An implantable medical product

Huawei Technologies Co. Ltd is a multinational company that deals with telecommunication equipments and services and networking with headquarters in Shenzhen in China. It is currently the leading producer of telecommunication equipments globally followed by Erikson. It was established in 1988 as a private company by Ren Zhengfei, an ex-military officer. It produces communication devices which are sold directly to consumers, builds telecommunication networks and consulting services and equipments to firms in foreign countries. Currently, this company services 45 of the 50 largest telecom operators in the world and its products and services are offered in more than 140 countries. It has been rated as one of the fastest growing companies in the telecommunication sector. In 2010, this company recorded a profit of $3.7 billion (Huawei, 2012).

Huawei started expanding internationally in 1997 after it was awarded its first overseas contract to provide network products to Hutchison Whampoa, a Hong Kong company. During the same year, Huawei started producing wireless GSM-based products and launched aggressive marketing campaign in foreign countries. In 1999, it opened its first research and development centre outside China in Bangalore, India, and started producing a wide range of telecom software. Since then, Huawei has increased its overseas expansion and has more than 20 research and development institutes with more than 140,000 employees in various countries including China, India, United States, Sweden, Germany, Ireland, Turkey and Russia. In 2010, the company was recognized by US Magazine (Fortune) in the Global Fortune 500 2010 list dues to its 2009 sales of US$21.8 billion and a net profit of US$2.67 billion (Huawei, 2012).

Huawei has managed to achieve tremendous expansion in its networking solutions and mobile technology through forming partnerships with both local and foreign companies. It formed its first joint venture in 2003 with 3Com Corporation, a Chinese company that dealt with research and development and production and sale of data networking products. It began a joint venture with Siemens, a producer and seller of mobile communication and technology products, in 2005. In 2006, Huawei started a joint venture with Motorola, a producer and seller of mobile communication and technology products, which aimed at developing a research and development centre in Shanghai to develop UMTS technologies. During the same year, Huawei formed a joint venture with Telecom Venezuela to establish a research and development centre in Venezuela and to establish sale channels for telecommunication terminals. It also acquired Symantec, an American security firm, in 2012 which dealt with developing security and storage solutions (Huawei, 2012).

Huawei entered the Kenyan telecommunication industry almost a decade ago and has managed to establish competitive edge over the years. It has been offering its products and services in various branches established in the country and through local distributors with whom they have formed partnership with. The various products offered by Huawei constitute to its inventory and as in any other firm in the telecommunication firm, inventory constitutes one of its important assets. As such, inventory management is one of the key functions of the company’s management. The inventory management decisions made in this company are influenced by various internal and external factors, as in other industries.

2.3 INVENTORY MANAGEMENT DECISIONS/POLICIES
Inventory management in any organization is influenced by organizational management policies and decisions. As Tersin (2009) highlighted, different organizations have different policies regarding management of inventories, which are influenced by different factors. To gain a better understanding of this, this paper looks at three inventory management areas in which managers need to make policies, namely, management of costs, purchasing of the right order quantity at the right time and adoption of appropriate method of inventory management.

2.3.1 Management of Costs
As mentioned, there are four types of costs that are associated with inventory, namely, acquisition, procurement, carrying, and stock-out or shortage costs. Acquisition costis the price a firm pays for the product (Gianpaolo et al, 2005). Procurement costsare the costs associated with purchasing the product: checking inventory, placing orders, receiving orders, stocking the product, and paying the invoices. Carrying costsrefer to the storage, handling, insurance, cost of capital to finance the inventory and opportunity costs. Another component of carrying cost is the cost of loss through theft, deterioration, and damage. Acquisition, procurement and carrying costs can be calculated accurately and are an important financial consideration in telecommunication firms’ management (Gianpaolo et al, 2005). These three types of inventory costs generally place little direct stress on busy telecommunication staff but can depress the organization’s operating margins if not monitored appropriately. The shortage or stock-out costis the cost of not having a product on the shelf when a buyer needs or wants it. This is frustrating to a telecommunication firm that has to explain why the product is not available and is an inconvenience to the buyer. Shortage costs may be difficult to quantify but definitely have an impact on any telecommunication firm (Gianpaolo et al, 2005).

