Inventory and Distribution System at ARGOS and IKEA
Inventory control is a widely discussed subject in logistics and is a crucial element of the supply chain. Choosing the right inventory system model for your organization is, however, dependent on several crucial properties, and it is not a straightforward activity. This paper is divided into eight main topics. The first part explains briefly what inventory is and is basic principles. The second part discusses the various advantages of inventory control in two mostly similar but quite different scenarios that are in warehouses compared to distribution centers. Next, we tackle the various elements that make up a good inventory system. By this point, we have a clear understanding of inventory control. This brings us to two real-life examples of inventory and distribution models that two successful companies have successfully adopted in the form of ARGOS and IKEA. The importance of stock control is the next topic, followed by a discussion of one of the main models that organizations are currently considering: the Just-In-Time model. Finally, the inventory turnover is discussed, which is a crucial component in business operations.
Inventory Systems are very useful to businesses for tracking inventory. They are basically used by organizations dealing with product manufacturing or those companies that are in one way involved with the selling of goods, especially on a large scale so that they can account for all physical goods that facilitate the sale of any finished product. Inventory systems can be costly; hence, the size of a particular firm is critical in determining whether the firm is in need of such an investment. Large firms contain various components and require a system, which will assist the management to track their inventory. The justification of this paper is to provide a discussion of the various components of an inventory system, how they can be utilized in making them more effective as well as real life examples, which will assist in understanding how this has been achieved.
Inventory can be described as the physical stock of goods, other items, or resource kept in a storage facility with the aim of meeting the expected demand. Given the definition of inventory, a number of situations may be interpreted as inventory management problems, and they include manufacturing inventory, distribution inventory, and services inventory, as well as the retail inventory. According to Jacobs, Chase, and Richards (2013), manufacturing inventory refers to raw materials, which is expected to be used in the production finished products, component parts; for example, in an assembly plant, supplies for maintenance, repair, and operation (MRO), and work-in-process, which is also referred to as work-in-progress (WIP) or pipeline inventory. Distribution inventory refers to inventory in-transit, indicating that it is in motion somewhere in the system and warehouse inventory. Retail inventory is carried for direct sales to consumers while services inventory basically refers to any physical goods that will be sold and the resources or supplies required for the administration of the service.
Having understood what inventory is then one would wonder, why do we keep inventories? How is it beneficial? Well, the process of inventory is effective because when there is a fall in supply of various goods; inventory provides access to more supply to keep up with demand. The inventory also allows the flexibility of operations in an organization in that for every new range of products there are costs associated with its production. Inventory reduces these costs by ensuring that there is the least number of possible production setups when there is a stock in the inventory. In fact, the pressure to release goods is eased on the production system, thus causing longer lead time, which in turn allows proper planning in production, which ensures a smoother and lower cost operation by producing large lot sizes. The inventory also provides security for differences in the delivery of raw materials. When an organization orders raw material from its vendor, there are many inconveniences that could occur. These may include delays because of a shortage of the materials, delays in normal shipping time, and other unexpected and unplanned inconveniences. In addition, availability of ready stock caters for this anomaly. For an order to be placed, received and the good to be delivered, there are many small costs that are involved, including, phone calls, labor, and others charges. The larger the order is, the lower these costs are. Having a large stock of inventory allows the organization to take advantage of this large purchase order. On the other hand, inventory also has its disadvantages in that it takes space in terms of warehouses, and it costs money in terms of space, losses, and capital. Carrying cost could cost up to 30% of its value annually in some instances (Zipkin, 2000).
