As supply chain flows are essential for fulfillment of customer orders, managers throughout the network need to anticipate the customer requirements at each of the levels of the chain. Simply put, organisations require materials from a variety of suppliers in order to make a number of distinct and often diverse products that are sold or consumed by a host of different customers.
Purpose of Inventory
There are several views why inventory is important for different organisations.
Some of these views include:
Demand and supply fluctuations – safety stocks held to buffer against variations in demand and supply to avoid stock-outs.
Improve customer service levels – supporting the role of marketing, i.e., once demand has been created stocks must be available to satisfy this demand.
Leveraging production economies – unit costs are lowest when production is manufactured in long production runs at constant quantities.
Purchase and transportation economies – the premise is that these costs are reduced if lot sizes are large.- economies of scale
Hedging against price changes – in times of high inflation this aspect minimises the impact of supplier price increases.
Protection against demand and lead time uncertainties – problems in the logistics systems are not known with any reliable degree of certainty.
Hedging against contingencies – there are numerous factors that are unpredictable e.g. labour disputes, fires, floods, and other emergencies all these can create problems for operations.
From above we may group the inventories into the following groups:
Buffer inventory - This is sometimes referred to as safety inventories with its purpose to compensate for the uncertainty inherent in supply and demand. This also includes uncertainties in replenishment time.
Cycle inventory - This inventory will incur between one or more stages of the supply chain processes. This is also inventory that is required for an operation in order to satisfy the demand. A good illustration of cycle stock is components or products that are received in bulk by a downstream partner. This stock is gradually used up and then replenished again in bulk by the upstream supplier.
Anticipatory inventory - As in buffer inventory, this type is used again to compensate the timing of supply and demand. This inventory is held in anticipation of customer demand and allows for instant availability of items when customers want them and may also be used for seasonal types of demand.
Pipeline inventory – sometimes referred to as ‘transportation inventories this inventory exists, because material cannot be transported instantaneously between points of demand and supply. For an example a retailer may order stocks from a wholesaler who will in turn process the order for delivery to the retailer. This process may take days, weeks and even months to deliver and this may represent a considerable amount of investment. Consider a supplier located in South Korea with a shipment sitting at the docks in Kimhau for a customer in Arizona, USA. Until this stock is physically at the retailer, it is regarded as ‘pipeline’ inventory.
Whatever the reason and justification, the holding of inventory has an impact on financial performance as well as customer service for our organisation. The wider acceptance of supply chain management has also been based on the notion that inventory levels throughout the system or pipeline can be optimised through collaboration between network partners.
Supply chain managers continue to explore opportunities for internal and external trade-offs in order to reduce the levels of inventory holding at any location within the pipeline. It therefore follows that inventory management has an important role in the effective management of supply chains.
As a manager you must be able to use the tools and techniques provided earlier in order to match demand with supply, e.g., forecasting approaches. We will look at more techniques that you can use as part of your decision making toolkit in this role.