Essentials of Inventory Management / Edition 2

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Inventory management is about more than counting what you’ve got. It’s about understanding business realities and making decisions that balance current demand with future needs—while keeping overhead and operating costs to a minimum.

Now in its Second Edition, Essentials of Inventory Management gives inventory professionals the information they need to maximize productivity in key areas, from physical stock issues to problem identification and resolution to technologies like RFID and other automated inventory mechanisms. Perfect for novice and veteran managers alike, this ultra-practical book covers topics such as:

Forecasting and replenishment strategies • Differences between retail and manufacturing inventories • Materials requirements planning and just-in-time inventory systems • Simple formulas for calculating quantities and schedules • Management of inventory as a physical reality and a monetary value • Supply chain risk management

Complete with detailed examples, handy tools, and a revised and expanded chapter analyzing “Why Inventory Systems Fail and How to Fix Them,” this nontechnical yet thorough guide is perfect for both instructional and on-the-job use.

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Product Details

  • ISBN-13: 9780814416556
  • Publisher: AMACOM Books
  • Publication date: 4/25/2011
  • Edition description: Second Edition
  • Edition number: 2
  • Pages: 272
  • Sales rank: 527,441
  • Product dimensions: 5.50 (w) x 9.10 (h) x 1.10 (d)

Meet the Author

MAX MULLER has been an executive for a wide range of product distributors. His seminars throughout the United States, Canada, and the United Kingdom have drawn more than 100,000 attendees. His books include The Manager’s Guide to HR (978-0-8144-1076-9).

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Read an Excerpt

Introduction to the Second Edition

When I wrote the first edition of Essentials of Inventory Management

my objective was to present, in accessible language supported

by copious illustrations and examples, timeless inventory

management concepts and techniques. My purpose was to give the

reader a fundamental understanding of inventory as it exists in the

physical world (shelf count), and as an intangible item (record

count) existing in a computer database and/or on paper.

The basic principles covered in that edition are as relevant today,

even with the explosion of Internet-based e-commerce solutions to

many inventory and materials management issues, as when they

were first written.

I am pleased to note that the book was successful. It has been

translated into Spanish, with distribution in a number of Spanishspeaking

countries, and, an English-language soft cover edition is

being distributed in India, Pakistan, Sri Lanka, Nepal, and

Bangladesh. AMACOM Books and I have received excellent responses

to the first edition from individuals just beginning their careers

in fields related to inventory management, as well as from

experienced materials managers who reported that the book reminded

them of effective techniques they had known but had forgotten

over the years.

Over the past several years, as I have continued to lecture and

consult, it became apparent that the book could be enhanced by

adding chapters and sections on subjects such as cycle counting,

enterprise resource planning, and supply chain management. And

so, this second edition was born.

The second edition retains the timeless, essential inventory

management basics that are the hallmarks of the first edition, with

new and expanded information that includes:

Introduction to the second edition

FM-Essential Inventory Mgmt 12/6/10 12:55 PM Page xi

 An expansion of Chapter 2, “Inventory as Money,” to

include a section dealing with profit margins and

merchandising metrics and containing both examples

and formulae related to merchandising.

 A renamed Chapter 4, “Automated Inventory

Identification Systems,” with new material on Radio

Frequency Identification Systems (RFID) that discusses

the strengths and challenges associated with this


 New coverage in Chapter 5, “Planning and

Replenishment Concepts,” of the benefits of enterprise

resource planning (ERP), including the five main reasons

why an enterprise should consider incorporating this

concept into its organization.

 A revised and expanded Chapter 6, “Why Inventory

Systems Fail and How to Fix Them,” which includes new

material regarding how to distinguish A-B-C cycle

counting analysis using a single factor from approaches

combining multiple factors (e.g., dollar value and usage

rate). The chapter now explains in detail how to

undertake an A-B-C cycle counting analysis by

combining multiple factors.

 A new Chapter 7, “Basics of Supply Chain Risk

Management,” reveals how the very techniques that have

allowed American businesses to slash operating costs and

inventories by embracing just-in-time and lean

manufacturing techniques have made them vulnerable to

a number of serious supply chain risks. It offers

suggestions regarding steps organizations should take in

trying to balance the risks and rewards of SCM, and

xii Introduction to the second edition

FM-Essential Inventory Mgmt 12/6/10 12:55 PM Page xii

provides a starting point to any supply chain risk

management effort.

And, of course, as it has since the first edition, the book introduces

the new stockroom/warehouse manager, the nonfinancial

inventory control individual, and the small business owner to the

fundamental nature of inventory from financial, physical, forecasting,

and operational standpoints. In addition, it explains in easily

understandable terms the concepts underlying automated identification

of product through both bar coding and RFID.

The ultimate goal of this book is to present immediately usable

information in the areas of forecasting, physical control and layout,

problem recognition, and resolution, as well as how to begin to better

manage a supply chain.