At this juncture, it is clear that there are a lot of variables and dynamics involved in the process of managing inventory, and that is where inventory control comes in. Under normal circumstances, control of inventory basically takes up 45% of 90% of all business expenses. Inventory control refers to the process of managing inventory that is in the warehouses or stockroom and to be efficient it basically requires that one knows what products are in the warehouse and how much they are, and being conversant with where each item is located in the warehouse, a situation that makes sure that every product in the warehouse remains in perfect condition as it was in the beginning, as well as storing the products in order to reduce the cost of filling orders. There is no fixed ideal inventory; the ideal inventory depends on the market and an organization normally uses industry figures to determine the ideal stock to maintain. Often, there is no justification in a large inventory because the turnover does not make the investment worth it and a low stock, on the other hand, means sales and profits alike will be low, and a number of products will not be able to meet the demand (Schreibfeder, 2009).
Benefits of Inventory Control
Inventory control is important because it aids in balancing the stock based on different properties in relation to demand. Similar goods may come in different sizes, packaging, colors, quantity, and many other properties. Therefore, good inventory control enables the company to identify the effects of each particular property and adjust the inventory accordingly. Another reason for inventory control is because planning helps in adding the movers and moving slow sellers. In fact, it is worth noting that some products will sell more than the others based on the different market dynamics; hence, the inventory control helps to manage this aspect. Inventory control also helps in getting the best rate of stock turnover for each item in the inventory and reduces expenses and markdowns. Finally, with good inventory control, an organization is able to maintain a good reputation for its customers by always having quality merchandise with the desirable properties (Prem, 2014).
Three main approaches used for inventory control are the eyeball system, Reserve stock/brown bag system, and perpetual inventory system. The eyeball system is mostly a large number of retail and small manufacturing companies. The person in charge stands in a central position and observes around. If he or she notices a product that is out of stock, they place an order immediately. The problem with this system is that a product that is doing quite well on the market might be out of stock for some time before the manager is able to notice. This means that the organization will be losing stocks for that particular period (Score, 2006). Also, in a small manufacturing company, the low stock may go unnoticed until when none will be left and there will be a problem with production until the issue is resolved.
The reserve stock system can be said to be more methodical compared to the eyeball system. In this system, a certain quantity of stock is reserved; on most occasions a brown bag is actually positioned at the back of the area where the stock is stored. After the last product of the remaining stock has been used, the stock in the brown bag is now used as open stock from which point an order is placed immediately. If accurate calculations had been carried out, the replenishing stock should arrive just in time before all the stock is depleted. For this to take place, it is important to be aware of the rate at which the product is being used and the time taken by one order cycle. Therefore, if for example 50 units are sold in a week and the order cycle delivery takes two weeks, the reserve stock would be made up of 100 units (50u x 2w). This is okay provided the cycle period is maintained. After a new order is received, the reserve stock is again replaced, and the cycle continues. It is a fairly simple and quite efficient system for almost any kind of organization. The differences in this system only occur in the management of the reserve stock (Score, 2006).
Perpetual inventory systems are the final group, and some types of the same are manual systems, the computer operated systems, and card-based systems. Computer oriented systems usually use a programmed instruction or message that is mostly called a trigger, which places an order to the right vendor when a particular item falls below the required level. The role played by each of the three systems is to count either the dollar use, unit use, or both of product lines and different goods. These facts aid in evading stock outs and maintaining the evaluation of product sales to determine where most of the emphasis should be focused (Score, 2006).
Warehousing and Distribution Centers
Warehousing and distribution activities have been in existence since the establishment of the production and transportation processes. In modern times, warehouses are normally used as points of storage along with the supply chain from the source of raw materials to the point of consumption. They exist due to the economies of scale in transportation and manufacturing. In fact, the distribution centers, on the other hand, can be described as a special form of warehouses whose main attention is on throughput. Products received from different manufacturers are put together and shipped depending on the customer’s requirement (Chopra & Meidl, 2003).
