CHAPTER 2 LITERATURE REVIEW

2.1 Introduction

In the previous chapter 1 discussed earlier the main objective of the senior project is to
implement an inventory management system for reducing the errors and workload of employees
in the Hashem Construction and Trading Co .This chapter will be cover the content that will
include the different types of inventory management systems , similar systems how is it used ,
different soft wares used for the inventory management etc.

2.1.1What is Inventory management system?

This is a computer based system for tracking inventory levels, sales , orders and deliveries.
Companies use this system to avoid the overflowing of products and prevent product outage
.This tool is used for organizing inventory data that was previously stored in excel sheet
manually which was really cumbersome process and time consuming. This tool can be associated
which is similar to distribution software, as distributors that can compete with less cash tied up in
inventories have a distinct advantage over their competitors.

2.2 Types of inventory management systems There are two main types of inventory system
which can then be classified in two categories namely:

2.2.1Perpetual inventory systems:

Is one in which inventory data is updated after a specific interval of time , usually once a year .
Information is not consistently up to date.

2.2.2 Periodic inventory systems:

Unlike the periodic inventory method where data is updated consistently as sales occur.

2.3 Objectives and tasks

Companies often use inventory management software to reduce their carrying costs. The system
is used to track products and parts as they are transported from a vendor to a warehouse, between
warehouses, and finally to a retail location or directly to a customer. Inventory management
system is used for a variety of purposes, including:
 Maintaining a balance between too much and too little inventory.

Tracking inventory as it is transported between locations.

Receiving items into a warehouse or other location.

Picking, packing and shipping items from a warehouse.

Keeping track of product sales and inventory levels.

Cutting down on product obsolescence and spoilage.

2.4 Components of Inventory management systems

The Inventory Software is the base with components like Barcode or RFID scanner, Barcode or
RFID label printer. There is Retail Inventory System, stockroom inventory, warehouse Inventory
System, and fixed asset inventory. For the most efficient Inventory System should be integrated
with the rest of your operations like sales, shipping and receiving, accounting, and billing. You
still can isolate the inventory tracking if that is critical to your operation.

2.4.1 A barcode reader (or barcode scanner) is an electronic device for reading printed barcodes.
Like a flatbed scanner, it consists of a light source, a lens and a light sensor translating optical
impulses into electrical ones.

Additionally, nearly all barcode readers contain decoder circuitry analyzing the barcode's image
data provided by the sensor and sending the barcode's content to the scanner's output port. 2.4.2
Radio-frequency identification (RFID) is the wireless non-contact use of radio-frequency
electromagnetic fields to transfer data, for the purposes of automatically identifying and tracking
tags attached to objects. The tags contain electronically stored information. Unlike a barcode, the
tag does not necessarily need to be within line of sight of the reader, and may be embedded in the
tracked object. Inventory management is made up of several key components that work together
to create a cohesive inventory for inventory organizations .These features include:

2.4.3 Order management: This helps to decide should inventory reach a certain threshold, a
company's inventory management system can be programmed to tell managers to reorder that
product. This helps companies avoid running out of products or tying up too much capital in
inventory . 2.4.4 Asset tracking When a product is in warehouse or stock , it can be tracked via
barcode or any RFID or any other tracking criteria such as serial number, lot number or revision
number. Nowadays most companies uses the barcode or RFID technology or other wireless
technology for tracking the products.

2.4.5 Service management Companies that are primarily service oriented other than product
oriented uses the inventory management software to calculate the cost of materials that is used to
provide services such as cleaning supplies.

2.4.6 Product identification Barcodes are the often used means to whereby the data on the
products and the orders is inputted in the inventory management software. A barcode reader is
used to read barcodes and look up information on the products they represent. Radio-frequency
identification (RFID) tags and wireless methods of product identification are also becoming
more popular.

2.5 Principles of inventory management systems

Demand forecasting
Warehouse flow
Inventory turns/stock rotation
Cycle counting and
Process auditing

2.5.1 Demand forecasting: This depends on the industry, inventory ranks in the top five business
costs. Accurate demand forecasting has the highest potential savings for any of the principles of
inventory management. Both over supply and under supply of inventory can have critical
business costs. Whether it is end-item stocking or raw component sourcing, the more accurate
the forecast can be. Establishing appropriate max-min management at the unique inventory line
level, based on lead times and safety stock level help ensure that you obtain when you need it.
This also avoids costly overstocks. Idle inventory increases incremental costs due to handling
and lost storage space for fast-movers.

2.5.2 Warehouse flow:

the old concept of the warehouse being dirty and in unorganized form is outdated and costly.
Lean concepts including the S5 have found way in warehouse. Sorting , setting order, systematic
leaning and ensuring discipline makes sure that money is worth spent in all these processes. The
principles of any inventory management are not different form other system. Each process from
housekeeping to inventory transactions requires a proper, formal standardized process to ensure
correct results.

2.5.3Inventory Turns/Stock Rotation

In certain industries, such as pharmaceuticals, foodstuffs and even in chemical warehousing,

managing inventory can be critical especially to minimize business costs. Inventory turns is one
of the key metrics used in evaluating how effective your execution is of the principles of
inventory management. Defining the success level for stock rotation is critical to analyzing your
demand forecasting and warehouse flow.

2.5.4Cycle counting

One of the accurate methods of maintaining accurate inventory is cycle counting. This helps
measure success of your existing processes and maintain accountability for potential error
success. Some industries require 100% periodic counts .this can be achieved through perpetual
inventory maintenance or full building counts.

