Inventory Management and Inventory Control must be designed to meet the

dictates of the marketplace and support the company's strategic plan. The
many changes in market demand, new opportunities due to worldwide marketing,
global sourcing of materials, and new manufacturing technology, means many
companies need to change their Inventory Management approach and change the
process for Inventory Control.

Despite the many changes that companies go through, the basic principles of
Inventory Management and Inventory Control remain the same. Some of the new
approaches and techniques are wrapped in new terminology, but the underlying
principles for accomplishing good Inventory Management and Inventory
activities have not changed.

The Inventory Management system and the Inventory Control Process provides
information to efficiently manage the flow of materials, effectively utilize people
and equipment, coordinate internal activities, and communicate with
customers. Inventory Management and the activities of Inventory Control do not
make decisions or manage operations; they provide the information to Managers
who make more accurate and timely decisions to manage their operations.

The basic building blocks for the Inventory Management system and Inventory
Control activities are:
Sales Forecasting or Demand Management
Sales and Operations Planning
Production Planning
Material Requirements Planning
Inventory Reduction

The emphases on each area will vary depending on the company and how it
operates, and what requirements are placed on it due to market demands. Each of
the areas above will need to be addressed in some form or another to have a
successful program of Inventory Management and Inventory Control.

Inventory is a list for goods and materials, or those goods and materials
themselves, held available in stock by a business. It is also used for a list of the
contents of a household and for a list for testamentary purposes of the possessions
of someone who has died. In accounting inventory is considered an asset.

Origins of the word Inventory

The word inventory was first recorded in 1601. The French term inventaire, or
"detailed list of goods," dates back to 1415.

Business inventory

The reasons for keeping stock

There are three basic reasons for keeping an inventory:

1. Time - The time lags present in the supply chain, from supplier to user at
every stage, requires that you maintain certain amount of inventory to use in
this "lead time"
2. Uncertainty - Inventories are maintained as buffers to meet uncertainties in
demand, supply and movements of goods.
3. Economies of scale - Ideal condition of "one unit at a time at a place where
user needs it, when he needs it" principle tends to incur lots of costs in terms
of logistics. So bulk buying, movement and storing brings in economies of
scale, thus inventory.

All these stock reasons can apply to any owner or product stage.

• Buffer stock is held in individual workstations against the possibility that

the upstream workstation may be a little delayed in long setup or change-
over time. This stock is then used while that change-over is happening. This
stock can be eliminated by tools like SMED.

These classifications apply along the whole Supply chain not just within a facility
or plant.

Where these stocks contain the same or similar items it is often the work practice
to hold all these stocks mixed together before or after the sub-process to which
they relate. This 'reduces' costs. Because they are mixed-up together there is no
visual reminder to operators of the adjacent sub-processes or line management of
the stock which is due to a particular cause and should be a particular individual's
responsibility with inevitable consequences. Some plants have centralized stock
holding across sub-processes which makes the situation even more acute.

[edit] Special terms used in dealing with inventory

• Stock Keeping Unit (SKU) is a unique combination of all the components

that are assembled into the purchasable item. Therefore any change in the
 packaging or product is a new SKU. This level of detailed specification
assists in managing inventory.
• Stockout means running out of the inventory of an SKU.[1]
• "New old stock" (sometimes abbreviated NOS) is a term used in business to
refer to merchandise being offered for sale which was manufactured long
ago but that has never been used. Such merchandise may not be produced
any more, and the new old stock may represent the only market source of a
particular item at the present time.

[edit] Typology

1. Buffer/safety stock
2. Cycle stock (Used in batch processes, it is the available inventory excluding
buffer stock)
3. De-coupling (Buffer stock that is held by both the supplier and the user)
4. Anticipation stock (building up extra stock for periods of increased demand -
e.g. ice cream for summer)
5. Pipeline stock (goods still in transit or in the process of distribution - have
left the factory but not arrived at the customer yet)

[edit] Inventory examples

While accountants often discuss inventory in terms of goods for sale, organizations
- manufacturers, service-providers and not-for-profits - also have inventories
(fixtures, furniture, supplies, ...) that they do not intend to sell. Manufacturers',
distributors', and wholesalers' inventory tends to cluster in warehouses. Retailers'
inventory may exist in a warehouse or in a shop or store accessible to customers.
Inventories not intended for sale to customers or to clients may be held in any
premises an organization uses. Stock ties up cash and if uncontrolled it will be
impossible to know the actual level of stocks and therefore impossible to control
them.

Whilst the reasons for holding stock are covered earlier, most manufacturing
organizations usually divide their "goods for sale" inventory into:

• Raw materials - materials and components scheduled for use in making a

product.
• Work in process, WIP - materials and components that have begun their
transformation to finished goods.
• Finished goods - goods ready for sale to customers.
• Goods for resale - returned goods that are salable.
 • Spare parts

For example:

[edit] Manufacturing

A canned food manufacturer's materials inventory includes the ingredients to form

the foods to be canned, empty cans and their lids (or coils of steel or aluminum for
constructing those components), labels, and anything else (solder, glue, ...) that will
form part of a finished can. The firm's work in process includes those materials
from the time of release to the work floor until they become complete and ready
for sale to wholesale or retail customers. This may be vats of prepared food, filled
cans not yet labelled or sub-assemblies of food components. It may also include
finished cans that are not yet packaged into cartons or pallets. Its finished good
inventory consists of all the filled and labelled cans of food in its warehouse that it
has manufactured and wishes to sell to food distributors (wholesalers), to grocery
stores (retailers), and even perhaps to consumers through arrangements like factory
stores and outlet centers.

[edit] Logistics or distribution

The logistics chain includes the owners (wholesalers and retailers), manufacturers'
agents, and transportation channels that an item passes through between initial
manufacture and final purchase by a consumer. At each stage, goods belong (as
assets) to the seller until the buyer accepts them. Distribution includes four
components:

1. Manufacturers' agents: Distributors who hold and transport a consignment of

finished goods for manufacturers without ever owning it. Accountants refer
to manufacturers' agents' inventory as "matériel" in order to differentiate it
from goods for sale.
2. Transportation: The movement of goods between owners, or between
locations of a given owner. The seller owns goods in transit until the buyer
accepts them. Sellers or buyers may transport goods but most transportation
providers act as the agent of the owner of the goods.
3. Wholesaling: Distributors who buy goods from manufacturers and other
suppliers (farmers, fishermen, etc.) for re-sale work in the wholesale
industry. A wholesaler's inventory consists of all the products in its
warehouse that it has purchased from manufacturers or other suppliers. A
 produce-wholesaler (or distributor) may buy from distributors in other parts
of the world or from local farmers. Food distributors wish to sell their
inventory to grocery stores, other distributors, or possibly to consumers.
4. Retailing: A retailer's inventory of goods for sale consists of all the products
on its shelves that it has purchased from manufacturers or wholesalers. The
store attempts to sell its inventory (soup, bolts, sweaters, or other goods) to
consumers.

It is a key observation in the "Lean Manufacturing" that it is often the case that
more than 90% of a product's life prior to end user sale is spent in distribution of
one form or another. On the assumption that the time is not itself valuable to the
customer this adds enormously to the working capital tied up in the business as
well as the complexity of the supply chain. Reduction and elimination of these
inventory 'wait' states is a key concept in Lean.

[edit] High level inventory management

It seems that around about 1880[2] there was a change in manufacturing practice
from companies with relatively homogeneous lines of products to vertically
integrated companies with unprecedented diversity in processes and products.
Those companies (especially in metalworking) attempted to achieve success
through economies of scope - the gains of jointly producing two or more products
in one facility. The managers now needed information on the effect of product mix
decisions on overall profits and therefore needed accurate product cost
information. A variety of attempts to achieve this were unsuccessful due to the
huge overhead of the information processing of the time. However, the burgeoning
need for financial reporting after 1900 created unavoidable pressure for financial
accounting of stock and the management need to cost manage products became
overshadowed. In particular it was the need for audited accounts that sealed the
fate of managerial cost accounting. The dominance of financial reporting
accounting over management accounting remains to this day with few exceptions
and the financial reporting definitions of 'cost' have distorted effective management
'cost' accounting since that time. This is particularly true of inventory.

