1 KOD DAN NAMA PROGRAM / PROGRAM’S CODE & NAME FB-025-4:2012 – ADMINISTRATIVE MANAGEMENT TAHAP / LEVEL L4 KOD DAN NAMA UNIT KOMPETENSI / COMPETENCY UNIT CODE. AND NAME C03 – OFFICE INVENTORY MANAGEMENT NO. DAN PENYATAAN AKTIVITI KERJA / WORK ACTIVITIES NO. AND STATEMENT 1. IDENTIFY OFFICE INVENTORY MANAGEMENT REQUIREMENTS 2. PLAN OFFICE INVENTORY MANAGEMENT ACTIVITIES 3. PERFORM INVENTORY MANAGEMENT 4. REPORT OFFIE INVENTORY MANAGEMENT ACTIVITIES NO. KOD/CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 1 Drp / of : 11 TAJUK/TITLE: OFFICE INVENTORY MANAGEMENT SYSTEM TUJUAN/PURPOSE: This Information Sheet is intended to describe on inventory management checklist format, inventory management system and method, par stock, Economic Ordering Quantity (EOQ), ordering schedule, storing arrangement and stock take activity. COLLEGE BREYER KL (L02020) LEVEL 8, WISMA HAVELA THAKARDAS, NO.1, JALAN TIONG NAM, 50350 KUALA LUMPUR. KERTAS PENERANGAN ( INFORMATION SHEET )
2 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 2 Drp / of : 15 PENERANGAN/INFORMATION: 1. INVENTORY MANAGEMENT CHECKLIST FORMAT It is extremely important that you start with a checklist of all the items that should be in the inventory before starting the count. If your results are not accurate, it might lead to misstatements about the company’s inventory and can lead to budget mismanagement, theft, and overall customer dissatisfaction. Given below is a sample of an Inventory Audit Checklist that aims to cover all the aspects of a firm’s inventory planning and management. You can add to this list, or make changes as required. 1.1 Inventory Level i. Have you invested too much money in his inventory? ii. Are there shortages in the stock on a regular interval? iii. Does the inventory contain obsolete items which are hardly used? iv. Is there a set time for placing orders? v. Is the inventory level accurately recorded regularly? 1.2 Inventory Policies i. Are there any realistic reorder point levels in the Company? ii. Are there any safety stock levels in the Company? iii. Does the Company have realistic inventory lead times? iv. Are all the inventory policies and regulations properly documented? v. Does the company has policies that cover movement of product between facilities? 1.3 Inventory Monitoring i. Are the records regarding the Company’s inventory regularly updated?
3 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 3 Drp / of : 15 ii. Are all incoming and outgoing materials properly documented during transactions? iii. Are the inventory records verified? iv. Are the surplus items properly stored and listed in the inventory? v. Is there a training protocol that covers inventory management? 2. INVENTORY MANAGEMENT SYSTEM AND METHOD 2.1 Definition of inventory management The key to managing any inventory, including those in your office supply closet, is attention. If you pay attention to what you have, how much you use and how often you need more, you can create an office inventory method that works for you and saves you money. By limiting access and creating a written procedure for your inventory management, everyone can work together to make sure your inventory stays under control. 2.2 How inventory management works? Inventories are company assets that are intended for use in the production of goods or services made for sale, are currently in the production process, or are finished products held for sale in the ordinary course of business. Inventory also includes goods or services that are on consignment (subject to return by a retailer) or in transit. There are three types of inventory: raw materials, work-in-progress, and finished goods. Given the significant costs and benefits associated with inventory, companies spend considerable amounts of time calculating what the optimal level of inventory should be at any given time. Because maximizing profits means minimizing inventory expenses, several inventory-control models, such as the ABC inventory classification method, the economic order quantity (EOQ) model, and just-in-time management are intended to answer the question of how much to order or produce. Inventory management also means maintaining effective internal controls over inventory, including safeguarding the inventory from damage or theft,
4 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 4 Drp / of : 15 using purchase orders to track inventory movement, maintaining an inventory ledger, and frequently comparing physical inventory counts with recorded amounts. Common inventory accounting methods include "first in, first out" (FIFO), "last in, first out" (LIFO), and lower of cost or market (LCM). Some industries, such as the retail industry, tailor these methods to fit their specific circumstances. Public companies must disclose their inventory accounting methods in the notes accompanying their financial statements. Inventory management makes its biggest mark on the inventory line item of the balance sheet. That line item doesn't just reflect the cost of the inventory; it also reflects costs directly or indirectly incurred in readying an item for sale, including not only the purchase price of that item but the freight, receiving, unpacking, inspecting, storage, maintenance, insurance, taxes, and other costs associated with it. 2.3 Types of inventory management systems and methods i. ABC Method This is one of the common methods used across retail industry and it is at times coupled with other methods for better control on inventory. This is more of an inventory classification technique where in products are classified based on the sales contribution and importance of the same in their assortment plan. A- Category products will be the maximum grocers in sales and flagship products with higher margin. Usually top 20% of the products in the assortment contributing to 80% of the total sales are classified under A category where tight control on inventory is required to ensure no loss in sales. 20% of products contributing to 80% of sales is known as 80-20 Rule or Pareto principle C-Category products are bottom of the line contributing less to sales. These items are marginally important for the business and are kept only for the sole purpose of customer requirement. B-Category products are important to the retailer but are less important compared to A Category products.
