With many people currently locked in doors right now, we know that many are looking for blogs and articles to read during the current situation. That’s why we are making the first chapters from a selection of our learning materials available to read on our Blog free of charge.
This week, we will be providing access to five first chapters from different subject areas, including Supply Chain, Warehousing and Transport. Our penultimate article this week is an introduction to Inventory, taking a look a why Inventory is important and how Inventory slots into the Supply Chain.
WHAT IS INVENTORY
Inventories are a major component of any supply chain system. The supply chain system connects supply and demand so that the requirements of the consumer can be met.
Within the supply chain, inventory is present in many different formats. At the start of the supply chain, inventory will be in the format of raw materials perhaps being grown or stored in the ground. As these materials pass down the chain they will get converted into parts, components and sub-assemblies. Sometimes they may be held in a partly completed state, as work in progress, waiting further processing. Eventually they will become a finished product. Even at this stage they can be held in different formats. At the distribution centre they may be held in boxes of ten, but later in the chain they may be held as individual items. They may even get packaged with other products to make a completely new item. All the way through this journey there is potential for the material or product to become damaged requiring it to be scrapped or reprocessed or returned to the supplier.
Finally, it may have taken so long for this whole journey to occur that having got to the consumer they have changed their minds, or a new, more sophisticated product might have become available, making the item obsolete.
Materials and products flow through the supply chain. The supply chain journey is taking place the material flows across functional, company and international boundaries. Often this will result in the legal ownership of the inventory changing hands.
INVENTORY WITHIN THE SUPPLY CHAIN
In simplified terms, Supply Chain Management is about:
- Optimising flows from source to consumption
- Managing variability and uncertainty
- Synchronising activity
- Making consumer demand visible
- Reducing complexity
- Compressing time
- Breaking down barriers
All of these concepts have considerable impact on the levels of inventory being held and the consequent financial investment. Importantly, inventory is the linking theme between supply chain partners. Without availability of products the next party cannot perform their role in the whole process. This break in flow ultimately leads to the consumer being let down. Remember supply chain management is about working together, in a different way, to satisfy consumer requirements.
There are situations when supply is seasonal. If products are grown often they are harvested once or twice per year. Demand however may be stable throughout the year. Clearly if we did not have inventory to buffer this difference in the rate of supply and demand consumers could not have this service. On the other hand we also have products whose demand is seasonal. This is particularly true of products that are used during festivals and celebrations, such as Christmas trees. It’s possible that all the demand may occur within a very short time period, but supply has to occur over the whole year. In such a case inventory will be built gradually so that sufficient is available to meet the surge of demand.
Other situations will occur when predicting future demand will be difficult. This applies to promotional activity and new product launches. Having committed substantial amounts of money to marketing a new product, we want to ensure that the product will be available when consumers start to ask for it. This may require we build inventory prior to the launch.
Sometimes decisions might be made to build inventory for investment purposes. By buying at a cheaper price now and holding inventory, we can make a greater profit when the price increases. From these situations you can begin to see the dilemmas an inventory manager faces.
To provide a higher level of customer service requires that we hold more stock to protect against the amount of uncertainty, which in turn increases the level of investment.
LEVEL OF INVESTMENT
The first part of the balance concerns the acceptable level of investment. This financial objective will be a fluctuating one depending upon the economic and corporate situation. For example in times of high interest rates this level is likely to be lower. Similarly if cash flow is tight greater constraints are likely to be imposed.
DESIRED SERVICE LEVEL
On the other side of the balance is the desired level of service. The key word here is desired. The obvious way of finding out about what the customer desires is to ask them. Achieving a balance between the service requirements and the investment in stock is therefore, the main aim of an Inventory Manager.
Variation to the challenge so we increase the risks of upsetting our customers by having out of stocks. Remember, an ‘out of stock’ may result in a lost sale and a lost customer with the consequent revenue issues. Our ability to achieve this balance will be hindered or assisted by a number of key factors.
Visibility to enable us to understand the variations that are happening within the supply chain. This requires us to develop and open up the flow of information. This will depend upon the development of trust between organisations sharing what may be quite sensitive commercial information.
A lot is talked about partnerships in the supply chain. However, it should be noted that with the differing objectives of the different companies involved in a supply chain means the reality of partnerships is perhaps a long way off. Collaboration, however, with shared values and aims is possible and there are many cases active today.
Many retailers feel that the main manufacturers and marketers of branded goods fail to take responsibility for seeing their products through to the tills. As a consequence they plan their inventory, often based upon factory capacity, resulting in overstocks. The resulting overstocks require promotional activity to clear stocks out and that only adds to the variability in the supply chain.
Sharing the retailers Point of Sale (POS) data with all collaborative members of a supply chain will ensure that all members are planning on the same set of numbers.
FORECASTING INVENTORY
The need for accurate forecasting is an obvious misnomer as all forecasting will, to a greater and lesser extent, have errors and therefore will be inaccurate. Only confirmed orders are truly accurate. However there is a need to measure forecasting accuracy comparing actual with forecast and utilise the most accurate and focused data within the shortest time period possible.
The general direction of the supply chain is to where ever possible move to a Just-in-Time (JIT) replenishment system responding to customers replenishment requirements. Suppliers and Manufacturers are also utilising Vendor Managed Inventory Replenishment Systems where it is the supplier who decides how much and when replenishment is required base upon POS data linked to delivery lead times.
Central to the management of inventory is the issue of risk. Each product will have a different risk profile depending upon its market, profile and value. These risk profiles will have an impact upon the investment required i.e. the higher the risk the higher the protection required, the larger the investment. The ordering parameters will also be dependent upon the levels of risk, taking into consideration lead times, reliability and variability.
Strategic plans derived from a company’s objectives will link to the marketing and service strategies that will drive the targets required for availability and investment required to achieve these. This objective setting is a key management activity. The setting of these objectives also dictates the investment profile of each line item.
We have also mentioned the sources of risk being forecast error and supplier reliability. These sources are multiplied in impact as lead times and review periods increase in length. Combining the investment profile with the risk profile dictates the ordering parameters for an item.
We hope that you enjoyed this first chapter. If you are interested in learning more about Inventory why not consider studying one of our LLA Online Short Courses? We are currently providing a 10% discount for all of our Short Courses until 31st May 2020. Prices start from just GBP340.00 (reduced to GBP306.00) for our Introductory Inventory short course. For more information, visit our Short Course page or email enquiry@logisticslearningalliance.com.
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