Hence high level financial inventory has these two basic formulas which relate to
the accounting period:

1. Cost of Beginning Inventory at the start of the period + inventory purchases

within the period + cost of production within the period = cost of goods
 2. Cost of goods − cost of ending inventory at the end of the period = cost of
goods sold

The benefit of these formulae is that the first absorbs all overheads of production
and raw material costs in to a value of inventory for reporting. The second formula
then creates the new start point for the next period and gives a figure to be
subtracted from sales price to determine some form of sales margin figure.

Manufacturing management is more interested in inventory turnover ratio or

average days to sell inventory since it tells them something about relative
inventory levels.

Inventory turn over ratio (also known as inventory turns) = cost of goods
sold / Average Inventory = Cost of Goods Sold / ((Beginning Inventory +
Ending Inventory) / 2)

and its inverse

Average Days to Sell Inventory = Number of Days a Year / Inventory Turn

Over Ratio = 365 days a year / Inventory Turn Over Ratio

This ratio estimates how many times the inventory turns over a year. This number
tells us how much cash/goods are tied up waiting for the process and is a critical
measure of process reliability and effectiveness. So a factory with two inventory
turns has six months stock on hand which generally not a good figure (depending
upon industry) whereas a factory that moves from six turns to twelve turns has
probably improved effectiveness by 100%. This improvement will have some
negative results in the financial reporting since the 'value' now stored in the factory
as inventory is reduced.

Whilst the simplicity of these accounting measures of inventory are very useful
they are in the end fraught with the danger of their own assumptions. There are in
fact so many things which can vary hidden under this appearance of simplicity that
a variety of 'adjusting' assumptions may be used. These include:

• Specific Identification
• Weighted Average Cost
• Moving-Average Cost
• FIFO and LIFO.
Inventory Turn is a financial accounting tools for evaluating inventory and it is not
necessarily a management tool. Inventory management should be forward looking.
The methodology applied is based on historical cost of goods sold. The ratio may
not be able to reflect the usability of future production demand as well as customer
demand.

Business models including Just in Time (JIT) Inventory, Vendor Managed

Inventory (VMI) and Customer Managed Inventory (CMI) attempt to minimize on-
hand inventory and increase inventory turns. VMI and CMI have gained
considerable attention due to the success of third party vendors who offer added
expertise and knowledge that organizations may not possess.

[edit] Accounting perspectives

[edit] The basis of Inventory accounting

Inventory needs to be accounted where it is held across accounting period

boundaries since generally expenses should be matched against the results of that
expense within the same period. When processes were simple and short then
inventories were small but with more complex processes then inventories became
larger and significant valued items on the balance sheet[3]. This need to value
unsold and incomplete goods has driven many new behaviours into management
practise. Perhaps most significant of these are the complexities of fixed cost
recovery, transfer pricing, and the separation of direct from indirect costs. This,
supposedly, precluded "anticipating income" or "declaring dividends out of
capital". It is one of the intangible benefits of Lean and the TPS that process times
shorten and stock levels decline to the point where the importance of this activity is
hugely reduced and therefore effort, especially managerial, to achieve it can be
minimised.

[edit] Accounting for Inventory

Each country has its own rules about accounting for inventory that fit with their
financial reporting rules.

So for example, organizations in the U.S. define inventory to suit their needs
within US Generally Accepted Accounting Practices (GAAP), the rules defined by
the Financial Accounting Standards Board (FASB) (and others) and enforced by
the U.S. Securities and Exchange Commission (SEC) and other federal and state
agencies. Other countries often have similar arrangements but with their own
GAAP and national agencies instead.
It is intentional that financial accounting uses standards that allow the public to
compare firms' performance, cost accounting functions internally to an
organization and potentially with much greater flexibility. A discussion of
inventory from standard and Theory of Constraints-based (throughput) cost
accounting perspective follows some examples and a discussion of inventory from
a financial accounting perspective.

The internal costing/valuation of inventory can be complex. Whereas in the past

most enterprises ran simple one process factories, this is quite probably in the
minority in the 21st century. Where 'one process' factories exist then there is a
market for the goods created which establishes an independent market value for the
good. Today with multi-stage process companies there is much inventory that
would once have been finished goods which is now held as 'work-in-process'
(WIP). This needs to be valued in the accounts but the valuation is a management
decision since there is no market for the partially finished product. This somewhat
arbitrary 'valuation' of WIP combined with the allocation of overheads to it has led
to some unintended and undesirable results.

[edit] Financial accounting

An organization's inventory can appear a mixed blessing, since it counts as an asset

on the balance sheet, but it also ties up money that could serve for other purposes
and requires additional expense for its protection. Inventory may also cause
significant tax expenses, depending on particular countries' laws regarding
depreciation of inventory, as in Thor Power Tool Company v. Commissioner.

Inventory appears as a current asset on an organization's balance sheet because the

organization can, in principle, turn it into cash by selling it. Some organizations
hold larger inventories than their operations require in order to inflate their
apparent asset value and their perceived profitability.

In addition to the money tied up by acquiring inventory, inventory also brings

associated costs for warehouse space, for utilities, and for insurance to cover staff
to handle and protect it, fire and other disasters, obsolescence, shrinkage (theft and
errors), and others. Such holding costs can mount up: between a third and a half of
its acquisition value per year.

Businesses that stock too little inventory cannot take advantage of large orders
from customers if they cannot deliver. The conflicting objectives of cost control
and customer service often pit an organization's financial and operating managers
against its sales and marketing departments. Sales people, in particular, often
receive sales commission payments, so unavailable goods may reduce their
potential personal income. This conflict can be minimised by reducing production
time to being near or less than customer expected delivery time. This effort, known
as "Lean production" will significantly reduce working capital tied up in inventory
and reduce manufacturing costs (See the Toyota Production System).

[edit] The role of a cost accountant on the 21st-century in a manufacturing

organization

By helping the organization to make better decisions, the accountants can help the
public sector to change in a very positive way that delivers increased value for the
taxpayer’s investment. It can also help to incentivise progress and to ensure that
reforms are sustainable and effective in the long term, by ensuring that success is
appropriately recognized in both the formal and informal reward systems of the
organization.

To say that they have a key role to play is an understatement. Finance is connected
to most, if not all, of the key business processes within the organization. It should
be steering the stewardship and accountability systems that ensure that the
organization is conducting its business in an appropriate, ethical manner. It is
critical that these foundations are firmly laid. So often they are the litmus test by
which public confidence in the institution is either won or lost.

Finance should also be providing the information, analysis and advice to enable the
organizations’ service managers to operate effectively. This goes beyond the
traditional preoccupation with budgets – how much have we spent so far, how
much have we left to spend? It is about helping the organization to better
understand its own performance. That means making the connections and
understanding the relationships between given inputs – the resources brought to
bear – and the outputs and outcomes that they achieve. It is also about
understanding and actively managing risks within the organization and its
activities.

[edit] FIFO vs. LIFO accounting

Main article: FIFO and LIFO accounting

When a dealer sells goods from inventory, the value of the inventory is reduced by
the cost of goods sold (CoG sold). This is simple where the CoG has not varied
across those held in stock; but where it has, then an agreed method must be derived
to evaluate it. For commodity items that one cannot track individually, accountants
must choose a method that fits the nature of the sale. Two popular methods which
normally exist are: FIFO and LIFO accounting (first in - first out, last in - first out).
FIFO regards the first unit that arrived in inventory as the first one sold. LIFO
considers the last unit arriving in inventory as the first one sold. Which method an
accountant selects can have a significant effect on net income and book value and,
in turn, on taxation. Using LIFO accounting for inventory, a company generally
reports lower net income and lower book value, due to the effects of inflation. This
generally results in lower taxation. Due to LIFO's potential to skew inventory
value, UK GAAP and IAS have effectively banned LIFO inventory accounting.

[edit] Standard cost accounting

Standard cost accounting uses ratios called efficiencies that compare the labour and
materials actually used to produce a good with those that the same goods would
have required under "standard" conditions. As long as similar actual and standard
conditions obtain, few problems arise. Unfortunately, standard cost accounting
methods developed about 100 years ago, when labor comprised the most important
cost in manufactured goods. Standard methods continue to emphasize labor
efficiency even though that resource now constitutes a (very) small part of cost in
most cases.

Standard cost accounting can hurt managers, workers, and firms in several ways.
For example, a policy decision to increase inventory can harm a manufacturing
managers' performance evaluation. Increasing inventory requires increased
production, which means that processes must operate at higher rates. When (not if)
something goes wrong, the process takes longer and uses more than the standard
labor time. The manager appears responsible for the excess, even though s/he has
no control over the production requirement or the problem.

