Question

What is your take on the inventory requirements needed to run a business?

Answer 1

My take on the inventory requirements needed to run a business is highly based on the Lean systems and Six Sigma strategies, besides Kanban because these methods help to efficiently control the inventory requirements of the business without putting pressure upon the inventory carrying costs. Besides, for the basic level understand, the Break-analysis is equally helpful to comprehend the inventory requirements to run a business, the ratio analysis and also capacity planning. Let us view all of them in brief:

CAPACITY PLANNING FOR INVENTORY REQUIREMENTS:

Capacity planning helps in the determination of the Plant’s production capacity that is capable to meeting the demands of the Organization’s production activities. It is a long-term conceptual tool in Product and Operations Management that helps to understand whether the production capacity is sufficient enough to meet the capacity levels as required by the Master schedules. Moreover, upon evaluating the differences between the available capacity and the required capacity, Capacity Planning concept in turn is useful to negotiate any required changes to the Master schedules accordingly. The capacity requirements could be therefore altered to match the Production and Marketing demand based on various activities such as adding of more shifts to boost the capacity of production or application of overtime allowances in order improve the performance levels of the workers, subcontracted labor force or deployment of additional machinery and equipment, etc. As this concept does not consider any schedule receipts neither the actual inventories nor stock in hand while estimating the capacity requirements, ‘Capacity planning’ is simply a statement of gross production requirements. Thus, this tool is basically undertaken to evaluate the important resources against the validity of the Master schedules in order to generate the MRP plans in an exhaustive manner. In terms business, it therefore helps in Inventory control.

INVENTORY VELOCITY RATIO:

The ratio is usually expressed as number of times the stock has turned over. Inventory management forms the crucial part of working capital management. As a major portion of the bank advance is for the holding of inventory, a study of the adequacy of abundance of the stocks held by the company in relation to its production needs requires to be made carefully by the bank.

 A higher ratio may mean (higher turnover or less holding periods): 

• The stocks are moving well and there is efficient inventory management ; or 

• The stocks are purchased in small quantities. This may be harmful if sufficient quantities are not available for production needs; secondly, buying in small quantities may increase the cost. 

Contrarily, a lower ratio (i.e.., lower turnover of longer holding period may be an index of (1) Accumulation of large stocks not commensurate with production requirements, (2) A reflection of inefficient inventory management or over-valuation of stocks for balance sheet purposes ; or Stagnation in sales, if stocks comprise mostly finished goods.

BREAK-EVEN ANALYSIS:

The Break-even analysis can help the management in decision making regarding the inventory control for the future decision making towards the type of inventory required that could be undertaken while decision upon product planning processes could be undertaken accordingly.

KANBAN:

Kanban cards are directly linked to the inventory levels in Work-in Progress. When the inventory levels are high, the number of Kanban cards required, would be more. Accordingly, other things remaining the same, when the container size increases and so does the demand, the items in the inventory would gradually deplete thereby impacting the number of Kanban cards required. The application of the Kanban and level production techniques are used in JIT for ensuring the material processes to be implemented and controlled.

LEAN SIX SIGMA:

Six Sigma could be useful in any industry that experiences significant non-value added time in their processes and it large enough to support the resources required to fully implement it. Be it in small or in large entities, dealing with non-value added time in processes or the optimization of resource allocation have now become feasible due to the versatility of the Lean Six sigma. In the manufacturing and service processes, where with reduction in inventory maintained and with considerable decrease in the order-to-delivery time by the Companies, by far, the concept of Six Sigma has been successfully undertaken by many Organizations in order to be efficient in serving the customers in a highly competitive market. Such as, Toyota had developed the concept of Lean Manufacturing way back about seven decades ago, which is a type of Six Sigma process and it was because of the efforts taken by Toyota that the US automobile manufacturers also started adapting to Lean-Six Sigma in more committed way.