From a financial perspective, effective inventory management decreases the cost of goods sold and operational expenses, resulting in increased gross margins and net profits. As Green (1997) illustrated, saving $100 on the purchase of computer software in a firm will increase the gross margin and net profit by $100 (assuming that operational expenses remain constant). Moreover, having less money invested in inventory improves cash flow. A firm that has merchandise that is not selling or an oversupply of product sitting on the shelf has less cash available to pay expenses and/or invest in other business operations. A firm that is able to reduce its inventory by $100 has that much more cash to spend on day-to-day operations, invest in new services, or place in a savings or checking account. From an operational perspective, effective inventory management is important in meeting consumer demands for both goods and services (Green, 1997). It means minimizing the investment in inventory while balancing supply and demand.

People use inventory management in their everyday lives. Lee (2002) illustrates that when people shop for groceries, they think about what they would like to (i.e., current inventory). From this, they create a grocery list. This list is revised depending on how much money they have, grocery store specials, storage space, and how quickly the food will spoil. They may compare products and shop at various grocery stores. Based on these as well as other factors, they eventually make purchases and evaluate how well those purchases satisfy their needs and wants. The process is repeated and reevaluated on a continuous basis. This is similar to how telecommunication firms purchase their inventory (Lee, 2002). Based on specific influencing factors, telecommunication firms create lists of products they need, revise the lists based on current inventory, determine how much money they have to purchase these goods, evaluate any specials from their vendors and their available storage space and then finally make and evaluate their purchases. Generally, firms try to make informed and rational decisions in order to ensure that they purchase the right quantity of products at the right time and to ensure that they always have adequate inventory.

2.3.2 The right order quantity at the right time
Bliss and Markelevich (2011) explain that having too much product ties up a firm’s money without providing an adequate return on investment. On the other hand, having too little product may result in lost sales and profits when the product is not available when consumers want to make a purchase. Not having enough products available also inconveniences firm’s staff and customers and may result in the loss of customers in the future (Bliss and Markelevich, 2011). Thus, not only is having the right product is critical to inventory management, but also having the right quantity at the right time is also essential. The right quantity means having just enough products on hand to cover consumer demand at any given time. Determining the right quantity for any given product is difficult, if not impossible, given that demand may fluctuate unexpectedly (Bliss & Markelevich, 2011). However, it is still important for inventory managers to track consumer demand for their products and monitor trends that may affect their use. While managers may not always have the right quantity on hand, use of such information helps them to anticipate fluctuations in demand (Bliss & Markelevich, 2011).

Based on the characteristic of the target market, a firm’s inventory managers may need to make consideration of three types of stock while making decisions, namely, cycle stock, buffer/safety stock and anticipatory/speculative stock. Cycle stockis the regular inventory that is needed to fulfill orders (Ayad, 2011). Buffer or safety stockis additional inventory that is needed in case of a supply or demand fluctuation. Anticipatory or speculative stockis inventory that is kept on hand because of expected future demand or expected price increase. Buying anticipatory stock is risky in most cases, and therefore, some firms such as pharmacies usually do not carry much anticipatory stock and place higher markups on such anticipatory stock. These types of stock are important to consider when deciding how much to order and when to order (Ayad, 2011). In order to estimate the minimum quantity of goods needed to meet demand, a firm manager or purchasing agent needs to understand the number of items on hand, the point at which to make a re-order and the amount to re-order. Apart from making the right purchases and having adequate inventory at the right time, every firm relies on various internal or external factors to decide the appropriate method of inventory management to adopt.

2.3.3 Inventory management methods
There are three methods used commonly in telecommunication sector to manage inventory: the visual method, the periodic method, and the perpetual method (Timme et al, 2003). The visual methodrequires the manager or designated person to look at the number of units in inventory and compare them with a listing of the amount to be sold. When the number falls below the desired amount, an order is placed. The periodic methodrequires the manager or designated person to count the stock on hand at predetermined intervals and compare it with minimum desired levels. If the quantity is below the minimum, the product is ordered. Usually, a designated person is responsible for checking the shelves and placing orders. The firm manager may have a specific checklist, indicating that the person should conduct a stock review weekly or look for expired products monthly, in addition to placing orders and keeping inventory orders to a specific level. This person will learn the turnover rates for specific products and will develop a skill for purchasing for the firm. This method allows designated person to account for fluctuations in supply and demand. Today, the designated person is likely to use a hand-held electronic device into which item numbers and quantities are entered or a hand-held scanning device that scans the barcodes on the product packaging or shelf labels (Silver, 1998). These devices then can be used to submit an order electronically.