In adverse economic times, firms use the same efficiencies to downsize, rightsize,
or otherwise reduce their labor force. Workers laid off under those circumstances
have even less control over excess inventory and cost efficiencies than their
managers.

Many financial and cost accountants have agreed for many years on the desirability
of replacing standard cost accounting. They have not, however, found a successor.

[edit] Theory of Constraints cost accounting

Eliyahu M. Goldratt developed the Theory of Constraints in part to address the

cost-accounting problems in what he calls the "cost world". He offers a substitute,
called throughput accounting, that uses throughput (money for goods sold to
customers) in place of output (goods produced that may sell or may boost
inventory) and considers labor as a fixed rather than as a variable cost. He defines
inventory simply as everything the organization owns that it plans to sell, including
buildings, machinery, and many other things in addition to the categories listed
here. Throughput accounting recognizes only one class of variable costs: the trully
variable costs like materials and components that vary directly with the quantity
produced.

Finished goods inventories remain balance-sheet assets, but labor efficiency ratios
no longer evaluate managers and workers. Instead of an incentive to reduce labor
cost, throughput accounting focuses attention on the relationships between
throughput (revenue or income) on one hand and controllable operating expenses
and changes in inventory on the other. Those relationships direct attention to the
constraints or bottlenecks that prevent the system from producing more throughput,
rather than to people - who have little or no control over their situations.

[edit] National accounts

Inventories also play an important role in national accounts and the analysis of the
business cycle. Some short-term macroeconomic fluctuations are attributed to the
inventory cycle.

[edit] Distressed inventory

Also known as distressed or expired stock, distressed inventory is inventory whose

potential to be sold at a normal cost has or will soon pass. In certain industries it
could also mean that the stock is or will soon be impossible to sell. Examples of
distressed inventory include products that have reached its expiry date, or has
reached a date in advance of expiry at which the planned market will no longer
purchase it (e.g. 3 months left to expiry), clothing that is defective or out of
fashion, and old newspapers or magazines. It also includes computer or consumer-
electronic equipment that is obsolescent or discontinued and whose manufacturer
is unable to support it. One current example of distressed inventory is the VHS
format.[4]

[edit] Inventory credit

Inventory credit refers to the use of stock, or inventory, as collateral to raise

finance. Where banks may be reluctant to accept traditional collateral, for example
in developing countries where land title may be lacking, inventory credit is a
potentially important way of overcoming financing constraints. This is not a new
concept; archaeological evidence suggests that it was practiced in Ancient Rome.
Obtaining finance against stocks of a wide range of products held in a bonded
warehouse is common in much of the world. It is, for example, used with parmesan
cheese in Italy.[5] Inventory credit on the basis of stored agricultural produce is
widely used in Latin American countries and in some Asian countries. [6]A
precondition for such credit is that banks must be confident that the stored product
will be available if they need to call on the collateral; this implies the existence of a
reliable network of certified warehouses. Banks also face problems in valuing the
inventory. The possibility of sudden falls in commodity prices means that they are
usually reluctant to lend more than about 60% of the value of the inventory at the
time of the loan.

Inventory Management and Inventory Control must be designed to meet the

dictates of the marketplace and support the company's strategic plan. The
many changes in market demand, new opportunities due to worldwide marketing,
global sourcing of materials, and new manufacturing technology, means many
companies need to change their Inventory Management approach and change the
process for Inventory Control.

Despite the many changes that companies go through, the basic principles of
Inventory Management and Inventory Control remain the same. Some of the new
approaches and techniques are wrapped in new terminology, but the underlying
principles for accomplishing good Inventory Management and Inventory
activities have not changed.

The Inventory Management system and the Inventory Control Process provides
information to efficiently manage the flow of materials, effectively utilize people
and equipment, coordinate internal activities, and communicate with
customers. Inventory Management and the activities of Inventory Control do not
make decisions or manage operations; they provide the information to Managers
who make more accurate and timely decisions to manage their operations.

The basic building blocks for the Inventory Management system and Inventory
Control activities are:
Sales Forecasting or Demand Management
Sales and Operations Planning
Production Planning
Material Requirements Planning
Inventory Reduction
What is "Inventory Management"
Inventory management is the active control program which
allows the management of sales, purchases and payments.

Inventory management software helps create invoices, purchase

orders, receiving lists, payment receipts and can print bar coded
labels. An inventory management software system configured to
your warehouse, retail or product line will help to create revenue
for your company. The Inventory Management will control
operating costs and provide better understanding. We are your
source for inventory management information, inventory
management software and tools.

A complete Inventory Management Control system contains the

following components:

• Inventory Management Definition

• Inventory Management Terms
• Inventory Management Purposes
• Definition and Objectives for Inventory Management
• Organizational Hierarchy of Inventory Management
• Inventory Management Planning
• Inventory Management Controls for Inventory
• Determining Inventory Management Stock Levels

Read our inventory management blog articles.

Inventory management, or inventory control, is an attempt to balance

inventory needs and requirements with the need to minimize costs
resulting from obtaining and holding inventory. There are several schools
of thought that view inventory and its function differently. These will be
addressed later, but first we present a foundation to facilitate the reader's
understanding of inventory and its function.

WHAT IS INVENTORY?
Inventory is a quantity or store of goods that is held for some purpose or
use (the term may also be used as a verb, meaning to take inventory or to
count all goods held in inventory). Inventory may be kept "in-house,"
meaning on the premises or nearby for immediate use; or it may be held in
a distant warehouse or distribution center for future use. With the
exception of firms utilizing just-in-time methods, more often than not, the
term "inventory" implies a stored quantity of goods that exceeds what is
needed for the firm to function at the current time (e.g., within the next few
hours).

WHY KEEP INVENTORY?

Why would a firm hold more inventory than is currently necessary to

ensure the firm's operation? The following is a list of reasons for
maintaining what would appear to be "excess" inventory.

MEET DEMAND.

In order for a retailer to stay in business, it must have the products that the
customer wants on hand when the customer wants them. If not, the retailer
will have to back-order the product. If the customer can get the good from
some other source, he or she may choose to do so rather than electing to
allow the original retailer to meet demand later (through back-order).
Hence, in many instances, if a good is not in inventory, a sale is lost forever.

KEEP OPERATIONS RUNNING.

A manufacturer must have certain purchased items (raw materials,

components, or subassemblies) in order to manufacture its product.
Running out of only one item can prevent a manufacturer from completing
the production of its finished goods.

Inventory between successive dependent operations also serves to decouple

the dependency of the operations. A machine or workcenter is often
dependent upon the previous operation to provide it with parts to work on.
If work ceases at a workcenter, then all subsequent centers will shut down
for lack of work. If a supply of work-in-process inventory is kept between
each workcenter, then each machine can maintain its operations for a
limited time, hopefully until operations resume the original center.

LEAD TIME.

Lead time is the time that elapses between the placing of an order (either a
purchase order or a production order issued to the shop or the factory
floor) and actually receiving the goods ordered.

If a supplier (an external firm or an internal department or plant) cannot

supply the required goods on demand, then the client firm must keep an
inventory of the needed goods. The longer the lead time, the larger the
quantity of goods the firm must carry in inventory.

A just-in-time (JIT) manufacturing firm, such as Nissan in Smyrna,

Tennessee, can maintain extremely low levels of inventory. Nissan takes
delivery on truck seats as many as 18 times per day. However, steel mills
may have a lead time of up to three months. That means that a firm that
uses steel produced at the mill must place orders at least three months in
advance of their need. In order to keep their operations running in the
meantime, an on-hand inventory of three months' steel requirements
would be necessary.

HEDGE.

Inventory can also be used as a hedge against price increases and inflation.
Salesmen routinely call purchasing agents shortly before a price increase
goes into effect. This gives the buyer a chance to purchase material, in
excess of current need, at a price that is lower than it would be if the buyer
waited until after the price increase occurs.
QUANTITY DISCOUNT.

Often firms are given a price discount when purchasing large quantities of a
good. This also frequently results in inventory in excess of what is currently
needed to meet demand. However, if the discount is sufficient to offset the
extra holding cost incurred as a result of the excess inventory, the decision
to buy the large quantity is justified.

SMOOTHING REQUIREMENTS.

Sometimes inventory is used to smooth demand requirements in a market

where demand is somewhat erratic. Consider the demand forecast and
production schedule outlined in Table 1.

