An effective inventory manager ensures material and spares are available to cover operational and maintenance requirements — and at the same time — taking into account holding stock has an effect on organisational working capital.
Inventory management involves planning and control of materials.
When planning availability, the inventory manager seeks to answer questions of what, how much, and when to order.
The answers can be a result of a visual inspection of physical inventory locations or a clerical assessment of inventory levels using stock records. Clerical assessment may be a manual review of stock card or computer-aided assessments.
The consumption pattern of inventories often fluctuates and in most instances, the fluctuations cannot be predicated accurately. The fluctuations in consumption fall in four categories.
It might be seasonal, depicting sharp rises and steep falls in between; clothing demands follow such a trend with winter clothing reaching peak demand just before the season the same way summer clothing does.
Some products have a rather steady pattern that will almost be represented by a straight line; basic necessities normally follow such a pattern.
Some products have ever-rising patterns or the opposite trend. New products normally follow the two trends for some time. These new products may conquer the market and demand will rise for a significant period. The opposite happens to those that fail to thrive in a new market.
In addition to the demand patterns of the product, inventory managers also need to understand the product specific characteristics so as to make informed decisions.
Some inventory items are more important than others and management focus differs accordingly. Selective inventory control is therefore employed. Some techniques employed include:
Pareto’s law: this embraces the phrase of the vital few and trivial many. The trivial many account for 80% of inventory items with the vital few accounting for 20%.
The phenomenon was discovered and popularised by a German economist Pareto. It also applies to inventory value where 80% inventory account for 20% value and vice-versa.
ABC analysis: also known as “Always Better Control”assesses the annual value of consumption of a product. ABC analysis does not relate to unit value of products, but the overall total value per annum of a single product.
H-M-L (high, medium, low) classification: assesses unit price of material in contrast with the ABC analysis and does not take consumption into account.
V-E-D/N (vital, essential, desirable/necessary): is concerned with the critical nature of the component or material, with respect to production or operations.
S-D-E (scarce, difficult, and easy): relates to problems associated with availability when purchasing.
GOLF (government, ordinary, local, foreign): refers to the source from which material is obtained.
F-S-N (fast, slow, and non-moving): refers to the volume of issues from stores.
S-O-S (seasonal, off-season): applies to seasonality and applies mainly to commodities.
X-Y-Z: a technique used to relate to inventory value of items stored. X relates to the high-valued and Z to low-valued items.
There is no rule of thumb to determine stock levels or determine the strategy to be employed in stocking them.
Some classes would require tighter controls, others would be bought using estimations while others require rigorous planning.
Some classes would warranty very low or high-safety stocks, regular expediting or very strict consumption control. There is no common procedure available to classify all inventories.
The classifications would give the inventory manager an idea how to act and what decision to make. It is important to be able to apply selective inventory control separating wood from trees.
Nyasha Chizu is a fellow of CIPS and branch chairman for CIPS Zimbabwe. He writes in his own capacity.