Although the visual and periodic methods are still used today, perpetual inventory systems are common in most telecommunication firms. These perpetual systems are computerized inventory management systems. Perpetual inventory management systems are the most efficient method to manage inventory. This method allows the inventory to be monitored at all times. A perpetual system can tell precisely the amount of inventory on hand for any product at any time. Moreover, the firm manager can quickly assess the value of current inventory. Computer systems can be used to calculate the most economic order quantity (EOQ) and reorder point so that a product is reordered automatically when the inventory falls below a minimum standard (Tersin, 2009). This type of system significantly reduces procurement costs. Although the computer can be programmed to order products automatically, it is important for organizational staff to monitor inventory daily and to make corrections for variances owing to fluctuations in supply and demand. To maintain a perpetual inventory system, all purchases and sales must be entered into the computer system (Tersin, 2009). A clerk can enter data from purchases, or the computer dispensing system can be interfaced with the computer order system. The interface allows for the inventory to be reduced when a product is dispensed. The sales data can also be entered at the point of sale by devices that use optical scanning and barcode technology. Point-of-sale (POS) devices are advantageous in that they improve the accuracy of pricing and inventory data. They eliminate the need for price stickers, reduce the frequency of pricing errors, and automatically track inventory. Regardless of which method is used, most telecommunication firms need to conduct a physical inventory at least annually. The choice of the method to be adopted is dependent on organizational policies, which are also dependent on various factors in organizations.

2.4 FACTORS AFFECTING INVENTORY MANAGEMENT DECISIONS
Numerous studies have paid attention to the concept of inventory management as well as the factors that influence inventory management in various industries. The key impacts of these factors are reflected in an organization’s degree of inventory control and the level of inventory held (Rajeev, 2010).

2.4.1 Product type
An empirical study conducted by Tompkins and Harmelink (2008) across various industries in Europe found that inventory management decisions and policies are influenced by the type of product that an enterprise deals with. Products that are perishable such as fruits and cabbages require a different stock management policy than cloths, which are not perishable (Tompkins & Harmelink, 2008). A manager of products that have a short shelf life has to give consideration of expiry date before deciding the amount to stock. At the same time, producers of implantable medical products require a different inventory management policy than producers or retailers of perishable products. An implantable medical product requires a serial number on the products as well as the outer packaging, which may not be necessary for products such as cabbages and fruits (Tompkins, & Smith, 2010). When formulating and implementing inventory policies, a producer or a retailer of implantable medical products must make consideration of the serial number of each item and track the items using their serial numbers as they move in and out of the store. In a study of inventory management practice in pharmaceuticals in the US, Tompkins and Smith (2010), found that generic pharmaceutical products have lower costs of acquisition than brand-named products. Thus, brand-named products require greater attention and attract higher inventory control costs than their generic counterparts. The above finding are echoed in a study conducted by Njoga (2013) the factors affecting effective stores management in the Kenyan public sector. Njoga (2013) noted that type of product highly affects inventory management decisions.

2.4.2 Cost of the product
Most firms employ different inventory management policies based on the cost of product. In most cases, high-value products require additional inventory management policies than low-value products. A study conducted by Simchi-Levi et al (2007) in India indicated that retailers of Jewelries are more careful with their diamond-made products and employ additional inventory control policies than when dealing with lower-value consume products. Another meta-analysis by Martinich (2009) supported this argument as it found that producers of audio-video equipments keep some of their most expensive products in secured cages where only a few selected persons can access them. Along with that, most firms require authorization or signature from specific individuals before these expensive equipments are transported from one location to another within the firm. Based on the value of the equipment, it may require accompaniment of security as it is being moved from one point to another (Martinich, 2009). In a study involving firms from different sectors in Kenya, Mwikali (2012) highlights product cost as one of the factors influencing organizational management policies regarding choices of suppliers.

2.4.3 Lead Time
Lead time is a major factor affecting inventory management decisions made within an organization. Lead time refers to the period of time that an order takes before it is delivered to the buyer, after the seller receives an order (Mwikali, 2012). Different industries and products have varying lead times. Some have short lead times while others have extraordinarily long lead times. Cullinane (2011) highlights that production of furniture for retail in North Carolina diminished and retailers rely on supplies from China. When furniture was being produced locally in North Carolina, a furniture retailer used to wait for 2 to 4 weeks before receiving a product after making an order. This short lead time led retailers to reduce their furniture inventory since they could get more products within a fairly short notice. However, after furniture production moved from North Carolina to China, the lead time increased to around 90 to 120 days (Cullinane, 2011). As a result, the retailers had to change their inventory policies. They had to increase their level of inventory and most of them built bigger warehouses to accommodate the increased stock. The workload associated with managing inventory also increased with regard to general warehouse maintenance, yearly physical inventory and cycle counting.

2.4.4 Role of Technology

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