Notice how the use of inventory has allowed the firm to maintain a steady
rate of output (thus avoiding the cost of hiring and training new personnel),
while building up inventory in anticipation of an increase in demand. In
fact, this is often called anticipation inventory. In essence, the use of
inventory has allowed the firm to move demand requirements to earlier
periods, thus smoothing the demand.

CONTROLLING INVENTORY

Firms that carry hundreds or even thousands of different part numbers can
be faced with the impossible task of monitoring the inventory levels of each
part number. In order to facilitate this, many firm's use an ABC approach.
ABC analysis is based on Pareto Analysis, also known as the "80/20" rule.
The 80/20 comes from Pareto's finding that 20 percent of the populace
possessed 80 percent of the wealth. From an inventory perspective it can
restated thusly: approximately 20 percent of all inventory items represent
80 percent of inventory costs. Therefore, a firm can control 80 percent of
its inventory costs by monitoring and controlling 20 percent of its
inventory. But, it has to be the correct 20 percent.
The top 20 percent of the firm's most costly items are termed "A" items
(this should approximately represent 80 percent of total inventory costs).
Items that are extremely inexpensive or have low demand are termed "C"
items, with "B" items falling in between A and C items. The percentages
may vary with each firm, but B items usually represent about 30 percent of
the total inventory items and 15 percent of the costs. C items generally
constitute 50 percent of all inventory items but only around 5 percent of the
costs.

By classifying each inventory item as an A, B or C the firm can determine

the resources (time, effort and money) to dedicate to each item. Usually this
means that the firm monitors A items very closely but can check on B and C
items on a periodic basis (for example, monthly for B items and quarterly
for C items).

Another control method related to the ABC concept is cycle counting. Cycle
counting is used instead of the traditional "once-a-year" inventory count
where firms shut down for a short period of time and physically count all
inventory assets in an attempt to reconcile any possible discrepancies in
their inventory records. When cycle counting is used the firm is continually
taking a physical count but not of total inventory.

A firm may physically count a certain section of the plant or warehouse,

moving on to other sections upon completion, until the entire facility is
counted. Then the process starts all over again.

The firm may also choose to count all the A items, then the B items, and
finally the C items. Certainly, the counting frequency will vary with the
classification of each item. In other words, A item may be counted monthly,
B items quarterly, and C items yearly. In addition the required accuracy of
inventory records may vary according to classification, with A items
requiring the most accurate record keeping.

BALANCING INVENTORY AND COSTS

As stated earlier, inventory management is an attempt to maintain an
adequate supply of goods while minimizing inventory costs. We saw a
variety of reasons companies hold inventory and these reasons dictate what
is deemed to be an adequate supply of inventory. Now, how do we balance
this supply with its costs? First let's look at what kind of costs we are talking
about.

There are three types of costs that together constitute total inventory costs:
holding costs, set-up costs, and purchasing costs.

HOLDING COSTS.

Holding costs, also called carrying costs, are the costs that result from
maintaining the inventory. Inventory in excess of current demand
frequently means that its holder must provide a place for its storage when
not in use. This could range from a small storage area near the production
line to a huge warehouse or distribution center. A storage facility requires
personnel to move the inventory when needed and to keep track of what is
stored and where it is stored. If the inventory is heavy or bulky, forklifts
may be necessary to move it around.

Storage facilities also require heating, cooling, lighting, and water. The firm
must pay taxes on the inventory, and opportunity costs occur from the lost
use of the funds that were spent on the inventory. Also, obsolescence,
pilferage (theft), and shrinkage are problems. All of these things add cost to
holding or carrying inventory.

If the firm can determine the cost of holding one unit of inventory for one
year (H) it can determine its annual holding cost by multiplying the cost of
holding one unit by the average inventory held for a one-year period.
Average inventory can be computed by dividing the amount of goods that
are ordered every time an order is placed (Q) by two. Thus, average
inventory is expressed as Q/2. Annual holding cost, then, can be expressed
as H(Q/2).
SET-UP COSTS.

Set-up costs are the costs incurred from getting a machine ready to produce
the desired good. In a manufacturing setting this would require the use of a
skilled technician (a cost) who disassembles the tooling that is currently in
use on the machine. The disassembled tooling is then taken to a tool room
or tool shop for maintenance or possible repair (another cost). The
technician then takes the currently needed tooling from the tool room
(where it has been maintained; another cost) and brings it to the machine
in question.

There the technician has to assemble the tooling on the machine in the
manner required for the good to be produced (this is known as a "set-up").
Then the technician has to calibrate the machine and probably will run a
number of parts, that will have to be scrapped (a cost), in order to get the
machine correctly calibrated and running. All the while the machine has
been idle and not producing any parts (opportunity cost). As one can see,
there is considerable cost involved in set-up.

If the firm purchases the part or raw material, then an order cost, rather
than a set-up cost, is incurred. Ordering costs include the purchasing
agent's salary and travel/entertainment budget, administrative and
secretarial support, office space, copiers and office supplies, forms and
documents, long-distance telephone bills, and computer systems and
support. Also, some firms include the cost of shipping the purchased goods
in the order cost.

If the firm can determine the cost of one set-up (S) or one order, it can
determine its annual setup/order cost by multiplying the cost of one set-up
by the number of set-ups made or orders placed annually. Suppose a firm
has an annual demand (D) of 1,000 units. If the firm orders 100 units (Q)
every time it places and order, the firm will obviously place 10 orders per
year (D/Q). Hence, annual set-up/order cost can be expressed as S(D/Q).
PURCHASING COST.

Purchasing cost is simply the cost of the purchased item itself. If the firm
purchases a part that goes into its finished product, the firm can determine
its annual purchasing cost by multiplying the cost of one purchased unit (P)
by the number of finished products demanded in a year (D). Hence,
purchasing cost is expressed as PD.

Now total inventory cost can be expressed as:

Total = Holding cost + Set-up/Order cost + Purchasing cost
or
Total = H(Q/2) + S(D/Q) + PD

If holding costs and set-up costs were plotted as lines on a graph, the point
at which they intersect (that is, the point at which they are equal) would
indicate the lowest total inventory cost. Therefore, if we want to minimize
total inventory cost, every time we place an order, we should order the
quantity (Q) that corresponds to the point where the two values are equal.
If we set the two costs equal and solve for Q we get:
H(Q/2) = S(D/Q)
Q = 2 DS/H

The quantity Q is known as the economic order quantity (EOQ). In order to

minimize total inventory cost, the firm will order Q every time it places an
order. For example, a firm with an annual demand of 12,000 units (at a
purchase price of $25 each), annual holding cost of $10 per unit and an
order cost of $150 per order (with orders placed once a month) could save
$800 annually by utilizing the EOQ. First, we determine the total costs
without using the EOQ method:
Q = $10(1000/2) + $150(12,000/1000) + $25(12,000) = $306,800
Then we calculate EOQ:
EOQ = 2(12,000)($150)/$10= 600
And we calculate total costs at the EOQ of 600:
Q = $10(600/2) + $150(12,000/600) + $25(12,000) = $306,000
Finally, we subtract the total cost of Q from Q to determine the savings:
$306,800 − 306,000 = $800

Notice that if you remove purchasing cost from the equation, the savings is
still $800. We might assume this means that purchasing cost is not
relevant to our order decision and can be eliminated from the equation. It
must be noted that this is true only as long as no quantity discount exists. If
a quantity discount is available, the firm must determine whether the
savings of the quantity discount are sufficient to offset the loss of the
savings resulting from the use of the EOQ.

There are a number of assumptions that must be made with the use of the
EOQ. These include:

• Only one product is involved.

• Deterministic demand (demand is known with certainty).
• Constant demand (demand is stable through-out the year).
• No quantity discounts.
• Constant costs (no price increases or inflation).

While these assumptions would seem to make EOQ irrelevant for use in a
realistic situation, it is relevant for items that have independent demand.
This means that the demand for the item is not derived from the demand
for something else (usually a parent item for which the unit in question is a
component). For example, the demand for steering wheels would be
derived from the demand for automobiles (dependent demand) but the
demand for purses is not derived from anything else; purses have
independent demand.

OTHER LOT-SIZING TECHNIQUES

There are a number of other lot-sizing techniques available in addition to
EOQ. These include the fixed-order quantity, fixed-order-interval model,
the single-period model, and part-period balancing.