2.5.5 Process auditing

Proactive source error identification starts with process auditing .One of the most important
principles of inventory management is to process auditing which should be done often .Process
auditing should take place at every transactional steps from receiving and to shipping inventory
including all the inventory transactions that takes place in between the processes. 30 2.6
Advantages of inventory management system The some of the advantages of inventory system
are thus summarized below which can prevent the organization /firm from suffering from big
financial loss and other problems that may occur during the daily operations of the firm that can
be viewed as the materials being out of stock or machine failures and many other operations
happening on daily basis. There are several Advantages of using the inventory management in a
business setting are :

2.6.1 Cost savings:

In many cases companies inventory is one of the largest investments along with its workforce
and locations. inventory management systems helps the companies to cut the expenses by
minimizing the amount of unnecessary products and materials in storage.it also helps companies
keep lost sales to a minimum by having enough stock to meet demand .

2.6.2 Increased efficiency:

the inventory management system allows for may automated inventory task for example the
system can automatically collect data , calculate costs .this also reduces in costs saving and time
saving and thus consequently leading to increase in business efficiency.

2.6.3 Warehouse organization:

Inventory management system help distributors, wholesalers, manufacturers and retailers

optimize their warehouses. If certain products are often sold together or are more popular than
others, those products can be grouped together or placed near the delivery area to speed up the
process of picking.

2.6.4 Updated data:

provides up to date and real time data on inventory levels is and advantage of inventory
management system. Company executives can usually access the software through their mobile
devices , laptop for checking 31 current inventory numbers this automatic updating of inventory
allows the business to make informed decisions.

2.6.5 Data security :

by accompanying with the restricted user rights, company managers can allow many employees
to assist in inventory management. They can grant employees enough information access for
tasks such as receiving products, making orders, transfer products and perform other tasks
without compromising company security. This can speed up the inventory management process
and save managers time. 2.6.6 Insight into trends this helps tracking the products which are in
stock and from which suppliers do they come from and the length of the time they are stored is
made possible with inventory management system by analyzing this data the company can
optimize their inventory levels and maximize the use of warehouse space. Additionally firms are
more prepared for the demands and supplies of the market, especially during special
circumstances such as a peak season on a particular month.

2.7 Disadvantages of Inventory Management System

The disadvantages of using the inventory management systems where there are pros to suing a
particular system will be automatically followed by some of the drawbacks or the cons of using
the system .

2.7.1 Cost

Cost can be a major disadvantage to suing the inventory management system. Many large
companies can use the system but small business may find it difficult to afford the huge expenses
of buying the system. Barcode readers and other hardware can compound this problem by adding
even more cost to companies. The advantage of allowing multiple employees to perform 32
inventory-management tasks is tempered by the cost of additional barcode readers.

2.7.2 Complexity: Inventory management system is not necessarily easier to learn , remember
and use. A companys management team must dedicate a certain amount of time to learning the
new system, including both software and hardware, in order to implement for usage .Most
inventory management software includes training manuals and other information available to
users. Despite its apparent complexity, inventory management software offers a degree of
stability to companies.

2.7.3 Risk of fraud Any computerized system carries the risk of intrusion, and with a
computerized inventory management system comes the risk of fraud as well. A dishonest vendor
could hack the system to receive payment for products never delivered, or a dishonest employee
could redirect checks to themselves.

2.7.4 Accuracy Issues A computerized system alone does not ensure accuracy, and the inventory
data is only as good as the data entry that created it. Companies that plan to use a computerized
inventory management system need to have a system in place to validate their data and check the
numbers reported by the system. A select hand count or targeted audit may be necessary to
ensure the integrity of the system.
2.8 Similar systems A comparative study

2.8.1 Vendor management systems

This system is a new trend for inventory management system. With this system the distributors
can control inventory management for customers .The reports are calculated on daily basis and
are transferred from the customer to the vendor. The data gathered from these reports lets the
vendor knows when to recalculate the stock of the customers merchandise. This method
significantly reduces the load of paper work /the cost and the labor .There are few drawbacks of
using this method which is this will be difficult for the distributor/suppliers to keep up with
demand of the product that is popular and is demanded by the customers from all around the
world. Companies believe that the money saved in time and labor is worth the risks involved.

2.8.2 Traker systems

Traker system is an inventory management system allowing you to control your inventory with
this software management system the you can you can track and control purchasing, invoicing,
product recalls, shipping and receiving, ordering and all other aspects of inventory management.
The software comes with full system of reports allowing you to have the status of your inventory
available at your fingertips. Some of the forms available with Traker Systems include packing
slips, invoices and inbound receipts. Analysis reports include analysis summary, allocation
reports, products lists, inventory summary and inventory history. The operating system required
to use Traker Systems is Windows 2000, Windows XP or Windows Vista. 34

2.8.3Warehouse management systems:

WMS (warehouse management system ) is a software application that supports day to day
operations in the warehouse of company. The system enables centralized management of tasks
such as tracking inventory levels and stock locations .WMS systems may be standalone systems
or integrated with the ERP system. Warehouse management system used previously could only
store the data of stock locations .the current systems are so complex and data intensive that they
require a dedicated staff to operate the system. High end system may include routing and
tracking technologies such as RFID and voice recognition. It does not matter how complex the
system but the goal remains the same that to provide the management for information that it
needs to move efficiently and control the movement of the materials within warehouse. Figure 6:
Warehouse Management system