Application of Inventory Management - Toyota Company - Case Study Example

Running Header: Inventory Management Student’s Name: Instructor’s Name: Course Name & Code: Date of Submission: Table of Contents Table of Contents 2 Executive summary 3 Introduction 4 Literature Review 4 Managing and controlling inventory 6 Corporate attitudes 7 Inventory-role, types and functions 9 Role of inventory 9 Types of inventory 9 Functions of inventory 10 Corporate inventory 11 Impact of inventory on profit levels 11 Application of inventory Management-Toyota Company 12 Recommendations 13 Conclusion 13 References 14 Executive summary The introduction of this study shows the importance of managing materials within a company which shows it solves the problem of mismanagement, the cost of materials used in a Bakery for example wheat, yeast etc. is also minimised and finally strategies can be made in a better way. The literature review shows that once all factors are not incorporated well then inventory inefficiency occur which leads to delays, excessive inventory or incorrect forecasting which have major effects at the customer service level, profit levels and investment. It therefore makes more sense for a company to hold inventory of the dependent demand items at a level not tied to a calculated rate of requirement. The conclusion of the study gives that once management of the Toyota Company understands the two lead times, it becomes easy to know when to place an order and to know how many units will be ordered to smoothly run the production process. Introduction Many small business owners have discovered that inventory is one of the more visible and tangible aspect of doing business. These include raw materials, goods in process and finished goods and are termed as money until they leave the company as purchased products. One major way that has been utilised by companies in achieving profits includes taking inventories as a liability and therefore managing it as a risk. According to Abernathy et al. (2000, pp. 76) the importance of managing materials includes the fact that it solves the problem of mismanagement, the cost of materials is also minimised and finally strategies can be made in a better way. If these factors are not incorporated well then inventory inefficiency occurs which leads to delays, excessive inventory or incorrect forecasting which have major effects at the customer service level. This study analyses Toyota which is a vehicle manufacturing company involved vehicle making and assembly and is located in Japan. The study also shows the inventory management processes involved in the vehicle production system. Literature Review Inventory management involves the specification of the size and placement of safety stocks. Inventory management therefore ensures that the safety stock required at different locations and in many nodes of supply network is against random disturbances and is in respect to the demand and at the replenishment lead time. Bowers and Agarwal (1999, pp. 30-33) describes that inventory management also involves proper storage, handling and distribution of stock. It involves knowing what is in hand, where it is to be used and what are the results of the finished products. It also involves overseeing the constant flow of units in and out of the organisation. This avoids inventory to be too high or too low which could jeopardise the company. Inventory management Also controls the costs associated with the for example from the total value of goods included in the tax burden and generated by the value of the inventory. There are various factors that should be considered in order to balance inventory management. One of the factors is time. It is necessary to understand how long it would take for a supplier to deliver various parts required to manufacture vehicles and deliver them to customers. This helps management in setting time frames for various products and therefore avoids delays and effective flow of products. The time factor to be considered enables one to have a solid understanding of how long it takes for company materials to be transferred out of the inventory. Once management understands the two lead times, it becomes easy to know when to place an order and to know how many units will be ordered to smoothly run the production process. According to Scholasticus (2010) the other important factor needed to be considered in inventory management is being able to calculate buffer stock. Buffer stock is referred as the additional units above and beyond the minimum number required in maintaining the production levels. An example is where management may decide to keep in store one or two extra units of a particular machine part on hand for an emergency situation. This creation of buffer helps to minimise the chance for interruption of production for example due to lack of necessary parts in the operation supply inventory. Inventory management also involves documentation of the delivery raw materials in this case wheat, yeast, sugar etc. and the movement of materials to their operational process. This movement is known as work in progress inventory and it is necessary for managers to track the movement of these materials used to create finished goods. It also helps in identifying whether the material needed is available and to adjust the ordering amounts incase more will be needed to complete the project. Inventory management finally involves keeping accurate records of finished goods meant for shipment purposes. This management involves updating the newly finished goods records and subtracting the recent shipments of finished goods to buyers. In cases where the company has a return policy, a sub-category found in finished goods inventory is used to account for any returned. These are classified as either refurbished goods or second grade quality. Maintaining accurate figures on the records of finished goods inventory enables a company to quickly convey information to sales personnel showing records of what is available and ready for shipment at any given time of production. Apart from maintaining control of volume and the movement of various inventories, it is also necessary to prepare accurate records used for accessing any tax dues on every inventory. This makes it easy for the company to calculate tax amounts and may lead to underpaying of taxes due or the company may incur stiff penalties of independent audit if the information is not provided (Scholasticus 2010). Managing and controlling inventory Inventory is in various forms which help in the design of delivery systems and in meeting of short time lead times. These needs are met while keeping inventory levels to its minimum level in order to effectively manage operations. Inventory management is a major operations task in a business because it is large and therefore enables other operations to run smoothly and efficiently. It also affects the supply of services and gods to customers if the supply chain management is not effectively managed. Felipe and Jeremie (2010) shows the rate of supply determines the level of inventory which also determines