FIXED-ORDER-QUANTITY MODEL.

EOQ is an example of the fixed-order-quantity model since the same

quantity is ordered every time an order is placed. A firm might also use a
fixed-order quantity when it is captive to packaging situations. If you were
to walk into an office supply store and ask to buy 22 paper clips, chances
are you would walk out with 100 paper clips. You were captive to the
packaging requirements of paper clips, i.e., they come 100 to a box and you
cannot purchase a partial box. It works the same way for other purchasing
situations. A supplier may package their goods in certain quantities so that
their customers must buy that quantity or a multiple of that quantity.

FIXED-ORDER-INTERVAL MODEL.

The fixed-order-interval model is used when orders have to be placed at

fixed time intervals such as weekly, biweekly, or monthly. The lot size is
dependent upon how much inventory is needed from the time of order until
the next order must be placed (order cycle). This system requires periodic
checks of inventory levels and is used by many retail firms such as drug
stores and small grocery stores.

SINGLE-PERIOD MODEL.

The single-period model is used in ordering perishables, such as food and

flowers, and items with a limited life, such as newspapers. Unsold or
unused goods are not typically carried over from one period to another and
there may even be some disposal costs involved. This model tries to balance
the cost of lost customer goodwill and opportunity cost that is incurred
from not having enough inventory, with the cost of having excess inventory
left at the end of a period.
PART-PERIOD BALANCING.

Part-period balancing attempts to select the number of periods covered by

the inventory order that will make total carrying costs as close as possible to
the set-up/order cost.

When a proper lot size has been determined, utilizing one of the above
techniques, the reorder point, or point at which an order should be placed,
can be determined by the rate of demand and the lead time. If safety stock
is necessary it would be added to the reorder point quantity.
Reorder point =
Expected demand during lead time + Safety stock

Thus, an inventory item with a demand of 100 per month, a two-month

lead time and a desired safety stock of two weeks would have reorder point
of 250. In other words, an order would be placed whenever the inventory
level for that good reached 250 units.
Reorder point =
100/month × 2 months + 2 weeks' safety stock = 250

OTHER SCHOOLS OF THOUGHT

IN INVENTORY MANAGEMENT

There are a number of techniques and philosophies that view inventory

management from different perspectives.

MRP AND MRP II.

MRP and MRP II are computer-based resource management systems

designed for items that have dependent demand. MRP and MRP II look at
order quantities period by period and, as such, allow discrete ordering
(ordering only what is currently needed). In this way inventory levels can
be kept at a very low level; a necessity for a complex item with dependent
demand.
JUST-IN-TIME (JIT).

Just-in-time (JIT) is a philosophy that advocates the lowest possible levels

of inventory. JIT espouses that firms need only keep inventory in the right
quantity at the right time with the right quality. The ideal lot size for JIT is
one, even though one hears the term "zero inventory" used.

THEORY OF CONSTRAINTS (TOC).

Theory of constraints (TOC) is a philosophy which emphasizes that all

management actions should center around the firm's constraints. While it
agrees with JIT that inventory should be at the lowest level possible in most
instances, it advocates that there be some buffer inventory around any
capacity constraint (e.g., the slowest machine) and before finished goods.

THE FUTURE OF INVENTORY

MANAGEMENT

The advent, through altruism or legislation, of environmental management

has added a new dimension to inventory management-reverse supply chain
logistics. Environmental management has expanded the number of
inventory types that firms have to coordinate. In addition to raw materials,
work-in-process, finished goods, and MRO goods, firms now have to deal
with post-consumer items such as scrap, returned goods, reusable or
recyclable containers, and any number of items that require repair, reuse,
recycling, or secondary use in another product. Retailers have the same
type problems dealing with inventory that has been returned due to
defective material or manufacture, poor fit, finish, or color, or outright "I
changed my mind" responses from customers.

Finally, supply chain management has had a considerable impact on

inventory management. Instead of managing one's inventory to maximize
profit and minimize cost for the individual firm, today's firm has to make
inventory decisions that benefit the entire supply chain.
The Approach The SIA methodology has seven unique steps:

End-to-end solutions involve many different factors for every link in your
supply management chain. If your company is operating on a significant
global scale, then you may be feeling the compounding of that issue as
every new link in the supply chain carries its own concerns individually
as well as dynamically in the way they can affect the other links in your
supply chain. The ultimate aim in moving your product, however, is in
efficient supply chain inventory management. Whether it's finding less
expensive, more consistent ways to get raw materials delivered to your
manufacturing facilities, or getting assembled products in the hands of
your consumer base, there are distinct components of effective supply
chain inventory management each play a significant role in your entire
supply chain management model.

Created to offer business-specific solutions that incorporate best

practices thinking, Infor leverages industry expertise with an expansive
global reach to not only address your company's current global needs,
but provide you the tools necessary to facilitate further growth, in part,
through intelligent supply chain inventory management. Our goal is to
create software solutions as enterprising as your company is.
Whatever your specific industry needs may be, Infor's supply chain
inventory management solutions offer tools for improving:

• Strategic Network Design

• Distribution Planning
• Transportation and Logistics
• Warehouse Management
• Event Management
• And more

To learn more about how Infor’s enterprising supply chain inventory

management solutions can make a difference in your business,
contact Infor today.

Supply Chain Inventory Management in Manufacturing

Manufacturers face a myriad of dynamic challenges that require not
only exceptional advanced planning, but a thorough network of
communication tools that allow you to address changes at a moment's
notice. From rapid locational and volume changes in customer
demand, to globalization, to natural disasters, any number of factors
can have a serious effect on your revenue projections. And when you
have inventory stuck in the supply chain, nobody is getting paid. As
such, the ability to quickly (and intelligently) address inbound and
outbound issues through effective supply chain inventory management
solutions not only ensures you keep the wheels of business turning, it
gives you an advantage in being able to address consumer needs in a
way that slower, less agile manufacturers will be unable to do.

Offering global supply chain management tools, Infor can partner with
your company to leverage your manufacturing agility and help to meet
(or exceed) forecasts through supply chain inventory management
solutions that keep products moving.

Supply Chain Inventory Management in Transportation and

Logistics
In addition to local concerns such as warehouse efficiencies and
optimal strategies for inventory replenishing, the nuts and bolts
process of moving inventory from one location to another takes on a
whole host of new transportation logistics management challenges
when your company deals with a global market. From longer lead
times, to regulatory requirements, to issues of customs and their
effective on the ability to establish efficient routines in cross-border
supply chains, having versatile supply chain inventory management
solutions on hand can ensure your inventory keeps moving. Further,
robust reporting tools from Infor's supply chain inventory management
give you real-time visibility along your supply chain, so you can make
adjustments now. When your global growth depends outpacing the
competition, the race is won in the turns. Prepare your company for
whatever twists and turns may happen with superior global supply
chain management tools from Infor.
Supply Chain Inventory Management in Retail

When you deal in retail, nothing is more important than the moment of
transaction. This may seem simple, but companies who lose sight of
this principle for even a minute will be eclipsed by another company
who didn't. This key fundamental should be the premise for all supply
chain inventory management decisions your company makes. All of
your processes should be driven by the ability to facilitate the
exchange of product for money. This means removing any obstacles
that can slow (or potentially) stop this from happening. In a proactive
sense, however, global supply chain management tools that allow your
company the ability to address event management on multiple fronts
maximizes profitability by increasing supply where marketing and
other promotions are pushing demand. This level of coordination is
absolutely necessary in today's fiercely competitive global market. If
you have doubts in your current supply chain inventory management
systems to achieve these goals, you are probably leaving money on
the table right now.

