Supply Chain

Supply Chain Management:

Inventory Management (E)

What was the evolution history of supply chain management? What are the main components of supply chain? How big is the importance of supply chain integration?

Posted: Aug 2011

Inventory management is the process of balancing of inventory needed to achieve high levels of customer service level with the cost of holding this inventory. Inventories are managed at all steps in the supply chain. However, those positioned closer to the customer are considered more important. Therefore, inventory management is mostly associated with the manufacturers, distributors, retailers and consumers components of the supply chain.

Effectively control of company's inventory is necessary for the financial health of the company. Companies can have millions captured in on-hand inventory. Frozen inventory is in risk of being obsolete. Also, the money invested in inventory is frozen capital which could be used in other areas of the company activity. The carrying cost of inventory ( the cost of holding the product ) has been estimated at 25 - 40% of the value of the inventory itself, on an annual basis. The cost of holding inventory is even higher when products can lose the value through time. This is particularly typical for products like computers and other high technology items, since they become obsolete very fast, due the fast pace of technology change.  

The supply chain managers within profit/performance oriented companies have the answers for this question. They incorporated flexibility and quick response into their processes and practices. The concept is named "lean and agile. This mean that the company need to have optimal level of stock, that will not burden the company with the excessive stock ( Lean ). On the other side, the company structure need to be flexible enough to be responsive to the needs of the business changes ( Agile ).

By complying to the Lean & Agile supply chain concept, the companies can achieve higher level of efficiency through the return on assets, return on invested capital, and improved return on sales. Company should focus on shorter and more consistent cycle times. This will consequently reflect on inventory levels. Reducing inventory levels has direct impact a company's income statement and balance sheet.

In order to achieve optimization of inventory levels, the companies are using different approaches and their combination. The typical inventory management initiatives are:

• Just-in-Time (JIT)
  

  Supply chain management plays a very important role within the company. The supply chain generate most of the costs of the company, due to the width and complexity of the function (manufacturing, warehouse, distribution). Any inefficiency can create tremendous negative impact to the company. On the other hand, good supply chain management can bring huge benefits and competitive advantage to the company.

  
  

  
  

  JIT is defined as inventory control system that has an aim of reducing inventory levels by coordinating demand and supply to the point where the desired item arrives just in time for use. This initiative does not imply that no inventory is required, since that is practically impossible. The Just in Time has the aim of zero inventories to main components. At same time the just in time concept has a goal of eliminating waste in the supply chain. Consequently, this will lead to very low stock. This is a contrast to the situation in the past, when companies accumulated large inventories, in order to be on the safe side, for case of demand increase. Obviously, just in time requires changes in relationship between suppliers and buyers.
   

• Vendor-managed inventory
  VMI involves the manufacturer using information from its customers, in order to replenish inventory to pre agreed stock levels in the retail outlets, without direct intervention from the retailer. This information is obtained with the use of Electronic Data Interchange - EDI. The manufacturer has responsibility to estimate retailer’s needs and to replenish customer's stock accordingly. Therefore, no orders from the retailer are necessary in case of implementation of VMI. 
   

• Continuous Replenishment Program (CRP)
  The general concept of Continuous Replenishment Programs is "sell one - make one. This, means that the products shouldn't be produced and delivered until customer sells previous one. It would be impossible to literally sell one to one product, but this is a god way of reducing the inventory.

Continue Reading:

Overview of Supply Chain Components
Historical Development of Supply Chain
Traditional and Modern View to Supply Chain
Supply Chain Activities
Procurement
Order Processing
Demand and Supply Planning
Inventory Management
Warehousing
Transportation
Customer Care
Integrated Supply Chain
Product
Information
Financial Resources
Integration vs. Non-Integration