5 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 5 Drp / of : 15 ii. TWO BIN Method Diagram 1: TWO BIN Method This is a simple method used usually in warehousing where in an item is stored in two locations or bins in a warehouse and the stock is replenished in the first bin from the second bin once the first bin is consumed completely. The required quantity to be filled in the second bin is placed for ordering. The availability of stock in each bin is calculated based on reorder lead time to ensure enough stock is made available till the new stock arrives.
6 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 6 Drp / of : 15 iii. THREE BIN Method Diagram 2: THREE BIN Method This is a common method following in manufacturing where Kanban system is being followed. It is similar to two bins system with a third bin at the suppliers' location. The supplier will not manufacture spare parts for the manufacturer until the reserve bin is emptied. Three bins each with a Kanban card tracking movement of inventory is available, one at manufacturing/ shop floor, one at the shop/back store, one with the supplier. Once the inventory in manufacturing/shop floor bin/display is consumed/sold, it is replenishmed with the complete bin from the back store/shop. Later the back store bin is sent to the supplier and replace with a complete bin from the supplier. Then the supplier will manufacture to fill the inventory in the third bin with him. This will act as a complete loop until manufacturing of the product is ceased. iv. Fixed Order Quantity This method is used to avoid ordering mistakes and ensure regular replenishment of existing products. Only a fixed quantity can be ordered at one time for the item. This type of ordering is usually used in auto replenishment of goods where in auto reordering point is set in system and when the product's inventory level hits the reordering point or minimum stock levels, an order is placed to the maximum stocking capacity of the product. To use this method the retailer should know the minimum and maximum stocking capacity of the product based on space allocated and the sales trend.
7 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 7 Drp / of : 15 In the above, the item has maximum stocking capacity of 24 and reorder point is set as 4, so when the inventory hits 4 units, a purchase order is auto generated for 20 units to full fill the gap. v. Fixed Period Ordering In this system there is fixed time interval between every order placed for the item. For example a vendor will visit the store in person and check the inventory of the respective products and resupply the products based on the sales for the time duration. This kind of ordering is done in small format stores like pharmacies and grocery stores vi. Just In Time (JIT) The objective of JUST IN TIME method is to increase the inventory turnover and at the same time reduce the inventory holding cost. JIT inventory system also exposes the unwanted or the dead inventory held my the retailer/ manufacturer. This method is ideal for manufacturing organisation and it is not used in Retail industry in general. This will also involve usage if Kanban card to track inventory movement vii. Vendor Managed Inventory As the name explains, it involved SKUs managed directly by the supplier. Inventory is replenished based on the sales on regular intervals by the vendor. The retailer provides shop floor space and the vendor is charged a consignment rate on every product sold at the location. The ownership of the items from receiving to sales and inventory loss if any will be with the supplier. 3. PAR STOCK AND ECONOMIC ORDERING QUANTITY (EOQ) 3.1 Par stock Inventory par levels are the minimum quantity of a given item that must always be in stock. When an item hits below par levels, an order should be placed to replenish that item. Par levels are created in order to ensure that the product is always stocked at the optimal amount and you have a healthy inventory turnover ratio . To set par levels , you will need to identify the optimal stock levels for each item and you’ll need to know what your inventory on hand ratio is. Your inventory on hand is a
8 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 8 Drp / of : 15 ratio used to measure the number of days it takes your business to sell it’s average balance of inventory. The formula for inventory on hand is: Average Inventory / Costs of Goods Sold x Number of Days in the Year = Inventory on Hand Once you know your inventory on hand, you can compare it against your sales report to see how much inventory of each item is depleted between each delivery. The inventory on hand and sales report together will tell you how fast you go through your inventory and will in turn help you understand when orders need to be placed and in what quantities. In order to better facilitate par inventory predictions, it’s recommended to use both front and back of house tools that provide the data you need based on your purchases and your inventory. Using the Simple Order platform, you will know the costs of goods sold and the value of your inventory in order to determine par levels with more ease. Predicting par levels with accuracy for a given time period, is a very important factor in keeping our restaurant financially viable. 3.2 Economic Ordering Quantity (EOQ) Economic order quantity (EOQ) is an equation for inventory that determines the ideal order quantity a company should purchase for its inventory given a set cost of production, demand rate and other variables. This is done to minimize variable inventory costs, and the formula takes into account storage, or holding, costs, ordering costs and shortage costs. The full equation is as follows: where : S = Setup costs D = Demand rate P = Production cost I = Interest rate (considered an opportunity cost, so the risk-free rate can be used) EOQ is an important tool for management to minimize the cost of inventory and the amount of cash tied up in the inventory balance. For many companies, inventory is the largest asset balance owned by the company, and these businesses must carry sufficient