Supply Chain Inventory Management and Open Service Oriented

Architecture

Open service oriented architecture is the foundation upon which every

Infor business software solution is built. This is especially important
with regards to supply chain inventory management. When you are
moving inventory across borders, the level of integrated operations to
make this happen with the greatest efficiency can be considerable.
This means you may be using several different software applications
to achieve your goals. When you implement any supply chain
management software solutions from Infor, our open service oriented
architecture means these solutions will work with your existing
technology to leverage your existing resources and, perhaps, even
give you integrated service options you didn't have before. When it
comes to supply chain inventory management, having more options
means having more agility.
Supply Chain Inventory Management Solutions from Infor
Industry specific solutions accompanied by powerful vertical
capabilities provide a distinct advantage for global companies,
especially those functioning in multiple industries. The ability of
flexible, comprehensive global supply chain management to quickly
address consumer demand and deliver the goods while minimizing
associated inventory costs leads to instant ROI and return customers.
Supply Chain Management Solutions
Supply chain masters know the secret to supply chain success—and it
starts with the very design of their network. Superior performance is
determined by the location and capacity of manufacturing, distribution,
and transportation assets. To meet the challenges of expansion,
competitiveness, and risk, companies need the ability to continually
evaluate and strategically align these assets.
Infor SCM Strategic Network Design fine-tunes your supply chain,
helping you determine the optimal number, location, and size of
facilities necessary to meet your customer service goals. As new
opportunities arise, you’ll have the essential tools to reconfigure your
network to changes in demand, supply, labor, transportation, and
outsourcing initiatives to sustain a strong, highly competitive supply
chain.
A strategic decision-support toolset for analyzing and designing supply
chain networks, Strategic Network Design offers extensive modeling
and optimization features to help planners design more efficient supply
chain networks. You can determine facility location and capacity
requirements, evaluate different transportation and inventory
strategies, select vendors, mitigate risks, and perform profitability and
cost analysis. Plus, interactive map-based graphics and point-and-
click functionality simplify the complexities of strategic supply chain
planning.
When combined with Tactical Planner , a time-phased strategic
planning application that tells you when to buy, when and where to
manufacture, and where to hold inventory, you can align demand with
your supply planning processes to deliver the most complete, capacity
constrained—and cost-effective—supply chain
 Supply Chain Management Solutions

Profitability. Competitiveness. Growth. Infor provides enterprising

supply chain management solutions that help organizations manage
the complexities and regulations of today's volatile business
environment in order to improve efficiency and attain these vital
objectives.
Discover how the many key elements of integrated supply chain
solutions from Infor SCM (Supply Chain Management) harmonize to
create one inclusive, customizable, enterprise-wide solution capable of
fulfilling your specific concept-to-customer vision.

Integrated Supply Chain Solutions

Infor SCM supply chain management solutions take into account the
distinct challenges you face and are customizable to ensure efficient
planning and execution strategies are attained through the integration
of the following key components:

• Strategic Network Design

Attaining maximized efficiency starts with the design of your network.
Supply chain management solutions from Infor SCM are initiated by
determining the ideal size, location, and number of facilities necessary
to adequately meet the needs of customers in your specific industry.
• Demand Planning
The unpredictable nature of today's business environment requires
organizations to implement solutions that enable rapid response rates
to unforeseen changes in customer demand. Demand Planning
supply chain solutions from Infor provide the ability to more accurately
forecast and shape demand to reduce production costs and increase
delivery performance.
• Distribution Planing
The distribution complexities organizations face grow as supply
chains merge and globalization impacts cross geographical
boundaries and regulations. Distribution Planning supply chain
management solutions from Infor enhance visibility of supply and
 demand across the entire organization while helping to reach superior
fulfillment at lower costs.
• Manufacturing Planning

Obtaining and sustaining customer delight necessitates accurate

manufacturing planning on a consistent basis. Infor SCM
Manufacturing Planning provides advanced supply chain solutions
which go beyond traditional ERP-based planning to optimize and
synchronize each facet of the manufacturing process.
Production Scheduling
Every minute counts in today's competitive business environment.
Infor SCM Production Scheduling supply chain management solutions
focus on coordinating products on all lines to maximize production
through the utilization of finite capacity scheduling (FCS).

•
• Transportation & Logistics Planning
As the customer base of organizations grow, so too do the
complexities involved in efficiently delivering goods to the right place
at the right time. Transportation & Logistics Planning from Infor is
comprised of advanced supply chain solutions that help determine
optimal processes from inception to delivery, effectively reducing
inventory and transportation costs while strengthening customer
relationships.
• Warehouse Management System
Improve end-to-end fulfillment and distribution with help from Infor
Warehouse Management system. Our enterprising supply chain
management solutions concentrate on enhancing the ability of
organizations to successfully align inventory and processes, meeting
customer requirements in a cost-effective manner.
• RFID
Increased customers, inventory, facilities, and regulations require
organizations to implement effective supply chain solutions that
provide improved visibility and data communication capabilities. Infor's
RFID solution connects all parties involved from inception to delivery
and allows for rapid response to unanticipated changes.
• Event Management
Make sense of the many intricacies involved in supply chain
management and acquire the ability to efficiently react to unplanned
 events. With proven supply chain management solutions from Infor
SCM, organizations can detect any conditional changes throughout
the supply chain and quickly react in a timely, appropriate manner.

Overview: Inventory management is an important activity

towards ensuring smooth production process. Accounting
information plays a key role in inventory management. Just-in-
Time (JIT) manufacturing involves purchasing the raw materials
and going ahead with the production process as and when the
demand arises. JIT is an approach towards minimizing waste and
maximizing productivity. The costing system associated with JIT
manufacturing is known as Backflush Costing. The paper
examines inventory management with emphasis on JIT and
Backflush Costing

JIT, or just in time, inventory is a inventory management strategy that is

aimed at monitoring the inventory process in such a manner as to minimize
the costs associated with inventory control and maintenance. To a great
degree, a just-in-time inventory process relies on the efficient monitoring of
the usage of materials in the production of goods and ordering replacement
goods that arrive shortly before they are needed. This simple strategy helps
to prevent incurring the costs associated with carrying large inventories of
raw materials at any given point in time.

Another application of a just in time inventory focuses not on raw materials

but on finished goods. Again, the idea is to develop a solid understanding
of what is needed to produce goods and schedule them for shipment to
customers within the shortest time frame possible. As with raw materials,
shipping finished goods shortly after producing them leads to minimizing
storage costs and any taxes that may be applicable. This dual application
of a just in time inventory strategy can significantly cut the operational
expenses of a business in regards to the amount of inventory that must be
stored at any one time and the amount of taxes that must be paid on larger
inventories.

A just in time inventory management process involves understanding how

much of a given item is needed to maintain production while more of the
same item is ordered. This involves two key factors. First, it is necessary to
know how long it will take for the item to be shipped from the supplier and
arrive at the manufacturing facility. Second, the anticipated life or usage of
the item must be determined. By knowing these two pieces of information,
it is possible to establish procedures that allow the item to be reordered just
in time to arrive and replace a worn item, without having the replacement
set in storage for an extended period of time.

Many purchasing departments employ a just in time inventory for such key
items as raw materials and machine parts. This means that records are
kept that make it possible to place a new order for a given component
when the number of units on hand decreases to a pre-determined point. In
times past, this type of inventory control often was accomplished by
maintaining a flip card inventory, such as the old Kardex system. Today,
this same type of component usage is often managed with purchasing and
inventory control software.

The idea of a just in time inventory is not new. Henry Ford of the Ford
Motor Company is known to have applied this principle to the purchase of
raw materials for automobile manufacturing in the early years of the 20th
century. Many small businesses engage in the use of a just in time
inventory approach out of necessity. With limited resources on hand,
maintaining a small inventory of materials and parts simply makes sense.
However, even large corporations today realize that the savings associated
with this type of approach can save a significant amount of financial
resources, making it possible to redirect those resources toward other
revenue generating processes.

In computing, just-in-time compilation (JIT), also known as dynamic

translation, is a technique for improving the runtime performance of a computer
program. JIT builds upon two earlier ideas in run-time environments: bytecode
compilation and dynamic compilation. It converts code at runtime prior to
executing it natively, for example bytecode into native machine code. The
performance improvement over interpreters originates from caching the results of
translating blocks of code, and not simply reevaluating each line or operand each
time it is met (see Interpreted language). It also has advantages over statically
compiling the code at development time, as it can recompile the code if this is
found to be advantageous, and may be able to enforce security guarantees. Thus
JIT can combine some of the advantages of interpretation and static (ahead-of-
time) compilation.
Several modern runtime environments, such as Microsoft's .NET Framework and
most implementations of Java, rely on JIT compilation for high-speed code
execution.

Overview

In a bytecode-compiled system, source code is translated to an intermediate

representation known as bytecode. Bytecode is not the machine code for any
particular computer, and may be portable among computer architectures. The
bytecode may then be interpreted by, or run on, a virtual machine. A just-in-time
compiler can be used as a way to speed up execution of bytecode. At the time the
bytecode is run, the just-in-time compiler will compile some or all of it to native
machine code for better performance. This can be done per-file, per-function or
even on any arbitrary code fragment; the code can be compiled when it is about to
be executed (hence the name "just-in-time").