the rate of demand. This is true because as the flow of materials into the process differs from the pattern and the rate at which customers demand, inventory at the same time is held to support the operations delivery system from the changes occurring. Using an example of a water tank, the rate of inflow and outflow of inventory directly affect the level of inventory involved and the management and control processes should be analyzed in forms of various aspects which include; corporate attitudes. This means that although inventory is large in the balance sheet terms, it tends not to be the priority task in any kind of business. The other type of aspect to be analysed is the role, types and functions of inventory. This shows the division between corporate and operations inventory which are parts of the way to effectively manage the asset. Managing and controlling inventory is separated into general and specific issues. Wild (2002) describes that the general issues show the different functional attitudes to inventory and the impact of inventory on the profit levels of a business. It also shows the cost structures, corporate issues, lead times and supplier relations. Specific issues on the other hand shows the independent and the dependent demand principle, the pareto principle, economic order quantities and the calculation and use of reorder levels. Inventory decision is the other aspect considered and it involves what and how much of inventory to hold and to order. Inventory systems and analysis include the different systems used in managing inventory and analyses inventory by cause and for reducing levels. Corporate attitudes The major executive task in inventory management is using of funds and then managing and controlling the investments. Wild (2002) puts it that this is because the balance sheet of any business shows that inventory represents a large part of the overall working capital and therefore need to be effectively managed and controlled. However, the task of managing and controlling inventory is not allocated sufficient resources and the attention given is less. This is because decisions for the use of funds for the purchase of plant and equipment are judged and monitored first then the efforts of managing and controlling inventory comes second. Inventory first increases for the company to be concerned about controlling the flow. Although investment done on company equipment and company’s inventory is of equal size, the former is well managed than the later due to various reasons (Donath et al. 2002). One is because inventory is termed as an intrinsic part of a company’s operations and therefore when output exceeds sales or purchases exceed output, inventory increases and vice versa. This means that changes to the level of inventory influence the company’s day to day activities though they are not specifically addressed once they occur. Investment in equipment is well managed than inventory because it is a one-off event and is invariably made after a conscious decision of addressing a particular proposal to buy. This type of case is therefore easier to manage than inventory which occurs every moment. The second reason why investment is well managed than inventory is because inventory looks the same and it is not easy to detect the acceptable quantities. However, new equipment purchased in business, no matter how small draws attention and questions and therefore easy to control and manage. The third reason is because the control of investment is ongoing as more and more products are produced while that of equipment is a one-off decision and does not demand management’s time. Fourth, inventory control is not viewed as a senior executive task, it is not dynamic and does not attract the attention of top management and therefore seen as ordinary since it occurs daily. It is also disregarded since the contents, issues and discussions are all the same. It is therefore not an agenda in any meeting unless there is either too much or too low levels of inventory. This is not the case with fixed asset investment which is usually an agenda and is seen as a senior executive task to be managed. Inventory-role, types and functions It is important to understand the role of inventory and why organisations hold it. This is because inventory is said to be services or materials that directly or indirectly form part of the ongoing task of delivering services or making products to an organisation. Coleman (2000, pp. 19-23) describes that these materials include inputs, services, part-finished services and products and complete items held for sale. In a fast restaurant, inventory is the stock of food and other items used in everyday’s activity and there are other assets such as cookers and clothes used and reused daily. The stock of food is used and replenished while the equipment for cooking are purchased and consumed for a longer time. Management should however make decisions on what items to hold, how much of an item to carry and when to restock. Role of inventory The role of inventory is to separate the various phases of a service delivery system allowing each manufacturing process to work independently. This is because in a bakery for example, stocking food enables one to cook without having to shop. However, various issues and dimensions are involved for example one may want to use fresh milk for breakfast. Types of inventory Inventory is in two types which include process-related and support inventory. Process related inventory include items that are directly used in the provision of services and in making the final products in an organisation. In a motor vehicle industry, process related inventory include wheels, windscreens, engines etc. in a manufacturing industry for example baking bread, the ingredients used in a bakery include the process-related inventory. It therefore includes all items used in services from raw materials to packaging. Support inventory on the other hand include items that are not basic of the service or product produced though they are necessary as they help in the overall running of the organisation such as making of papers and boxes used in the packaging on bread and cakes. According to Christian (2009) support inventory include maintenance of office supplies or cleaning of kitchen utensils. The fewer process-oriented materials involved in any business, the less inventory is needed to be controlled. In a bank for example, most services are consumed and the paperwork involved in the delivery system include support inventory. It is therefore necessary to control the support inventory as they are also important in the running of a business. Process related inventory consist of three categories which include raw materials and component, work-in-progress and finished goods. Raw materials ate the inputs used to provide service or to make products, work in progress is the work in process which includes the partly completed items waiting for the next stage and finished goods represent outputs or goods to be sold in retail stores. Functions of inventory The functions of inventory are categorised