9 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 9 Drp / of : 15 inventory to meet the needs of customers. If EOQ can help minimize the level of inventory, the cash savings can be used for some other business purpose. One component of the EOQ formula calculates a reorder point, which is a level of inventory that triggers the need to place an order for more inventory. By determining a reorder point, the business avoids running out of inventory and is able to fill all customer orders. If the company runs out of inventory, there is a shortage cost, which is the revenue lost because the company does not fill an order. Having an inventory shortage may also mean the company loses the customer or the client orders less in the future. EOQ takes into account the timing of reordering, the cost incurred to place an order and costs to store merchandise. If the company is constantly placing small orders to maintain a specific inventory level, the ordering costs are higher, along with the need for additional storage space. Assume, for example, a retail clothing shop carries a line of men’s jeans and the shop sells 1,000 pairs of jeans each year. It costs the company $5 per year to hold a pair of jeans in inventory, and the fixed cost to place an order is $2. The EOQ formula is the square root of: (2 X 1,000 pairs X $2 order cost) / ($5 holding cost), or 28.284 with rounding. The ideal order size to minimize costs and meet customer demand is slightly over 28 pairs of jeans. A more complex portion of the EOQ formula provides the reorder point. 4. ORDERING SCHEDULE 4.1 Identify Need The business must know it needs a new product, whether from internal or external sources. The product may be one that needs to be reordered, or it may be a new item for the company. 4.2 Requisition Document generated by a user department or storeroom-personnel to notify the purchasing department of items it needs to order, their quantity, and timeframe. It may also contain authorization to proceed with the purchase.
10 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 10 Drp / of : 15 4.3 Quotation Quotation in purchasing is called request for quotation (RFQ) or draft purchase order. It's an early stage of purchase order which there are no confirmation yet from the supplier about the price or the availability of the product. 4.4 Propose A request for a proposal accounts for price but focuses on meeting the project quality or schedule requirements. The process of developing a proposal in response to an RFP can be very expensive for the bidder, and the project team should not issue an RFP to a company that is not eligible to win the bid. 4.5 Approval The proposal will be presented to the management or person in charge where that party will provide an approval if it the purchase is deemed necessary. 4.6 Order The purchase order is used to buy materials between a buyer and seller. It specifically defines the price, specifications and terms and conditions of the product or service and any additional obligations. 4.7 Invoice An invoice is a commercial document that itemizes a transaction between a buyer and a seller. If goods or services were purchased on credit, the invoice usually specifies the terms of the deal, and provide information on the available methods of payment. An invoice is also known as a bill or sales invoice. 4.8 Payment Three documents must match when an invoice requests payment - the invoice itself, the receiving document and the original purchase order. The agreement of these documents provides confirmation from both the receiver and supplier. Any discrepancies must be resolved before the recipient pays the bill. Usually, payment is made in the form of cash,
11 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 11 Drp / of : 15 check, bank transfers, credit letters or other types of electronic transfers. 4.9 Receipt A receipt is a written acknowledgment that something of value has been transferred from one party to another. In addition to the receipts consumers typically receive from vendors and service providers, receipts are also issued in business-to-business dealings, as well as stock markettransactions. For example, the holder of a futures contact is generally given a delivery instrument, which acts as a receipt, in that it can be exchanged for the underlying asset when the future contract expires. 5. STORING ARRANGEMENT 5.1 First in first out (FIFO) First in, first out (FIFO) is an asset-management and valuation method in which the assets produced or acquired first are sold, used or disposed of first and may be used by a individual or a corporation. For taxation purposes, FIFO assumes that the assets that are remaining in inventory are matched to the assets that are most recently purchased or produced. FIFO is used for cost flow assumption purposes. As items being manufactured progress to later development stages and as finished inventory items get sold, the associated costs with that product must be recognized as an expense. The dollar value of total inventory decreases as this occurs because inventory has been removed from the company’s ownership. The costs associated with the inventory may be calculated in numerous ways —one being the FIFO method. 5.2 Last in first out (LIFO) Last in, first out (LIFO) is an asset management and valuation method that assumes assets produced or acquired last are the ones used, sold or disposed of first; LIFO assumes an entity sells, uses or disposes of its newest inventory first. If an asset is sold for less than it is acquired, then the difference is considered a capital loss. If an asset is sold for more than it is acquired, the difference is considered a capital gain. Using the LIFO method to evaluate and manage inventory can be tax advantageous, but it may also increase tax liability. The world of accounting is full of inventory