In contrast, a traditional interpreted virtual machine will simply interpret the

bytecode, generally with much lower performance. Some interpreters even
interpret source code, without the step of first compiling to bytecode, with even
worse performance. Statically compiled code or native code is compiled prior to
deployment. A dynamic compilation environment is one in which the compiler can
be used during execution. For instance, most Common Lisp systems have a
compile function which can compile new functions created during the run. This
provides many of the advantages of JIT, but the programmer, rather than the
runtime, is in control of what parts of the code are compiled. This can also compile
dynamically generated code, which can, in many scenarios, provide substantial
performance advantages over statically compiled code, as well as over most JIT
systems.

A common goal of using JIT techniques is to reach or surpass the performance of

static compilation, while maintaining the advantages of bytecode interpretation:
Much of the "heavy lifting" of parsing the original source code and performing
basic optimization is often handled at compile time, prior to deployment:
compilation from bytecode to machine code is much faster than compiling from
source. The deployed bytecode is portable, unlike native code. Since the runtime
has control over the compilation, like interpreted bytecode, it can run in a secure
sandbox. Compilers from bytecode to machine code are easier to write, because the
portable bytecode compiler has already done much of the work.
JIT code generally offers far better performance than interpreters. In addition, it
can in some or many cases offer better performance than static compilation, as
many optimizations are only feasible at run-time:

1. The compilation can be optimized to the targeted CPU and the operating
system model where the application runs. For example JIT can choose SSE2
CPU instructions when it detects that the CPU supports them. With a static
compiler one must write two versions of the code, possibly using inline
assembly.
2. The system is able to collect statistics about how the program is actually
running in the environment it is in, and it can rearrange and recompile for
optimum performance. However, some static compilers can also take profile
information as input.
3. The system can do global code optimizations (e.g. inlining of library
functions) without losing the advantages of dynamic linking and without the
overheads inherent to static compilers and linkers. Specifically, when doing
global inline substitutions, a static compiler must insert run-time checks and
ensure that a virtual call would occur if the actual class of the object
overrides the inlined method.
4. Although this is possible with statically compiled garbage collected
languages, a bytecode system can more easily rearrange memory for better
cache utilization.

However, JIT typically causes a slight delay in initial execution of an application,

due to the time taken to compile the bytecode. Sometimes this delay is called
"startup time delay". In general, the more optimization JIT performs, the better
code it will generate. However, users will experience a longer delay. A JIT
compiler therefore has to make a trade-off between the compilation time and the
quality of the code it hopes to generate.

One possible optimization, used by Sun's HotSpot Java Virtual Machine, is to

combine interpretation and JIT compilation. The application code is initially
interpreted, but the JVM monitors which sequences of bytecode are frequently
executed and translates them to machine code for direct execution on the hardware.
For bytecode which is executed only a few times, this saves the compilation time
and reduces the initial latency; for frequently executed bytecode, JIT compilation is
used to run at high speed, after an initial phase of slow interpretation. Additionally,
since a program spends most time executing a minority of its code, the saved
compilation time is big. Finally, during the initial code interpretation, execution
statistics can be collected before compilation, which helps to perform better
optimization.[1]

Also, Sun's Java Virtual Machine has two major modes -- client and server. In
client mode, minimal compilation and optimization is performed, to reduce startup
time. In server mode, extensive compilation and optimization is performed, to
maximize performance once the application is running by sacrificing startup time.

"Native Image Generator" (Ngen.exe) by Microsoft is another approach at

reducing the initial delay. Ngen pre-compiles (or pre-jits) bytecode in a Common
Intermediate Language image into machine native code. As a result, no runtime
compilation is needed. .NET framework 2.0 shipped with Visual Studio 2005 runs
Ngen.exe on all of the Microsoft library DLLs right after the installation. Pre-
jitting provides a way to improve the startup time. However, the quality of code it
generates might not be as good as the one that is jitted, for many of the same
reasons why statically compiled code cannot be as good as JIT compiled code in
the extreme case.

Material Requirements Planning (MRP) is a software based production planning

and inventory control system used to manage manufacturing processes. Although it
is not common nowadays, it is possible to conduct MRP by hand as well.

An MRP system is intended to simultaneously meet three objectives:

• Ensure materials and products are available for production and delivery to
customers.
• Maintain the lowest possible level of inventory.
• Plan manufacturing activities, delivery schedules and purchasing activities.

The scope of MRP in manufacturing

Manufacturing organizations, whatever their products, face the same daily

practical problem - that customers want products to be available in a shorter time
than it takes to make them. This means that some level of planning is required.

Companies need to control the types and quantities of materials they purchase, plan
which products are to be produced and in what quantities and ensure that they are
able to meet current and future customer demand, all at the lowest possible cost.
Making a bad decision in any of these areas will make the company lose money. A
few examples are given below:
 • If a company purchases insufficient quantities of an item used in
manufacturing, or the wrong item, they may be unable to meet contracts to
supply products by the agreed date.

• If a company purchases excessive quantities of an item, money is being

wasted - the excess quantity ties up cash while it remains as stock and may
never even be used at all. However, some purchased items will have a
minimum quantity that must be met, therefore, purchasing excess is
necessary.

• Beginning production of an order at the wrong time can cause customer

deadlines to be missed.

MRP is a tool to deal with these problems. It provides answers for several
questions:

• What items are required?

• How many are required?
• When are they required?

MRP can be applied both to items that are purchased from outside suppliers and to
sub-assemblies, produced internally, that are components of more complex items.

The data that must be considered include:

• The end item (or items) being created. This is sometimes called Independent
Demand, or Level "0" on BOM (Bill of materials).
• How much is required at a time.
• When the quantities are required to meet demand.
• Shelf life of stored materials.
• Inventory status records. Records of net materials available for use already
in stock (on hand) and materials on order from suppliers.
• Bills of materials. Details of the materials, components and subassemblies
required to make each product.
• Planning Data. This includes all the restraints and directions to produce the
end items. This includes such items as: Routings, Labor and Machine
Standards, Quality and Testing Standards, Pull/Work Cell and Push
commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot,
Economic Order Quantity), Scrap Percentages, and other inputs.

Outputs
There are two outputs and a variety of messages/reports:

• Output 1 is the "Recommended Production Schedule" which lays out a

detailed schedule of the required minimum start and completion dates, with
quantities, for each step of the Routing and Bill Of Material required to
satisfy the demand from the MPS.
• Output 2 is the "Recommended Purchasing Schedule". This lays out both the
dates that the purchased items should be received into the facility AND the
dates that the Purchase orders, or Blanket Order Release should occur to
match the production schedules.

Messages and Reports:

• Purchase orders. An order to a supplier to provide materials.

• Reschedule notices. These recommend cancelling, increasing, delaying or
speeding up existing orders.

Note that the outputs are recommended. Due to a variety of changing conditions in
companies, since the last MRP / ERP system Re-Generation, the recommended
outputs need to be reviewed by trained people to group orders for benefits in set-
up or freight savings. These actions are beyond the linear calculations of the MRP
computer software.

[edit] Problems with MRP systems

The major problem with MRP systems is the integrity of the data. If there are any
errors in the inventory data, the bill of materials (commonly referred to as 'BOM')
data, or the master production schedule, then the outputted data will also be
incorrect. Most vendors of this type of system recommend at least 99% data
integrity for the system to give useful results.

Another major problem with MRP systems is the requirement that the user specify
how long it will take a factory to make a product from its component parts
(assuming they are all available). Additionally, the system design also assumes that
this "lead time" in manufacturing will be the same each time the item is made,
without regard to quantity being made, or other items being made simultaneously
in the factory.

A manufacturer may have factories in different cities or even countries. It is no

good for an MRP system to say that we do not need to order some material because
we have plenty thousands of miles away. The overall ERP system needs to be able
to organize inventory and needs by individual factory, and intercommunicate needs
in order to enable each factory to redistribute components in order to serve the
overall enterprise.

This means that other systems in the enterprise need to work properly both before
implementing an MRP system, and into the future. For example systems like
variety reduction and engineering which makes sure that product comes out right
first time (without defects) must be in place.