according to the process stage for example the raw materials inputted in an organisation enables the business to cater for the variability of supply, take advantage of quality discounts, provide holding for supplies that could be few in future, form an investment and reduce overall lead times. Bernard (1999) shows the work in progress inventory enables an organisation to maintain independence of stages in the process by separating the steps involved. This therefore results to easy scheduling of orders, stabilisation of different output rates, and reduction of total delivery lead time to supply customer demands and it also facilitates higher utilisation of plant, process and labour. Finished goods inventory on the other hand enable organisations in fast delivery of goods. They also enable the business to achieve a steady delivery of goods to customers and in coping with fluctuations in demand for example of seasonal goods. Finished goods inventory also provide an insurance against equipment and suppliers’ strike. Finished goods in this case include packed breads and cakes ready to be dispatched to their respective buyers. Corporate inventory This is inventory that does not provide operations function and reflect the nature of the organisation. It represents 25 percent of the total inventory and includes sales inventory used to support customer agreements or owing to actual sales being lower than forecast sales. It is also the purchase inventory that is incurred in order to take advantage of quality discounts or the marketing inventory used to support a service or product launch. Operation inventory includes the decoupling inventory, cycle, pipeline, capacity-oriented and buffer (Bernard 1999). Impact of inventory on profit levels Inventory is not just part of working capital but also contributed to profit levels for example where a company is undergoing a period of reduced sales. Where the overhead costs are carried by a level of throughput set or lower sales activity, the profits for that period will be reduced. Vollman et al. (2004) shows management therefore decides whether to carry over some costs to the future for example through spare capacity to make products for stock. Inventory impact profit levels since a proportion from one time period is able to be legitimately being absorbed into the inventory value of that period or be carried forward to a future period when the finished products are sold. Application of inventory Management-Toyota Company Toyota Motor Corporation is a vehicle manufacture company that has its headquarters in Tokyo, China. Toyota has for a long time been recognized in its manufacturing and production of motor vehicles. However, this success has due to its effective inventory management processes that its management has put in place. Toyota success has been attributed to its proper inventory management specifically on its amount of stocks and other placements as illustrated by Vollman (2004). It has effective supply network of inventory which is regularly protect its operations from random disturbances. Just In Time (JIT) is one such inventory management system that Toyota has adopted in its efforts of ensuring it has up-to-date inventory management method. This has greatly led to significant potential of cost saving in terms of cost of production and time taken to produce the end products or vehicles. In terms of Just In Time (JIT), Toyota Company purchase materials and produces units taking into consideration the actual demands by the customers as illustrated by Vollman (2004). However, this inventory management process of JIT can lead to some delays at some point. This is especially when one assembly line comes to a halt due to unavoidable circumstances. This leads to halt of all other processes. Nevertheless, it has saved a lot of expenses for the Toyota while increasing the total production as well as increased efficiency. The effective management of inventory management has enabled Toyota to have “the right supply, at the right time, in exact amount and at the right place”. The supply on time delivery of Toyota has also increased significantly over the years with proper and effective floor space utilization improving greatly. Recommendations It is extremely crucial for the organizations to take into account and put in place appropriate inventory management processes in order to enhance and improve their production. It is therefore the role of management to ensure it has an effective inventory management system in an effort to avoid delays of supplies and production from occurring. Organizations should adopt the inventory management system in an effort to increase the effectiveness of their operations. It is through proper inventory management that organizations and businesses are able to record accurately its sales. Every business regardless of its size should have some inventory management system put in place as a strategy of improving its operations. Conclusion Inventory is therefore not just sizeable in terms of assets but is also a complex to manage and control just like investment. Most companies therefore wish to keep the investment low yet they understand inventory is an integral part of every day’s activity as it is central to workings of processes and delivery systems. In order to distinguish between independent and dependent demand items is the major principle in inventory management. This is because the usage rates of dependent demand items are connected to the level of demand of the independent items. The other difference is that the requirements for dependent demand items are calculated and scheduled together with independent items. It therefore makes more sense for a company to hold inventory of the dependent demand items at a level not tied to a calculated rate of requirement. The key factor in inventory management is fitting the decisions to the characteristics and requirements of an organisation. References Abernathy, F, Dunlop, J, Hammond, J & Well, D 2000, Control your inventory in a world of lean retailing, Harvard Business Review, vol. 78, no. 6, pp. 76-166. Bernard, P 1999, Integrated inventory management, Oliver Wight manufacturing services, Wiley. Bowers, M & Agarwal, A 1999, Lower in-process inventories and better on-time performance as Tanner companies Inc., Interfaces, vol. 25, no. 4, pp. 30-43. Christian, J 2009, Production and inventory management with substitutions, Lecture notes in economics & mathematical systems, vol. 636. Coleman, B 2000, Determining the correct service level target, Production and inventory management journal, vol. 41, no. 1, pp. 19-23. Donath, R, Mazel, J & Dubin, C 2002, The lona handbook of logistics and inventory, Wiley. Felipe, C & Jeremie, G 2010, Inventory management of a fast-fashion retail network, Journal of operations research, vol. 58, no. 2. Scholasticus, K 2010, Inventory management techniques, viewed 25 August 2011, Vollman, T, Berry, W, Whybark, D & Jacobs, R 2004, Manufacturing planning and control systems, 5th edn, McGraw-Hill. Wild, T 2002, Best practices in inventory management, Butterworth, Oxford. Read More