12 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 12 Drp / of : 15 management conventions used to help keep track of the cost and value of inventory. For this, accountants have developed two systems of inventory management: first in, first out (FIFO) and last in, first out (LIFO). 6. STOCK TAKE ACTIVITY Stock taking is the counting of on-hand inventory. This means identifying every item on hand, counting it and summarizing these quantities by item. There may also be a verification step, where the count results are compared to the inventory unit counts in a company's computer system. Stock taking is a common requirement of a periodic inventory system, and may also be required as part of a company's annual audit. 6.1 Stock card A document that records the status of a good held in stock room. A typical retailing business with a large stock room will use a stock card to record a running balance of stock on hand, in addition to information about stock received and notes about problems associated with that stock item. 6.2 Tagging Item-level tagging (or RFID item-level tagging, also known as ILT) is the tagging of individual products, as opposed to case-level and pallet-level tagging.[1] Item-level tagging is used to track individual items in order to better control inventory, by providing retailers with the ability to tag individual items on the retail floor.[2] Previously, RFID tags were used to track pallets of merchandise, rather than individual items, through the supply chain. [3] With the use of printed RFID tags, retailers are now able to track inventory at the item level, scan the tag, and know the location. 6.3 Frequency A full physical count is usually performed once a year, closer to the end of the year. A physical inventory is needed to provide accurate accounting data and identify any differences between what is currently in the warehouse(s) and what is reflected in the accounting system. If differences exist, then adjustments should be made to get the accounting counts to match the warehouse counts.
13 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 13 Drp / of : 15 A full physical inventory is usually performed when all inventory movements are stopped to ensure better accuracy. Cycle count frequency is determined so that every item is counted at least once a year, and a lot of companies perform counts to have all inventory items counted more than once during a year. Cycle counts may be performed on a daily, weekly, etc. basis depending on business needs. Several methods of selecting inventory for cycle counting exist. One of the methods is to count inventory based on a geographical factor. For example, starting from one location of a warehouse and proceeding systematically to the next location during the year so that by the end of the year the entire warehouse is counted at least once. If a company policy is to count all inventory multiple times a year, then this full cycle of counting a warehouse should take place that number of times, and the number of items counted each time should be adjusted accordingly. Another method to select counts for cycle counting is to put more emphasis on items with more movement than on items with less movement. This is logical because items which move faster and have higher volume will have more chances of misplacements, etc. resulting in differences between what's in the warehouse and what's in the accounting system. Under this method, an inventory item is assigned to a particular category. Such categories are labeled with letters like A, B, and C (thus, the method is sometimes called the ABC method). For example, category A will include items that turn at least 5 times a year, category B items will include items that turn between 2 and 5 times, and category C items will include items that turn fewer than 2 times a year. Then, the company may decide that any items in category A should be counted 12 times a year, in category B – 4 times a year, and in category C – once a year. Based on this information, the company would select items to count based on the established criteria. An alternative to assigning inventory items to categories would be a combination of how fast items turn and how much they cost.
14 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 14 Drp / of : 15 SOALAN/QUESTION : 1. State the three categories in inventory management checklist. __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 2. What is the definition and formula for par stock? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 3. State five types of inventory management method and systems. __________________________________________________________________ __________________________________________________________________ __________________________________________________________________ 4. What is the purpose and benefit of stock tagging? __________________________________________________________________ __________________________________________________________________ __________________________________________________________________
15 NO. KOD / CODE NO. FB-025-4:2012-C03/P(2/5) Muka Surat / Page : 15 Drp / of : 15 REFERENCES • Jaber, M. (2009). Inventory management. CRC Press, Boca Raton, ISBN NO 978-1-42007-997-5. Pp 102-214 • Muller, M. (2011). Essentials of inventory management. AMACOM, New York, ISBN NO 978-0-8144-1655-6. pp.75-168. • QStock Inventory. (2017). Easier and Quicker Inventory Audit Checklist. [online] Available at: http://www.qstockinventory.com/blog/inventory-audit-checklist/ [Accessed 26 Oct. 2017]. • Ramalingam, S. (2014). TYPES OF INVENTORY CONTROL SYSTEMS. [online] LinkedIn.com. Available at: https://www.linkedin.com/pulse/20140814080601-115338191-types-of-inventorycontrol-systems [Accessed 30 Oct. 2017]. • Staff, I. (2014). Economic Order Quantity - EOQ. [online] Investopedia. Available at: https://www.investopedia.com/terms/e/economicorderquantity.asp [Accessed 30 Oct. 2017]. • Staff, I. (2016). Last In, First Out - LIFO. [online] Investopedia. Available at: https://www.investopedia.com/terms/l/lifo.asp [Accessed 30 Oct. 2017].