In the last article, I discussed the how to calculate the Re-Order Point (ROP). To recap, the importance of the ROP is that it the mathematically ideal point at which to re-order a part in order to minimize holding costs while preventing a stock out at a certain service level. To help calculate the ROP, I have added an excel spreadsheet with sample data. Feel free to download this file and change the data on the two sheets in order to calculate your own ROPs.
I hope by now you understand why the ROP is important and how to calculate it. The problem now is how to know when you’ve reached the pre-determined point at which you want to re-order. Before I discuss Radio Frequency Identification Tags (RFID), I am going to cover some basic practices of inventory counting practices.
One way to keep track of inventory is to determine how many you have ordered and how may you have used. The remaining difference should be what you have in inventory. To make this process more accurate, many companies put barcodes on items and scan them at all locations to help track them. Unfortunately, for various reasons, this is not always as accurate is needs to be. Whether it is because of scrap, or stolen goods, this method of inventory counting is rarely 100% accurate.
Many organizations prefer to use a physical count of their materials. This means that some poor sap has the job of going around and counting exactly (or inexactly) how many of each material there is. This is a great way to manage inventory if you’re a handmade violin manufacturer and you make 1 violin a week. If however, you run an audio accessory plant that produces over 10,000 pairs of headphones a day, then a physical count might not be so simple. Or, imagine if you had not only 1 product, but had over 1000 and maintaining optimal inventory levels was an essential part of your business.
Wal-Mart has over 1000 products on their shelves and maintaining optimal inventory levels is essential to their business. One of the reasons they are able to keep costs so low is because of their high inventory turnover which is made possible by maintaining particular inventory levels. A physical count for a company with as many products as Wal-Mart is out of the question. Wal-Mart employs RFID tags in order to keep track of their inventory.
These tags send out radio frequencies tracked by computers which allow managers to keep track of where goods are at any point in time. These tags allow managers to not only track how much of a product is in their factory at a given point in time, but also where it is. RFID tags are essentially a manner of making the goods tell a computer where they are allowing the computer to count the goods, thus eliminating the need to count inventory physically while still keeping accurate counts of the inventory.
Currently, IBM is working on a more affordable RFID system.
Read More about RFID: http://www.rfidgazette.org/