Inventory Systems Summary
University of Phoenix
January 19, 2011
To be successful in today’s business environment, an organization must be able to perform certain fundamentals accurately and efficiently. One of these elements is having an effective and efficient Inventory System Management (ISM). ISM enables one to have the knowledge of where his or her inventory is at every step of the way. This allows one to better interact with consumer and make sales. Choosing the right ISM can lead and pave the ground work for future business success and profitability.
Inventory System Summary
The purpose of this group assignment is to collaborate as a team to compare different inventory systems and describe the advantage and disadvantages of each system in comparison to the others. Management of inventory is important to any business that wants to succeed. Companies purchase inventory systems to help manage the inventory of an organization. Team A reviewed the following companies and their inventory management programs: Best Buy, , and . This Inventory System Summary includes a description of the chosen companies and their inventory systems, and a comparison describing the advantages and disadvantages of each system. Best Buy
Best Buy is the largest consumer electronics store in the world. Each year it increases its presence in the market share and distances itself from others in the industry. Best Buy is headquartered in the Twin cities area of Minnesota, where it handles all main business functions and the leadership that manages its 180,000 employees and 4,000 stores across the globe (Best Buy, 2010). During the previous fiscal year, Best Buy accumulated nearly 50 billion in revenues and 2.2 billion in operating revenue. They also reported that they possess 18.3 billion in total assets and 6.3 billion in total equity.
Best Buy has a large array of merchandise including: consumer and commercial furniture, small and major appliances, and a wide assortment of consumer electronics. They also offer an increasingly large list of services. These services include Geek Squad computer services, Best Buy for Business commercial services, and many other services designed specifically for the end user. They operate stores in many countries across the world; however they also operate their company online. From their website, Bestbuy.com, many of their products and services can be ordered and set up for delivery.
The different types of products and services Best Buy offers in addition to the different options available to purchase and receive their merchandise makes Best Buy a very difficult company to maintain. They are successful because of the time and money put into their inventory systems. To maintain continuity across the board for all of their partner companies and different store brands they operate , Best Buy uses a similar inventory management system that allows them to track inventory, along with a transaction management system that directly adjusts and updates the world wide inventory both in warehouses and within each store.
Most products that Best Buy sales are shipped directly from the manufacturer to the many warehouses and distribution centers across the US and the world where the stores and online sales can pull and ship directly from. One change that Best Buy has gone through the past five years is a switch to a partially vendor based management system. With this new system, Best Buy will limit the vendors and distributers that they purchase from, and will relinquish some of their inventory control over to them. The innovation created by this new system allows vendors to monitor inventory levels and to ship and replenish product as levels get low. Some of the advantages of this system are: the advantage of directly supplying to the customer from vendor, which cuts the delivery time shorter, availability of the product, ability to offer products at a lower price compared to Best Buy’s competitors, and the flexibility to further develop other areas of their business. Some of the disadvantages are: limiting the vendors may limit the variety of products, relinquishing inventory control over to vendors and distributors may negatively impact their customer satisfaction, and the customers may decide to deal with supplier directly which could put Best Buy at risk of loosing their business.
