When there is fluctuation in customer demand, it is necessary to find the right time to adapt inventory policy to the change. For instance, an airline company decides to sell old aircrafts to the foreign countries. If the service providers of that airline company does not take action to adjust their stock levels conforming to any decrease in demand for relevant components, then those excess inventories most likely become obsolete. In such cases, optimal timing of inventory policy adaptation is important. Because if policy adaptation is early before any drop in demand, then there is rise in backordering which eventually decreases the stock level. When the adaptation is late, then it most likely leads to increase in obsolescence (Pince et al, 2010). The obsolescence issue has great impact on inventory costs which might be challenging to correct it by implementing simple adjustments (Song, 1996).
One of the inventory approaches called ABC model is used in order to reduce excess inventory and obsolete stock. A case study that has done by Larry (1983) to implement computer generated ABC model. Objectives of the study was including operational cost to the ordering process, developing inventory performance indices, and creating coherent procurement strategy with the ABC model. By the end of the study, developing inventory system established upon ABC model has decreased both existing inventory level, and stock outs. Moreover, another study in the literature suggests that ABC model is comprehensible and implementable inventory tool. Since concentrating on raw materials that have high dollar usage, improving availability of materials, lowering stock outs, and reducing obsolete items become achievable by executing ABC model (Thomas et al, 1998). Therefore it means that ABC model classifications should be always updated.
Furthermore, inventory management system called inventory quality ratio (IQR) uses ABC model as well as historical data and future customer requirements. This ratio measures performance of any segment related to inventory like suppliers, product lines, as well as various inventory locations. In addition, it monitors stock movements and identifies both shortages and excess stocks. IQR is easily connected to manufacturing resource planning (MRP) and enterprise resource planning (ERP) systems, as well as able to identify inventory problems and produce correct solutions (Matson, 2007). IQR was used by a company which had raw material inventory turns around 30 times annually. The company changed its existing performance parameters from 4-12-24 weeks to 1-2-6 weeks which eventually helped them to achieve raw material inventory turns up to 40 times annually (Grossard, n.d). Another inventory control technique called ‘red tag’ is tagging old stocks with red colour stickers including review and tagging date in order to identify obsolete stocks easily. Afterwards, those items should be moved to the isolated part of the warehouse. If those items are not used after the review date, they become liquidated. For instance, ‘red tag’ technique has mainly been used by automaker companies of Japan such as Toyota in order to create new area for useful inventories in the warehouses (Thummalapalli, 2010).
Poor forecasting may cause excess inventory, underused resources as well as customer dissatisfaction. Therefore, sales and operations planning (S&OP) is critical subject to focus for inventory managers. The process of sales and operations planning generates better results in forecasting since sales and customer feedbacks are the main data for demand estimation. For instance, if there is any change in the buying behaviour of target customers or any rival company releases new product to market are important information to take into account since they may affect demand negatively which eventually may lead to excess inventory (Aparajithan, 2011). Another study (Pay, 2014) emphasizes a close link between sales demand and operation performance which have direct influence on inventory performance especially on obsolete stocks, profitability, as well as customer demand fulfilment. The study represents research result of the Aberdeen Group which explains that despite of organization size, sales and operations planning can rise profitability by approximately 40%.
Sales and operations planning plays critical role in utilizing on hand resources such as raw materials, and capacity of the company. For instance, when items are not on the right location at specific time, then it may cause markdowns, excess inventory, loss in sales, as well as stock outs. Thus, S&OP includes internal factors like cost planning, forecasting, and risk management in order to determine right location and right product to manufacture (Aparajithan, 2011).
Furthermore, auto-replenishment process is one of the ways to decrease obsolete stock level since it helps to control uncertainty of the supply rate. One of the mostly used types of replenishment systems is vendor-managed inventory (VMI). Vendor-managed inventory helps to increase the quality of information flow between suppliers and customer which has positive effect on decision making. It also controls stocks of the customers because of accurate information flow and responsible for overall replenishment arrangements. Information flow includes data about stock levels, sales demand level, schedules of delivery, and performance rates (Groning et al, 2007). In classical approach, customers and suppliers are autonomously implement demand forecasting which means customers are specifying quantity of orders, while quantity of production are determined by suppliers (Cohen, 2002). Therefore, VMI system is better in which suppliers determine both quantities by having accurate information about their customers. Thus, obsolete stocks and stock out issues become reduced.
In addition, another replenishment system called Kanban technique which belongs to Japanese lean production philosophy. The main idea is that delivery of raw materials should when customer is lacking particular component in order to replenish the stock and avoid excess inventory. Within the production, there are specific cards as sign of missing components, then suppliers take action to replenish that specific quantity (Apreutesei et al, 2010). As a result, Kanban system helps companies achieve accuracy in overall inventory management.
AUTHOR: Leman ISMAYILOVA
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