Warehouses normally have roofed spaces, equipment for lifting products, shelves, loading docks, and offices. In many cases, products are packaged on pallets and lifted onto racks so as to maximize the use of vertical space. Warehouse design may vary depending on the type of product that will be stored. For instance, the decision on whether to build up or build out or have a two docks or single dock layout is based on the expected design. Warehousing operations can be said to have four major roles. First, there is the process of accumulating also referred to as bulk-making, which involves putting together of the quantity of stock. Secondly, there is break bulking, which involves breaking down a large quantity of smaller portions. Thirdly, there is assorting, which involves collecting different products and fourthly, there is sorting, which involves separating products of different grades and quantities.
Improvement in supply chain management ensures that the warehousing activities are efficient by using the automation process with a very good example being the picker system. The ordered parts are transported by a conveyor belt to the place the assembly is taking place to make the packages for distribution. Contrastingly, a picker to order system requires order pickers which search for and retrieve every item that is ordered. Automatic tracking of thousands of stock products makes it possible to replenish the stock automatically. Warehouses can be classified into three categories which are public, private, as well as a contract (Lester, Giuliano, & Meyer, 2011).
Public warehouses have a concept similar to the for-hire carrier used for transportation. They are mostly used for bulk breaking and repackaging. A disadvantage of public warehouses is that users have no control, and this makes it take more time before customers get their orders. Special public warehouses like bonded storage refer to a scenario where the customer has to pay a certain fee before the order is released. They are conveniently used by US Customs to hold untaxed stock. Private warehouses are held by the person using them for a long time because it is expensive to relocate or abandon. Contract warehousing is where a third party is consulted, and the warehousing task is outsourced to them. It is an agreement between private and public warehousing.
Inventory control in distributed centers, on the other hand, is specialized on throughput. A common practice in recent times is cross docking. After being received at the receiving dock, products are transported to the shipping dock immediately, where they are distributed to the waiting vehicles, a situation that minimizes the time for storage. Unlike in warehousing, the products must not necessarily be put in shelves (Lester, Giuliano, & Meyer, 2011).
Critical Elements of an Inventory System
Companies usually employ different inventory control programs mainly depending on the type of business. However, irrespective of the type of program, it should contain the following properties to encourage its effectiveness.
Processes and procedures: clearly laid out and documented processes are the backbone of inventory control, and they should outline specific tasks and requirements. The inventory should only be managed and transactions processed using procedures (Score, 2006).
Training: Everybody involved in the process should have a good understanding of the system, its procedures, and what is expected of them. It is shared exercise for employers to provide training to new staff before they are stationed in their respective places.
Compliance: All non-compliance issues should be promptly addressed. Only documented processes should be in use at all times.
Cycle counts: To ascertain the accuracy of inventory and discover problems that might be stemming, the aspect of cycle counts should be taken as a routine.
Inventory metrics: It is best to measure the accuracy of inventory activity and transactions to minimum standards. This measurement should be in turn used for process improvements.
Employees: Employee turnover should be monitored especially in positions that carry out inventory transactions. Having had less experience, newer employees may fall victim to various mistakes. Therefore, the underperforming employees should be retrained or moved to positions that do not affect inventory accuracy.
Storage: Stock should be well organized and marked to prevent damage or errors. Product may be declared out of stock while it is available due to disorganization. In fact, damages, on the other hand, cause huge losses, especially when spoiled goods have to be disposed of. An effective warehouse organization goes a long way in inventory control.
System: It is easier to control and manage inventory when only one system is used for keeping records. Transactions should move in a smooth path from order to warehouse and transportation management systems.
Company mindset: quality and inventory accuracy should be taken up as everybody’s responsibility and not just as the responsibility of the employees in charge of transactions. It is that right mindset among all levels of management that ensures success.
IKEA Inventory and Distribution System
IKEA was formerly established in 1943 in Sweden and since then it has offered home accessories and furnishings of high-quality services at affordable prices for the majority of the population. It operates with the vision of creating a better life for its customers. The business model is set with the idea of offering a diverse range of well-designed and operational furnishing home products that are very cheap such that the majority of people can afford them (Ikea, 2010).