Inventory levels over the past 4 years have remained on an increasingly consistent track as their revenue has risen. According to Best Buy (2010), this rise in revenue and assets is partly due to the fact that they enter new markets and open new stores across the world. The latest opportunities that they have come across include new stores in Europe and other areas overseas. This is new territory for Best Buy but has been a successful venture based on their flexibility with their inventory systems that they have in place. The following table presents the last five year financial highlights according to the Financial Statements and Supplementary Data of Annual Report on Form 10-K. (Investor Relations, 2010) Five-Year Financial Highlights Dollar in millions, except per share amounts
|Fiscal Year | |Revenue |$49,694 |$45,015 |$40,023 |$35,934 |$30,848 | |Operating Income |2,235 |1,870 |2,161 |1,999 |1,644 | |Net Earnings |1,317 |1,003 |1,407 |1,377 |1,140 | |Per Share Data | |Net Sharing |3.10 |2.39 |3.12 |2.79 |2.27 | |Cash dividends declared and|0.56 |0.54 |0.46 |0.36 |0.31 | |paid | | | | | | |Common stock price | |High |45.55 |48.03 |53.90 |59.50 |56.00 | |Low |23.97 |16.42 |41.85 |43.51 |31.93 | |Operating Statistics | |Comparable store sales gain|0.6 % |(1.3 )% |2.9 % |5.0 % |4.9 % | |(decline) | | | | | | |profit rate |24.5 % |24.4 % |23.9 % |24.4 % |25.0 % | |Selling, general and |19.9 % |20.0 % |18.5 % |18.8 % |19.7 % | |administrative expenses | | | | | | |rate | | | | | | |Operating income rate |4.5% |4.2% |5.4% |5.6% |5.3% | |Year-End Data | |Current ratio(6) |1.2 |1.0 |1.1 |1.4 |1.3 | |Total assets |$ 18302 |$ 15826 |$ 12758 |$ 13570 |$ 11864 | |Debt, including |1,802 |1,963 |816 |650 |596 | |current portion | | | | | | |Total shareholders' |6,964 |5,156 |4,524 |6,236 |5,257 | |equity(7) | | | | | | |Number of stores | |Domestic |1,192 |1,107 |971 |873 | 774 | |International(8) |2,835 |2,835 |343 |304 |167 | |Total(8) |4,027 |3,942 |1,314 |1,177 |941 | |Retail square | |footage (000s) | |Domestic |42,488 |40,924 |37,511 |34,092 |30,874 | |International(8) |13,623 |13,331 |11,069 |9,419 |4,652 | |Total(8) |56,111 |54,255 |48,580 |43,511 |35,526 |
Dell is clearly a giant leader in the information technology world. Dell is an American company with headquarters in Round Rock, Texas. The company develops, sells and supports computers and related products and services. The company got its birth in 1984, founded by Michael Dell. Dell has become one of the most admired companies in the electronic industry. According to Fortune Magazine, Dell is listed as the 38th largest company in the United States. Based on total revenue, Dell is the 5th largest company in Texas and the 2nd largest non-oil company in Texas (Wikipedia, 2010). So, how does Dell do it? Managing its inventory base is an indication. From its early beginnings, Dell set the bar. Dell uses the just in time (JIT) approach in the manufacturing facilities. By using this technique, Dell can minimize its inventory cost. In an industry that rapidly changes, maintaining low inventory levels is one key factor to survival. According to Wall Street Journal’s MarketWatch (2010), the following table provides a snapshot portion of the financials recorded for Dell from its balance sheet. Annual Financials for Dell, Inc. All amounts in million except per share amounts
|Year | 01/2010 | 01/2009 | 01/2008 | 01/2007 | |TTM=Trailing Twelve Months | (TTM) | (TTM) | (TTM) | (TTM) | |Assets | |Receivables |8,543.00 | 6,443.00 |7,693.00 |6,152.00 | |Raw Materials |487.00 |454.00 |744.00 |361.00 | |Work In Progress |168.00 |150.00 |160.00 |61.00 | |Purchased Components | 0.00 |0.00 |0.00 |0.00 | |Finished Goods |396.00 |263.00 |276.00 |238.00 | |Other Inventories | 0.00 |0.00 |0.00 |0.00 | |Inventories-Adj Allowances | 0.00 |0.00 |0.00 |0.00 | |Inventories |1,051.00 |867.00 |1,180.00 |660.00 |
