Inventory Methods – Operations Strategy Matrix

Pencil with "Y" Circled For Yes

Dear M&M:

I have been considering changing my inventory methods and starting all over.  I am at a complete lost as to what to do. Do you have any suggestions?

– Margaret.

Dear Margaret:

Some companies and managers are constantly trying to reinvent the wheel by reinventing inventory procedures. While it is true that you can increase efficiency and cash flow as a result of better control of your inventory, you don’t necessarily have to throw out the baby with the bathwater every time you fix your inventory issues. Instead, a few tweaks here and there may be able to take care of the process.

Method: Some companies have to reinvent their inventory process because they switch inventory methods and it creates discrepancies in their inventory totals. For instance, a company that has two different book values for its inventory may be using different inventory accounting methods or may have recently switched between one method and another. A company using the first in, first out approach, commonly called FIFO, will have a different book value for its inventory than if it switched to the last in, first out approach, called LIFO.

Automation: One of the reasons companies sometimes feel the need to reinvent their inventory is because the human element in the inventory process is prone to error and inefficiency. Companies that make the final reinvention of their inventory process usually do so through the incorporation of automated inventory methods. Companies that use computerized inventory methods don’t necessarily have to worry about changing their inventory process all the time. For them, it is generally a matter of keeping up with software updates or implementing a new piece of technology.

Produce to Order: One option that companies have for avoiding the inventory reinvention process is to move away from inventory altogether. Rather than keeping excessive amounts of inventory in stock, companies in the manufacturing sector can produce goods based on order volume rather than the attempt to keep production at a certain level. In his book “Reinventing the Factory,” Roy Harmon notes two ways that companies can take the on-demand approach and remain effective in producing the necessary goods that consumers want. The first method is to anticipate peak buying or demand periods, and produce higher numbers of the product during those periods. The second approach, increasing output only when signs of increased demand exist, works best for manufacturers who have the capacity to produce large quantities quickly and efficiently.

Consistency: Consistency is a key to having an up-to-date inventory in the first place. One reason that companies feel the need to reinvent the inventory process is because they aren’t consistent with their inventory procedures. Inconsistency can lead to inefficiency and a lack of accuracy. Inaccurate records can cost companies money by causing overproduction or a slow-down in production in response to inaccurate inventory costs. Companies can avoid the need for reinvention by simply staying on top of the inventory process from the outset and keeping it consistent.

 -M&M

Dear M&M:

How do I analyze my business using the operations strategy matrix?

-Matt

Dear Matt:

Effective operations are characterized by how well a firm can deliver value to its customer, according to Peter F. Drucker, political economist and business management scholar. An operations strategy relates to the plans and tactics a firm designs for the allocation of operational resources. This might include both formal and informal assessments of dynamics, such as core competencies, capacity, market demand and supply logistics. The operations strategy matrix is a tool used by strategic management to assess these major factors that impact operations.

Step 1: Identify the risk factors that exist in your business operations. The aim of the operations strategy matrix is to classify and assess pure risks and actual failures. Pure risks relate to occurrences that can result in only losses to the company, such as technology disasters. Businesses use the matrix to evaluate these operational risks and manage their potential consequences to their enterprise.

Step 2: Review the core elements of the operations strategy matrix. The four core elements of the operations strategy matrix are performance objectives, decision areas, resource usage and market competitiveness. The operations strategy matrix can be viewed as a checklist of issues that a company should evaluate when developing a comprehensive operations strategy.

Step 3: Assess your firm’s “performance objectives” and “decision areas.” The five major performance objectives in business relate to quality, speed, dependability, flexibility and cost. These five core performance objectives intersect with four major decision areas: capacity, supply network, process technology and development and organization. The decision areas illustrate the key resources within a firm that affects its ability to perform in each of the main performance objectives.

Step 4: Market competitiveness and resource usage are also areas that impact operational decisions. An operations manager might assess issues relating to the firm’s use of resources, such as the nexus between quality control and temperature control for certain types of inventory. Market competitiveness addresses different issues, such as how an operational change can direct effect sales. For example, a review of sales reporting data might indicate that a reduction in certain waste results soon after store sales managers is given monthly sales data.

 -M&M

To ask your questions: Call the Small Business Development Center(SBDC) at Cochise College (520)-515-5478 or email schmittm@cochise.edu or contact the Sierra Vista Economic Development Foundation(EDF) at 520-458-6948 or email  hollism@svedf.org

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