Its supply chain is globally spread with increasing sales in most of the major regions of the world. The approach has made its supply chain very complex due to the fact that it has very many stores and outlets across the world. It basically has over 1200 suppliers in 55 different countries and the stores being supplied from 31 central distribution centers from different countries or even directly from its suppliers (Ikea, 2010). Therefore, this has made its distribution channels and inventory system very complex. When it is looking for manufacturers, the company tries to source those who can produce their products at the lowest price possible but maintaining good function ability and design. Some of their producers are from Swedish forests while others are in China, Germany, or Poland (Bartlett, Dessain & Sjoman, 2006).
To support its distribution, it has established local offices nearest to its suppliers. This has also proved to be a good way of creating and maintaining good business relations between the involved companies. In addition, the employees responsible for trading services can make several visits to the supplier’s offices and closely follow up on the production process allowing the testing of new ideas and making frequent control checks. The offices have also been entrusted with the duty of surveilling the working conditions, the external environment around the factories, and ensuring suitable working conditions for other employees and social conditions. All those activities should all be in accordance with IKEA’s code of conduct (Jonsson, Rudberg, & Holmberg, 2008).
To overcome the difficult situation of stock control, IKEA has established a program with the aim of achieving better control of its supply chain while still upholding performance in its delivery service and pricing. A global planning concept that is still being implemented was set up. It works on the principles of maintaining a mutually integrated planning process and centralized planning organization. In addition, it also focuses on data quality and the use of advanced software support (Ikea, 2010).
Apart from achieving this, IKEA also has the aim of minimizing the effect its production and distribution has on the environment. The general principle of doing this is that it calculates as accurate and exact as possible the number of products needed to satisfy the market demand. This eliminates any unnecessary warehousing costs by a great deal. The secret being that, having a global distribution network that is combined with large volumes of production put in flat packages will ultimately translate into lower costs. Transporting flat package minimizes waste of space, thus making it possible to transport more products at any given time. The initiative increases efficiency altogether. In addition, most of its products in the next three years will be transported by rail as opposed to the road as has been done traditionally (Lief, 2008). Therefore, this aspect will enable them to monitor their environmental work as well as reduce the use of fuel, which will boost both cost and environmental objectives.
ARGOS Inventory and Distribution System
Over the years, ARGOS has become UK’s leading merchandise store due to their ability to provide customers with a mix of choice, value, and convenience. A catalogue of over 18,000 items is available to all customers across every request and conveyance channel. ARGOS has been able to maintain extraordinary value for customers by reinvesting purchasing and inventory network efficiencies in lower catalogue prices for their customers. ARGOS shopping experience is further strengthened by the integration of more than 700 stores with their website and telephone channels. All their energies have not been in vain given their growth in sales by approximately 4% to reach 4.3 billion pounds from 2007-2008 ((Rogers and Buckland, 2009).
Argos boasts a fully integrated multi-channel system where customers can search and select products from the internet, telephone, or in-store. They can also order and pay for the same and wait for timely delivery. Before the revamp of their system, ARGOS was faced with a number of challenges that faced their brand. Most of the sales made by ARGOS are from slow moving products involving longer supplier lead times, and they have a significantly high Christmas sales peak. ARGOS inventory management systems were outdated and unreconciled with their centralized server based merchandising, forecasting and replenishment system created up to 20 years back. A key audit of the supply chain capabilities prompted action in a bid to develop a solution that would allow ARGOS to improve their business model. ARGOS started the inventory and distribution transformation process back in 2001 with a key focus on replenishment and core operations. ARGOS formed a partnership with Accenture and Oracle to integrate business expertise, new technology and improve management expertise. Project RACO (Replenishment and core operations) focused on the use of technology to bring significant benefits in the Argos supply chain (Rogers and Buckland, 2009).