Production may be in progress for some part, whose design gets changed, with
customer orders in the system for both the old design, and the new one,
concurrently. The overall ERP system needs to have a system of coding parts such
that the MRP will correctly calculate needs and tracking for both versions. Parts
must be booked into and out of stores more regularly than the MRP calculations
take place. Note, these other systems can well be manual systems, but must
interface to the MRP. For example, a 'walk around' stocktake done just prior to the
MRP calculations can be a practical solution for a small inventory (especially if it
is an "open store").

The other major drawback of MRP is that takes no account of capacity in its
calculations. This means it will give results that are impossible to implement due to
manpower or machine or supplier capacity constraints. However this is largely
dealt with by MRP II.

Generally, MRP II refers to a system with integrated financials. An MRP II system

can include finite / infinite capacity planning. But, to be considered a true MRP II
system must also include financials.

In the MRP II (or MRP2) concept, fluctuations in forecast data are taken into
account by including simulation of the master production schedule, thus creating a
long-term control[2]. A more general feature of MRP2 is its extension to purchasing,
to marketing and to finance (integration of all the function of the company), ERP
has been the next step.

MRP II systems have been implemented in most manufacturing industries. Some

industries need specialised functions e.g. lot traceability in regulated
manufacturing such as pharmaceuticals or food. Other industries can afford to
disregard facilities required by others e.g. the tableware industry has few starting
materials – mainly clay – and does not need complex materials planning. Capacity
planning is the key to success in this as in many industries, and it is in those that
MRP II is less appropriate.
[edit] MRP and MRPII: History and Evolution

Material Requirements Planning (MRP) and Manufacturing Resource Planning

(MRPII) are predecessors of Enterprise Resource Planning (ERP), a business
information integration system. The development of these manufacturing
coordination and integration methods and tools made today’s ERP systems
possible. Both MRP and MRPII are still widely used, independently and as
modules of more comprehensive ERP systems, but the original vision of integrated
information systems as we know them today began with the development of MRP
and MRPII in manufacturing.

The vision for MRP and MRPII was to centralize and integrate business
information in a way that would facilitate decision making for production line
managers and increase the efficiency of the production line overall. In the 1980s,
manufacturers developed systems for calculating the resource requirements of a
production run based on sales forecasts. In order to calculate the raw materials
needed to produce products and to schedule the purchase of those materials along
with the machine and labor time needed, production managers recognized that they
would need to use computer and software technology to manage the information.
Originally, manufacturing operations built custom software programs that ran on
mainframes.

Material Requirements Planning (MRP) was an early iteration of the integrated

information systems vision. MRP information systems helped managers determine
the quantity and timing of raw materials purchases. Information systems that
would assist managers with other parts of the manufacturing process, MRPII,
followed. While MRP was primarily concerned with materials, MRPII was
concerned with the integration of all aspects of the manufacturing process,
including materials, finance and human relations.

Like today’s ERP systems, MRPII was designed to integrate a lot of information by
way of a centralized database. However, the hardware, software, and relational
database technology of the 1980s was not advanced enough to provide the speed
and capacity to run these systems in real-time[2], and the cost of these systems was
prohibitive for most businesses. Nonetheless, the vision had been established, and
shifts in the underlying business processes along with rapid advances in technology
led to the more affordable enterprise and application integration systems that big
businesses and many medium and smaller businesses use today (Monk and
Wagner).
MRP and MRPII: General Concepts

Material Requirements Planning (MRP) and Manufacturing Resource Planning

(MRPII) are both incremental information integration business process strategies
that are implemented using hardware and modular software applications linked to a
central database that stores and delivers business data and information.

MRP is concerned primarily with manufacturing materials while MRPII is

concerned with the coordination of the entire manufacturing production, including
materials, finance, and human relations. The goal of MRPII is to provide consistent
data to all players in the manufacturing process as the product moves through the
production line.

MRPII systems begin with MRP, Material Requirements Planning. MRP allows for
the input of sales forecasts from sales and marketing. These forecasts determine the
raw materials demand. MRP and MRPII systems draw on a Master Production
Schedule, the break down of specific plans for each product on a line. While MRP
allows for the coordination of raw materials purchasing, MRPII facilitates the
development of a detailed production schedule that accounts for machine and labor
capacity, scheduling the production runs according to the arrival of materials. An
MRPII output is a final labor and machine schedule. Data about the cost of
production, including machine time, labor time and materials used, as well as final
production numbers, is provided from the MRPII system to accounting and finance

Scheduling is an important tool for manufacturing and engineering, where it can

have a major impact on the productivity of a process. In manufacturing, the
purpose of scheduling is to minimize the production time and costs, by telling a
production facility what to make, when, with which staff, and on which equipment.
Production scheduling aims to maximize the efficiency of the operation and reduce
costs.

Production scheduling tools greatly outperform older manual scheduling methods.

These provide the production scheduler with powerful graphical interfaces which
can be used to visually optimize real-time work loads in various stages of
production, and pattern recognition allows the software to automatically create
scheduling opportunities which might not be apparent without this view into the
data. For example, an airline might wish to minimize the number of airport gates
required for its aircraft, in order to reduce costs, and scheduling software can allow
the planners to see how this can be done, by analyzing time tables, aircraft usage,
or the flow of passengers.
Companies use backward and forward scheduling to allocate plant and machinery
resources, plan human resources, plan production processes and purchase
materials.

Forward scheduling is planning the tasks from the date resources become available
to determine the shipping date or the due date.

Backward scheduling is planning the tasks from the due date or required-by date to
determine the start date and/or any changes in capacity required

There are four major decision areas in supply chain management:

1) Location,
2) Production,
3) Inventory,
4) Transportation (distribution),
These are both strategic and operational elements in each of these decision areas.
They are also referred to as the key elements of supply chain management

LOCATION DECISIONS

The geographic placement of production facilities, stocking points, and sourcing

points is the natural first step in creating a supply chain. The location of facilities
involves a commitment of resources to a long-term plan. Once the size, number,
and location of these are determined, so are the possible paths by which the
product flows through to the final customer. These decisions are of great
significance to a firm since they represent the basic strategy for accessing customer
markets, and will have a considerable impact on revenue, cost, and level of service.
These decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content,
distribution costs, production limitations, etc. (Arntzen, Brown, Harrison and
Tafton [1995] for a thorough discussion of these aspects.) Although location
decisions are primarily strategic, they also have implications on an operational
level.

PRODUCTION DECISIONS
The strategic decisions include what products to produce, and which plants to
produce them in, allocation of suppliers to plants, plants to DC's, and DC's to
customer markets. As before, these decisions have a big impact on the revenues,
costs and customer service levels of the firm. These decisions assume the existence
of the facilities, but determine the exact path(s) through which a product flows to
and from these facilities. Another critical issue is the capacity of the manufacturing
facilities--and this largely depends the degree of vertical integration within the
firm. Operational decisions focus on detailed production scheduling. These
decisions include the construction of the master production schedules, scheduling
production on machines, and equipment maintenance. Other considerations include
workload balancing, and quality control measures at a production facility.
Inventory Decisions
These refer to means by which inventories are managed. Inventories exist at every
stage of the supply chain as either raw materials, semi-finished or finished goods.
They can also be in-process between locations. Their primary purpose to buffer
against any uncertainty that might exist in the supply chain. Since holding of
inventories can cost anywhere between 20 to 40 percent of their value, their
efficient management is critical in supply chain operations. It is strategic in the
sense that top management sets goals. However, most researchers have approached
the management of inventory from an operational perspective. These include
deployment strategies (push versus pull), control policies --- the determination of
the optimal levels of order quantities and reorder points, and setting safety stock
levels, at each stocking location. These levels are critical, since they are primary
determinants of customer service levels.

Transportation Decisions

The mode choice aspect of these decisions are the more strategic ones. These are
closely linked to the inventory decisions, since the best choice of mode is often
found by trading-off the cost of using the particular mode of transport with the
indirect cost of inventory associated with that mode. While air shipments may be
fast, reliable, and warrant lesser safety stocks, they are expensive. Meanwhile
shipping by sea or rail may be much cheaper, but they necessitate holding
relatively large amounts of inventory to buffer against the inherent uncertainty
associated with them. Therefore customer service levels and geographic location
play vital roles in such decisions. Since transportation is more than 30 percent of
the logistics costs, operating efficiently makes good economic sense. Shipment
sizes (consolidated bulk shipments versus Lot-for-Lot), routing and scheduling of
equipment are key in effective management of the firm's transport strategy.