Effective Inventory Management

Introduction 

Inventory management is a critical component of supply chain management. It refers to the process of ordering, storing, and making use of a company’s inventory. Generally, inventory management involves the supervision of the flow of goods from suppliers to warehouses, as well as from these facilities to the point of sale. Effective inventory management practices can help companies to save money as well as improve cash flow in a variety of ways. It is important to realize that inventory management is a highly customizable function in business. As such, the optimal system is often different for each organization. In order to improve inventory management practices, businesses should always strive to remove human error from the process of managing inventory as much as possible. However, some inventory management issues often pop up. Such issues can effectively cripple businesses, particularly if they are unprepared (Subramanian et al., 2014). For instance, some miscalculation could occur in inventory making the business to have fewer inventories than expected or a slow moving product may take up the storage space. Therefore, companies should seriously consider adopting effective inventory management techniques that can significantly improve efficiency and reduce inventory costs. Systems contracting and reverse action are some of the inventory management techniques that can help in increasing efficiency and reducing costs in the inventory management process. These approaches could significantly help in the purchasing process for the electronic actuator components at ACL. 

Systems Contracting in Inventory Management 

A systems contract is a contract of the buyer’s system with that of the seller. As such, systems’ contracting refers to a release system in which the items that are commonly available off-the-shelf are identified and pre-priced in anticipation of certain usage (Kock & Verville, 2006). One important feature about systems contracting is that delivery releases are made against existing orders placed by purchase in order to help the buyer and the seller to significantly reduce administrative expenses associated with inventory management. Therefore, systems contracting could provide a suitable alternative for ACL because the company is grappling with high costs of ordering inventory from suppliers. The problem at ACL is compounded by the fact that the fabrication division deals with nine different suppliers of the inexpensive electronic actuator components. Besides, systems’ contracting helps in ensuring proper controls in managing inventory. Proper inventory control measures help in reducing the rate of obsolescence in inventory (Feng et al., 2014). Basically, higher rates of obsolescence in inventory increases the costs of handling inventory, adversely affecting the company’s bottom line. Systems’ contracting ensures that a constant track of the quantity and value of each stocked item is kept. The system authorizes the buyer to place orders directly to the supplier with the specific materials during the entire period covered by the contract. 

Normally, the contract is finalized only after the parties have ensured that an attempt has been made to integrate as many buyer-seller inventory management functions as possible. The systems contract is very simple, often covering only the delivery period, invoicing procedure and price. Systems’ contracting is suitable for ACL’s case because it orders electronic actuator components from suppliers. Electronic actuator components are inexpensive, with the average component unit values ranging from as low as $0.75. Ideally, systems contracting is especially useful for items with low unit price and high consumption profile. Thus, the systems relieves the buyer of the routine work involving inventory management and control. Although systems contracting has certain features in common with various other purchasing agreements, the integration of buyer-seller operations distinguishes it from other types of contracts relating to purchasing. Therefore, systems contracting is an excellent way of not only cutting costs, but also building efficiencies through simplifications. 

Reverse Auction 

Reverse auction refers to a type of public sale that features the reversal of the roles of the buyer and seller. It is an important business-to-business procurement tool. The primary objective of the reverse auction is to drive purchase prices downwards. Normally, reverse auction is an event used as last leg of tendering and sourcing. It encourages competition among the bidding sellers hence reducing prices of products. A single buyer often hosts a reverse auction and it features two or more suppliers who are competing for business (Jap, 2003). It is called a reverse auction because prices can only come down. 

Reverse auction could also offer a suitable alternative for ACL because it is very time efficient, as the awarding decision can be made within weeks instead of months. This results in shorter inventory delivery times. As such, a company can be able to order and receive materials in time, hence eliminating stock shortages. The approach will ensure that ACL sheds off the numerous suppliers who end up increasing the cost of inventory management. Besides, reverse auction reduces paperwork and increases transparency in the award process. This is something quite appreciated and required in the public sector. Additionally, reverse auction helps in breaking cartels, hence lowering the prices of inventory. Price is a critical aspect in procurement. However, companies should always strive to ensure that the quality of the products ordered from the suppliers. 

Conclusion 

In conclusion, it is demonstrable that having a proper inventory management system in place is essential for business success. It is important to have cost-effective inventory management methods in place to improve the company’s bottom line. When the two inventory management techniques are compared systems contracting stands out as an appropriate alternative for ACL. This is because systems’ contracting is suitable for ordering low cost products such as electronic actuator components. 

References

Feng, M., Li, C., McVay, S. E., & Skaife, H. (2014). Does ineffective internal control over financial reporting affect a firm's operations? Evidence from firms' inventory management. The Accounting Review , 90 (2), 529-557. 

Jap, S. D. (2003). An exploratory study of the introduction of online reverse auctions. Journal of Marketing , 67 (3), 96-107. 

Kock, N., & Verville, J. (2006). Enterprise systems contracting: developing and testing a model of divergent approaches in the service and manufacturing sectors. International Journal of Management Practice , 2 (2), 127-143. 

Subramanian, K., Rawlings, J. B., & Maravelias, C. T. (2014). Economic model predictive control for inventory management in supply chains. Computers & Chemical Engineering , 64 , 71-80.