ARGOS transformation was able to bring about the integration of planning and forecasting systems by introducing new demand forecasting and stock planning apparatus in 2003. This focused on enhancing category management and corporate planning crucial to future stages, and to guarantee business was working in an end-to-end style in front of replenishment, and forecasting accuracy, risk reduction to the general program because business change could be overseen in small proportions. Finally, was to allow implementation lessons on aspects of lower risks. The transformation also brought about a stable core merchandising and operation system by acquiring new merchandising systems in 2005 developed to be a flexible basis for future growth. Finally, the solution involved the development of world-class replenishment abilities by switching from reactive to proactive inventory management as well as advancing from checking every product line weekly to daily alert based workflows.
Oracle Retail Advanced Inventory Planning (AIP) improved the development of sensible, forecast-oriented, constraint-based replenishment and allocation plans across the inventory and distribution chain and transformed these plans into transfers and orders. It consolidated time-stage replenishment and assignment calculations to deliver a receipt arrangement taking into account demand forecasts, replenishment conditions, and stock accessibility at the various stages within the supply chain. AIP coordinates with applications over the business. Thus, issue determination requires learning of the entire inventory network. New procedures can highlight generally concealed issues in related operational ranges. Importing items from the Far East gives lower unit costs, but the augmented Supply Chain drives extra stock into the system and may decrease data quality. This brought about undesirable manual procedures because of the rate of extension of Far East sourcing inside of the business. Within the inventory network, the significance of value data implied that hierarchical structure needed to adjust. ARGOS now has an implanted consistent change cycle, which captures data and supply chain execution, enhances AIP, and endeavors to reach accessibility and cost sparing targets. (Rogers and Buckland, 2009)
Managing change was crucial and among the hardest tasks because since it involves trying to win people’s hearts and minds. Realization of benefits is also highly dependent on it. For the highest benefits, Argos dealt with supplier and distribution center challenges. Supplier successes included improvement of first time item and pallet presentation from 69% to 99%, a shift from due week delivery to due day delivery, and sharing of the supply performance of suppliers enabled Argos to focus on improvement and decrease the necessity for security stock. On the other hand, distribution successes included the removal of the need for expensive rework through right first time presentation of pallets. In fact, the suppliers not holding fast to delivery rules were pursued or rejected adding to accomplishing palletization and marking compliance, expanded distribution channel profitability. In addition, the goods-in proficiency expanded by more than half, and 100% of products in are presently physically receipted on the system upon the arrival of delivery. Training trading teams were also beneficial in that it ensured business status and execution was tracked to guarantee that teams are completely prepared for the next period of procedures and frameworks. An improvement in the organizational structure was also realized where new job positions are customized around best processes. Customers also benefitted from a revamp of the store layout of all ARGOS stores where orders are now ordered by the rate at which they sell hence faster selling items are more accessible for delivery to customers. Reorganization of the stockrooms also freed up space in small stock rooms, reducing the time taken to serve customers (Rogers and Buckland, 2009)
There are important supply chain lessons learnt from the ARGOS inventory and distribution system. First, it is crucial to understand your supply chain strategy right from the beginning. Secondly, conveying the vision ought to be driven by a convincing advantages case, progressing official sponsorship drives results, keeping up the engagement of a wider stakeholder group. Thirdly, the governance is an important competence, and it is important to proceed with caution when managing cost versus time versus quality. Nevertheless, it is difficult to test each situation, at one point it is ideal to go live and drive out further chances to move forward.
Benefits of Stock Control
Improves Inventory Accuracy
Ensuring accurate inventory details have a significant impact on the business operations. Stock levels also influence restocking, purchasing, and sales. The purchasing department also depends on the inventory level records, before ordering more stock; hence, having accurate records ensures smarter decisions.
Delivering the correct products for the first time
On the off chance that you dispatch the wrong merchandise to your clients, your business may acquire numerous extra costs. First, the error should be corrected by generally re-sending the right product at your expense. This likewise generally incorporates paying extra cargo charges. Labor costs increase both in the stockroom and at the client service desk as they process the return and reshipment. Customer loyalty may also be lost. Furthermore, sending the wrong products leads specifically to wrong stock levels, which can bring lost sales and poor buying choices, all of which influence profits. Stock control prevents these shortcomings. The barcodes greatly improve stock accuracy since manually recording item details increases the chance for errors.
