggested solutions should do as follows:

Provide a reliable and accurate inventory system to prevent data leakage. The proposed system suggests use of an integrated system that links the supplier, customer and bank. This starts from building data bases -if not available- using data warehouse. This would lead into more profit depending on the stock and supplies quantity as it is in Arc Fabrication and welding and Al’Aali group. Besides saving more items in stores to be used for the next years in the case of the school’s inventory.
Saving time and effort: This would obviously affect businesses and time is also money in the business world. Reports would be generated automatically upon using an automated inventory system. This would save employees time and effort providing accurate reports so that employees would be busy following up with other chores. Hassan Ali, inventory manager at Aljaberya School “We had to do summative reports per semester which needed a week at least to finish after doing all the calculations and data entry via spread sheets and creating the charts then data analysis and writing reports. We even find it difficult and some errors could occur due to lack of organization and experience in such subjects.
Elimination of technical errors: This would be clearly noticed in the replacement of an inventory control system instead of using spreadsheets in the case of AlA’ali group while this solution does not apply the other two companies as they were not using an automated system basically.

Other examples by effectively managing inventory using an ICS:

Xerox eliminated $700 million inventory from its supply chain.
GM has reduced parts inventory and transportation costs by 26% annually.
Wal-Mart became the largest retail company utilizing efficient inventory management.

“Wal-Mart’s system helps it maintain its signature “everyday low prices” by telling store managers which products are selling and which are taking up shelf and warehouse space. Inventory management systems are the rule for such enterprises, but smaller businesses and vendors use them, too. The systems ensure customers always have enough of what they want and balance that goal against a retailer’s financial need to maintain as little stock as possible. Mismanaged inventory means disappointed customers, too much cash tied up in warehouses and slower sales. Factors such as quicker production cycles, a proliferation of products, multi-national production contracts and the nature of the big-box store make them a necessity.”

Inventory software becomes a crucial part of small, mid and large business organizations to manage inventory system in accurate manner. ICS is designed to be useful for different users such as:

Retailers
Whole sellers
Service consultants
Manufacturers
Food service vendors
Loading places
Schools and colleges
Hotels
Restaurants and more…

The implementation of appropriate inventory control rules delivers the logistics operations of organizations a competitive advantage on the market place. This is also true for special types of networked manufacturing supply chains such as production networks which have complex topologies and increased complexity due to their logistic and production processes, information delays and the globalized markets.

Discussion

In our research we found that the business need to minimize the costs, and it is a vital managerial issue which can be solved with a good inventory control as Naples (2008) and Mawson (2009) suggest.

Sahin and Dallery (2009) considering in their research the errors in the inventory control systems and they label them as crucial and it is the idea which we agree and see it clearly in many organizations, whether they have an automated inventory control system or not. Therefore, reducing errors in these systems is a main objective of our system.

Jon Schreibfeder (2008) though that there is a relationship between the inventory management and the distribution of goods and of course on the customer. He said that “Effective Inventory Management allows a distributor to meet or exceed customers’ expectations of product availability with the amount of each item that will maximize net profits.” Since it was an important point, we try to include it in our system ICS by accessing the CRM database and view the customers’ records.

Gaining a competitive advantage is a strategic goal in this business environment these days. Claudio, Zhang and Zhang (2007) considered this issue in food industry; and by making our system suitable for different users and different types of organizations, it can be modified easily to reach the certain competitive advantage depending on the organization itself.

Conclusion

Inventory control system is a system to manage the inventory at stock (or out) in place of manual systems (or half-automatic ones).

The suggested system was developed around a group of agreed standards to fit a wide range of control stock of any organization. The system will help the organization to keep track on its suppliers, customers and the item movement; be it stock-in or out, or between different branches, or to-from the customers.

The suggested system is easy to navigate through because it has a simple graphical user interface, thus giving the user the flexibility in his work to enhance and increase his production, which is what the organization wants. Beside the fact that it needs a somewhat strong training, it is pretty much easy to use. Having an easy system, helps the employees do their work better which increases the effectiveness of their work; which by itself increases the effectiveness of the organization.

References

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[2] Alcuaz, Manuel L. Jr, (2008). Map insights; Retail problems, solutions, BusinessWorld,

[3] Ali, Hassan. (2009). Personal communication, Aljabirya Technical School, Bahrain.

[4] Alsahaer, Adel. (2009). Personal communication, Hajji Hassan Ala’ali Group, Bahrain.

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[17] Shahin, Evren and Dallery, Yves (2005). Improving the Performance of Inventory Systems Subject to Errors by Deploying the RFID Technology, Journal of Decision Systems, 14, 4, pp 427-449

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