Five Techniques for Managing Inventory in the Precision Industry

Written by Chia Pei Ying, DPSM

by Chia Pei Ying, DPSM

Five Techniques for Managing Inventory in the Precision Industry

Written by Chia Pei Ying, DPSM

by Chia Pei Ying, DPSM

by Chia Pei Ying, DPSM

Precision manufacturers require precise, fact-based intelligence to avoid costly delays and downtime. Maintaining safety stock is an essential part of capturing opportunistic sales, retaining business and making customers satisfied for businesses. One of the biggest and most important challenges many businesses will face is how to successfully manage and control their inventory. The common reason faced by the manufacturer is delay shipment which lack of proper planning for inventory stock control. The safety stock level is essential especially for those products with long delivery lead time.

Inventory management is managing of inventory and stock. As an element of supply chain management, inventory management simply refers to controlling and overseeing ordering inventory, storage of inventory, and controlling the amount of product for sale. For Precision Industry, this involves the overseeing and controlling of inventory such as product and raw material of the organization. The fundamental goal is to manage inventory at balanced levels at all times without ever having too much or too little product in stock.

The five techniques for managing inventory are

  1. Demand Forecasting
  2. First-in-first out (FIFO)
  3. ABC Inventory Analysis
  4. Just In Time Inventory Management
  5. Cycle Counting

Demand Forecasting

Demand plays a vital role in the decision-making of business; especially for Precision Industry which requires accurate and precise manufacturers. The effectiveness of a decision taken by purchasing managers depends on the accuracy of the decision taken by them. Many decisions of business depend on demand such as production, sales, employee requirement and others. Forecasting is the necessity of business at an international level as well as domestic level due to material lead time.

Demand forecasting may be a systematic method that involves anticipating the demand for the merchandise and services of a company in future under a set of uncontrollable and competitive forces. It helps company to reduce risks involved in business activities and make important business decisions.

Demand forecasting play a crucial role, especially for purchase of raw material with longer lead time. Apart from this, demand forecasting provides an insight into the organization’s capital investment and expansion decisions. From production planning to inventory management to entering a new market, demand forecasting will help to make a better decision for managing and growing your business. In term of production and inventory control, increased accuracy is likely to lead to lower safety stocks.

First-in-first-out (FIFO)

First-in-First-Out (FIFO) is an inventory management system in which the first or oldest stock is used first and the stock or inventory that has most recently been produced or received is only used or shipped out until all inventory in the warehouse or store before it has been used or shipped out. When a warehouse employs FIFO, whenever a new inventory is added, the oldest stock is made most accessible so as preventing the inventory from being outdated. An organized warehouse is an essential component to manage a FIFO system. For businesses in Precision Industry with a different spectrum of product types, especially for items with changes, shelve life, or even with a specified expiry date FIFO is a valuable strategy.

Practicing FIFO method can be helpful while the year-end accounts are being done as it acts as a key tool in calculating the value of inventory. But there will be a difference when practicing FIFO and LIFO for the same inventory, if the unit costs have increased, as per LIFO method, the cost of goods sold will be larger and the ending inventory will be smaller as that compared with FIFO. The order in which the costs and the physical units are removed from inventory is independent of each other.

ABC Inventory Analysis

ABC analysis is an application for classifying inventory items based on the items’ consumption values. It has become an indispensable part of a business and the ABC analysis is widely used for manufactured products, spare parts, components, finished items and assembly items in Precision Industry.

Some products need more attention than others. Use an ABC analysis to prioritize your inventory management. Separate out products that require a lot of attention from those that don’t. Do this by going through your product list and adding each product to one of three categories:

A – Items categorized under A are goods that register the highest value in terms of annual consumption. It is interesting to note that the top 70 to 80 percent of the yearly consumption value of the company comes from only about 10 to 20 percent of the total inventory items. Hence, it is crucial to prioritize these items; require regular attention because their financial impact is significant but sales are unpredictable.

