Inventory Management: Costs, VMI, JIT, MRP, and DRP
Inventory Management Strategies and Systems
Inventory Holding Costs
When maintaining inventory, organizations incur various costs:
- Holding Costs: These include storage, handling, insurance, taxes, obsolescence (products becoming out-of-date), theft, and interest on funds financing the goods. Holding costs increase as inventory levels rise and are commonly assessed as a percentage of unit value.
- Ordering Costs: These involve placing an order, including expenses related to personnel in a purchasing department and communications.
- Stockout Costs: These are sales that are lost, both short and long term, when a desired item is not available. They also include the costs associated with back-ordering the missing item or expenses related to stopping the production line because a component part has not arrived.
VMI vs. JIT
VMI stands for Vendor Managed Inventory.
Both JIT (Just-In-Time) and VMI help keep the risk on the suppliers. However, VMI may lead to increased costs payable by the buyer as a result of bargaining on inventory management. The specific advantage of JIT over VMI for the buyer is that it reduces the supplier’s bargaining power by the time of signing the contract, since all terms and conditions are planned in advance and incorporated in procurement documents. The success of JIT management rests on good procurement planning.
Improving Inventory Management Strategies
Managers can improve their inventory management strategies by:
- Securing top management commitment.
- Conducting ABC analysis of all inventory items.
- Improving demand forecasting with better techniques.
- Implementing inventory management software to track sales by item, costs, and length of time in inventory.
- Utilizing MRP (Material Requirements Planning) and DRP (Distribution Resource Planning) systems.
MRP vs. DRP Systems
MRP – Material Requirements Planning:
- Deals specifically with supplying materials and component parts, whose demand depends on the demand for a specific end product.
- Consists of a set of logically related procedures, decision rules, and records designed to manage inventory.
DRP – Distribution Resource Planning:
- Applies MRP principles and techniques to the flow and storage of finished products destined for the marketplace.
- Begins with customer demand.
- Develops a system-wide plan for ordering the necessary finished product and a time-phased plan for distributing product from plants and warehouses.
Relationship to JIT
In a JIT system, purchasers include suppliers (vendors) in the planning process by sharing information regarding sales and production forecasts so that suppliers (vendors) then have a clear idea of what their customers need. It’s related to MRP and DRP – as MRP is taking care of demand for specific end products and DRP with customer demand. So, everyone is working in concert/harmony with suppliers.
suppliers = vendors = dobavljači
Warehouse as Gathering Point vs. Break-Down Facility
Warehouse as a gathering point:
- Small quantities of multiple products can be received via less-than-full-load (LTFL) shipments.
- Shipped out to the customer in full-load (FL) quantities.
Warehouse as a break-down facility:
- Large quantities of goods come via full-load transport.
- Shipped out to customers in less-than-full-load shipments.