Inventory systems should be able to scan, verify, update product information, and post the transactions in real time. This ensures up to date records and increases the accuracy of data. Some inventory systems use a “batch” style solution where transaction information is stored in wireless scanners from which the staffs later synchronize the information to a handheld device. An error made while scanning means the system will not verify until the handheld device is synchronized with the system and this can lead to poor data or untimely information.
Serial Numbers and Lot Tracking
Recording serial numbers and tracking lot levels manually can lead to many inaccuracies. However, scanning bar codes and serial information ensure accuracy by a significant mile.
Simplifying work processes
Simplified work processes lead to improved productivity and efficiency. The lack of inventory control leads to a lot of time wastage before information passes from one employee to the other. Manual processing also leaves a lot of room for errors since the efficiency of machines is incomparable to human efficiency. Inventory management for a big firm requires a lot of memory that is impossible to be processed or stored by a single individual whereas an inventory system acts as one common brain. At the point when the ability to post exchanges to the bookkeeping framework starts in the distribution center as exchanges are being finished, operations in both the distribution center and office are streamlined and simplified (Accu-Dart, 2009).
Simplifying operations additionally apply to the usage and set-up of a given stock control framework. By using a solution that incorporates with bookkeeping framework, stock data are upgraded straightforwardly leaving no need for a different database to introduce. Some stock administration frameworks depend on a different database that communicates with the bookkeeping framework to prepare transactions. However, if a mistake happens, reconciling the two sets of information can be to a great degree tedious and disappointing. By developing a framework that gives a direct combination, all exchanges are posted directly to the accounting system. The staff can keep on using the accounting program and process stock exchanges at the same time.
Save time and money
This is probably the main reason for adopting an inventory control system. Without one, many hours are spent while conducting operations manually compared to what the system could have achieved in the same period. Using a system, processes are done at the warehouse cancelling out the process of doing the same work manually. Transactions can be instantly recorded and synchronized with the accounting system (Accu-Dart, 2009)
Just-In-Time Stock Distribution (JIT)
The roots of the Just-In-Time concept can be traced back to Japan. It started during the manufacture of the Toyota brand. JIT is a system where the company starts its manufacturing or purchasing process once an order for the product is placed thereby eliminating the need for inventory. The entire thought depends on the expression provide the products just in time as guaranteed when the request is set by the client. A reverse system of the JIT model is the same as the just-in-case model where the goods or products are manufactured and warehoused just in case the user requests the same. JIT system recognizes the constraints present in the value chain and eliminates the production waste of the system, but at the same time expanding the throughput. However, simple and interesting the JIT model sounds, it requires a great deal of coordination with the supply chain to ensure a timely schedule (Kootane, Babu, & Talari, 2013)
The entire idea of the JIT is separated from customary preparations frameworks utilizing push versus pull frameworks of production. The concept of Just in time production is based on the concept of pull production, which does not involve inventory. There are solid society perspectives connected with the rise of JIT in Japan. The improvement of JIT inside of the Toyota creation plants did not happen autonomously of these solid social impacts. The Japanese hard working attitude is one of these elements. The hard working attitude rose not long after World War II and was seen as a basic part of the Japanese monetary achievement. It is the prime element behind the advancement of unrivaled administration strategies that are best on the planet. The Japanese hard working attitude includes the accompanying ideas.