Ultimately, Essentials of Inventory Management will enable you


 Understand that modern practice discourages holding

large quantities of inventory and encourages only having

amounts on hand required for current needs.

 Grasp the signific ance of controlling actual, on-hand

inventory as both a physical object (shelf count) and as

an intangible object (record count and monetary worth).

 Appreciate the fundamental differences between finished

goods inventories in the retail/distribution sectors and

raw materials and work-in-process inventories found in

the manufacturing environment.

 Apply basic formulae to calculating inventory quantities.

 Utilize basic formulae to compute breakeven points,

profit margins, markups and markdowns, as well as

selling price and margin percentages.

Introduction to the second edition xiii

FM-Essential Inventory Mgmt 12/6/10 12:55 PM Page xiii

 Select the cycle counting inventory method that is right

for you.

 Undertake an A-B-C cycle counting analysis by

combining multiple factors.

 Recognize and analyze dysfunctions within your own


 Employ basic problem-solving techniques to issue


 Control the physical location of inventory in a more

efficient manner.

 Analyze whether or not RFID is right for your


 Be aware of supply chain management risks and possible


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Table of Contents


Preface to the Second Edition

Chapter 1 Inventory as Both a Tangible and an

Intangible Object

Inventory—Who Needs It?

Inventory Costs

The Purpose of Inventory

Types of Stock

Tracking the Paper Life

Electronic Data Interchange


Review Questions

Chapter 2 Inventory as Money

Accounting for Inventories

How Inventory Is Valued Inventory on the Balance Sheet

Inventory on the Income Statement

Ratio Analyses and What they Mean

Current Ratio

Quick Ratio or Acid Test

Inventory Turnover Ratio

Profit Margins

Calculating Gross Profit

Merchandising Metrics

Pricing Generally

Selling Price

Obsolete Stock

Why You Have Been Told Not to Dispose of

Obsolete Stock

Problems with Convincing Decision Makers

That “It’s Gotta Go”

Arguments in Favor of Disposing of Dead Stock

Methods of Disposal

Carrying Cost and Purchasing


Review Questions

Chapter 3 Physical Location and Control of Inventory

Common Locator Systems

Memory Systems

Fixed Location Systems

Zoning Systems

Random Locator Systems

Combination Systems

Common Item Placement Theories

Inventory Stratification

Family Grouping

Special Considerations

Location Addresses and SKU Identifiers


Keys to Effectively Tying Together SKUs and

Location Addresses


Review Questions

Chapter 4 Automatic Identification

The Basics of Bar Coding

Elements of a Bar Code Symbol

Structure of a Generic Bar Code Symbol 96

Quiet Zone

Start and Stop Characters

Data Characters

“X” Dimension

Symbologies: Bar Coding Structural Rules

Discrete and Continuous Symbologies

Symbology Summary

Popular Symbologies Found in the

Inventory World

Scanning Basics

Printing Basics

Bar Code Applications

The Basics of Radio-Frequency Identification

RFID Tag Types and Classes

Bar Code versus RFID

RFID Item Identification

The Advantages of RFID

The Problems Associated with RFID

Lack of RFID Standards

Money, Money, Money

System Disruption Vulnerability

RFID Reader Collision

RFID Tag Collision

Security, Privacy, and Ethics Problems with RFID


Review Questions

Chapter 5 Planning and Replenishment Concept

Replenishment Costs

Types of Inventory Management

Independent Demand Inventory

Economic Order Quantity Formula

Dependent Demand Inventory

Inventory Objectives

Enterprise Resource Planning


Review Questions

Chapter 6 Why Inventory Systems Fail and How to

Fix Them

Inventory system Failure: A Case Example

Discussion of Example Case


Inventory Record Accuracy

Fill Rates

Tools with Which to Uncover System


Run Charts

Flow Charts

Logic Charts

Variance Reports

Cycle Counting

Annual Inventories

Cycle Counting

Cycle Count Methodologies

Control Group Cycle Counting Method

Location Audit Cycle Counting Method

Random Selection Cycle Counting Method

Diminishing Population Cycle Counting


Product Categories Cycle Counting


A-B-C Analysis Cycle Counting Method

When to Count

Who Should Count


Review Questions

Chapter 7 Basics of Supply Chain Risk Management

SCM in a Perfect World

Primary Risks in SCM

Globalization and Supply Chain Complexity

Conflicting Interests

System Fluctuations Over Time

Evolving Relationships

Product Complexity

Inadequacy of Insurance


The Bullwhip Effect

Disruption in Communications

Inadequate Software

Suggested Solutions to SCM Problems

Analysis of Risks

Supplier Assessment

Lessen the Bullwhip Effect through Coordination

Within the Supply Chain

Contracts That Do and Don’t Coordinate the

Supply Chain

Inventory Levels


Review Questions



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