B – Items in category B fall somewhere in-between that have a medium consumption value; about 30 percent of the total inventory in a company which accounts for about 15 to 20 percent of annual consumption value.

C – The items placed in this category have the lowest consumption value and account for less than 5 percent of the annual consumption value that comes from about 50 percent of the total inventory items. It requires less oversight because they have a smaller financial impact, and they’re constantly turning over.

This method helps businesses to maintain control over the costly items which have large amounts of capital invested in them. This prioritization of attention and focus is vital to keep the costs in check and under control in the supply chain system.

Just In Time Inventory Management

Just in time (JIT) inventory management is a technique to increase production efficiency and decrease waste by receiving goods only as they are needed in the production process, thereby reducing inventory costs. In other words, JIT inventory refers to an inventory management system with objectives of having inventory readily available to meet demand, but not to a point of excess where you must stockpile extra products.

In Precision Industry operates using JIT inventory is which materials are purchased and units are produced only as needed to meet actual customer demand. Just-in-time inventory management helps you to manage cash flow. Before implement (JIT) inventory management system into your business operations, you need to conduct thorough research into customer buying habits, seasonal demand, and source for reliable suppliers and channels of transportation to minimize risks and screw-ups. This approach to managing inventory is an essential element in the philosophy of lean manufacturing, which is based on using information and strategy to run a business as efficiently as possible.

Cycle Counting

One of the key methods of managing inventory in Precision Industry is cycle counting. Cycle counting is a common inventory counting solution that allows businesses to count a number of items in a number of areas within the warehouse without having to count the entire inventory. As companies assess and modify their cycle counting practices, they’re finding more ways to improve inventory accuracy, fill rate, productivity, and profitability. The advantage is that you can focus on fast-moving product, high-value product or high-concern stock keeping units (SKUs) such as upcoming sale items.

A well-executed cycle counting reduces the need for the costly process of shutting down the manufacturing process in order to count inventory. Cycle counting can also result in more accurate interim financial statements since inventory is a key part of a company’s current assets and the calculation of its cost of goods sold. There are financial implications to cycle counting. Some industries require periodic 100% counts. These are done through perpetual inventory count maintenance or though full-building counts. This helps measure the success of your existing processes and maintain accountability of potential error sources.

Conclusion

Managing inventory is one of the largest aspects of business operations, making it crucial to have an effective system in place to successfully keep it controlled. A healthy inventory flow enables sale closings, customer shipments, and productive work for employees in Precision industries. An organization’s financial performance and position in the market depend heavily on the organization’s ability to manage inventory effectively and efficiently.


References

Dear system. (2018). “15 Inventory Management Techniques You Need to Use Today”. Retrieved from https://dearsystems.com/inventory-software/blog/inventory-management-techniques, accessed 12.12.2018.

Kalpana, R. (2018). “Methods and Techniques of Inventory Control Business Management”. Retrieved from http://www.businessmanagementideas.com/business-management/methods-and-techniques-of-inventory-control-business-management/542, accessed 12.12.2018.

Pepperdine. (2018). “5 Inventory Management Techniques to Implement in Your Business”. Retrieved from https://mbaonline.pepperdine.edu/blog/5-inventory-management-techniques-implement-business, accessed 12.12.2018.

Terese Ong Yee Chiat. (2018). “Five Important Techniques for Effective Inventory Control”. Retrieved from SIPMM: https://sipmm.edu.sg/five-important-techniques-for-effective-inventory-control, accessed 12.12.2018.

Veron Wong Sook Wei. (2018). “Effective Techniques for Inventory Stock Control”. Retrieved from SIPMM: https://sipmm.edu.sg/effective-techniques-inventory-stock-control, accessed 12.12.2018.

About the Author: Chia Pei Ying has substantive years of experience in the field of procurement and supply management, specifically in the precision manufacturing industry. She is a member of the Singapore Institute of Purchasing and Materials Management (SIPMM). Pei Ying completed Diploma in Procurement and Supply Management (DPSM) course on December 2018 at SIPMM.

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