According to Wikipedia (2010), just-in-time (JIT) is an inventory strategy that is designed aide in improving a business's return on investment by reducing in-process inventory and any carrying costs associated. JIT production method is also known as the Toyota Production System. JIT works with of use of signals at different points in the manufacturing process. The signals indicate the presence or absence of a part or the need to make another part. If JIT processes are implemented correctly, it can improve an organizations return on investment, quality, and efficiency. It is quite simple; the philosophy behind JIT is inventory is waste and Dell has tried to capture that philosophy. Wal-Mart The world’s largest and most profitable retailer, Wal-Mart continues to expand its reach in the US and worldwide. To do this, Wal-Mart has to track what is selling, what isn’t, and what products its over 3,740 stores nationwide need – whether it be their discount stores, supercenters, or neighborhood markets. The below excerpt from the 2010 annual report (2010 annual report-walmartstores.com, 2010) shows the level of inventories that Wal-Mart has maintained for the last four years: (Amounts in millions except per share and unit count data) |As of and for the Fiscal Years Ended January 31, |2010 |2009 |2008 |2007 | |Financial Position | | | | | |Inventories |$ 33,160 |$34,511 |$ 35,159 |$ 33,667 |
With an average of $34m in inventory, being valued under the LIFO – last in first out- method - keeping track of it is of major importance to the retail giant. To keep track of its inventory, “Wal-mart and Sam’s Club use electronic product code (EPC) labels to make sure the products you want are available when you need them” (walmartstores.com, 2010). What is an EPC? The EPC is a lot like a bar code that most stores use. Wal-Mart uses the EPC because the information that can be tracked about the product being purchased includes: what the product are, who are the manufacturers, and other specifics like color, size, style, and more. The information provided by the EPC allows Wal-Mart to better manage the inventory on hand, making sure the store provides its customers with what they want, when they want it. How does EPC work? EPC labels consist of a unique number that can be tied back to a specific piece of merchandise. Using special readers, and through the magic of RFID’s, the EPC doesn’t have to be scanned directly for them to be read by the computers. This means that Wal-Mart “can count thousands of items in seconds and know which products are out of stock” (walmartstores.com, 2010). The products that Wal-Mart is tracking with the EPC are easy to find. They are identified by an EPC symbol. What does EPC mean to consumers? The ability to track finite inventory information is important as it ensures that the retail giant can keep products in stock that consumers want. Amazingly, with all the information that the EPC tracks, there is no invasion of privacy to the consumer. The EPC does not collect personal information when purchased. Labels are not tracked once the actual merchandise is bought and leaves the store. Comparison
The different inventory systems used by each organization share a common goal. The system tracks the inventory for each company allowing them to hopefully save money by knowing where items are and what needs to be purchased. Each organization emphasizes inventory control and recognizes the effects of inventory management on their overall profitability. To this end, many of the companies use a variation of bar coding or Radio-frequency identification (RFID) to track inventory. Each organization also ties inventory management to an awareness of demand; this allows the organization to quickly react to changing market conditions.
Because inventory is possibly the largest current asset listed on a organizations financial statement, correct inventory management is at the heart of a business’s success or failure.
2010 Annual Report – Walmartstores.com (2010). Retrieved on January 10, 2011 from http://cdn.walmartstores.com/sites/AnnualReport/2010/PDF/WMT_2010AR_FINAL.pdf Best Buy (2010). Company Reference – Best Buy. Retrieved January 11, 2011 from http://www.answers.com/topic/best-buy-co-inc Dell. (2010). Wall Street Journal: MarketWatch. Retrieved January 12, 2011, from http://www.marketwatch.com/investing/Stock/DELL/financials/balance-sheet Hoyt, W. (2002). The basics of inventory tracking. Retrieved on January 10, 2011 from http://www.essortment.com/career/smallbusinesst_tuag.htm Investor Relations (2010). Retrieved January 11, 2011 from http://phx.corporate-ir.net/phoenix.zhtml?c=83192&p=irol-sec Walmartstores.com (2010). Retrieved on January 10, 2011 from http://walmartstores.com/270.aspx Wikipedia (2010). Dell. Retrieved January