Workers are profoundly motivated to look for steady change. Albeit high benchmarks are at present being met, there exist considerably higher standards to accomplish. Companies concentrate on combined effort, which includes the consolidating of talents and sharing information, problem solving abilities, thoughts and the accomplishment of a common objective. The work itself outweighs recreation. It is not uncommon for a Japanese worker to work 14-hour days. Employees have a tendency to stay in one organization over the span of their profession range; this permits the open door for them to sharpen their aptitudes and capacities at a steady rate, while offering various advantages to the organization. These advantages show themselves in representative reliability, low turnover expenses, and satisfaction of organization objectives. In addition, there exists a high level of gathering awareness and feeling of value in the Japanese world (Kootane, Babu, & Talari, 2013)
Advantages of JIT
JIT reduces inventory levels, which in turn translates to low investment in inventory. Adoption of the JIT model has been found to reduce inventory levels to a state of high turnover ratios. JIT lead-time reliability is highly improved because it requires a short delivery lead-time. This eventually translates to a reduction in the need for safety stock. Short lead times and setup times improve scheduling flexibility. Many companies using JIT have also reported high quality levels because it is easy to manage small order quantities. JIT has many financial benefits, including low investment in warehousing costs, reduced risk of obsolescence in inventory, reduced scarp, and rework, low paperwork, as well as reduced material costs though quantity purchases (Kumar, 2010)
Limitations of JIT
Despite the many benefits that JIT possesses, a number of limitations that could hinder the flourishing of the JIT model has also been identified. Cultural differences have been cited as a possible limitation, and this is made harder by the fact that it is difficult to measure. JIT success has been widely linked to the cultural properties of the Japanese. Lack of safety stock has also made it difficult for companies to adopt JIT since safety stock provides room for fluctuations in demand. JIT is characterized by a high level of employee involvement, which is not the case in western countries. An implementation of the same would require largely empowering the workforce in decision-making in JIT limited to the Japanese working environment. Loss of team and individual autonomy has also been a limitation in the implementation of JIT. This has been attributed to limited time between recurring activities. The success of JIT has also been said to be favorable in craft industries, thereby cutting off a significant number of industries (Kootane, Babu, & Talari, 2013)
A firm’s efficiency in its operations is commonly measured using the inventory turnover ratio. Minimized inventory holdings reduce overhead costs and the profitability performance of the organization. Normally the inventory turnover ratio should be calculated by dividing the quantity sold by the quantity at hand. Financial statements; however, only capture monetary valuations thus, external valuation of inventory turnover depends on the valuation metrics recorded under GAAP. Despite it being theoretically better to take an average of the “snapshot” balance sheet amounts for you to benchmark the cost of goods sold for the entire year, some analysts just utilize the ending inventory number. Often, the inventory turnover ratio is translated as a measure of the number of times the company sold through its stock during the year. Therefore, a ratio of 4.0 would imply that the organization sells through its stock quarterly. The inventory turnover ratio is in fact often inverted and multiplied by 360 to estimate the day’s sales were sitting in inventory. Mostly, two computational flaws lead to the misestimating of the inventory turnover ratio. First is utilizing sales revenue instead of the cost of goods sold in the numerator. Secondly, it is the failing to account for the off-balance sheet LIFO reserve in the denominator. Both mistakes result in an overstatement of the actual turnover (Hansen and Mowen, 2006)
As evidenced from the above analysis, inventory control has proved to be an important feature in logistics and supply chain management. Although there are shortcomings and numerous challenges involved in inventory control, the benefits by far outweigh the cons. In fact, choosing the right inventory model to use, however, requires a good understanding of your supply chain among other factors. Valuable lessons on the same can be obtained from the ARGOS and IKEA model examples, which represent real life examples of the importance of inventory control and choosing the right models. It is hard to ignore the monetary savings involved in the same. It is important to recognize the elements that make up the framework of a good inventory system for practical use in work environments as well as understanding the benefits of the same. Just-In-Time distribution model is an important model, which can go a long way in improving profitability in businesses if applied in the right way. Its major constraint seems to be cultural differences in the nature of the working philosophy in Japan compared to other regions, but this can be emulated, especially in businesses that are just starting up.
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