Inventory
Inventory exists in supply chain because of mismatch between demand and supply, some consider it as evil some consider it as essential. Few sector its intentional such as steel manufacturer, where it is economical to manufacture in large lots for future sales, Retail store is another such example where inventory is held in anticipation of future demand.
Another significant role that inventory plays is to reduce cost by exploiting economies of scale that may exist during production and distribution.
Inventory impacts the assets held, the costs incurred, and responsiveness provided in the supply chain. High levels of inventory in an apparel supply chain improve responsiveness but also leave the supply chain vulnerable to the need for markdowns, lowering profit margins. Low levels of inventory improve inventory turns but may result in lost sales if customers are unable to find products, they are ready to buy.
Inventory also has a significant impact on the material flow time in a supply chain. Material flow time is the time that elapses between the points at which material enters the supply chain to the point at which it exits. For a supply chain, throughput is the rate at which sales occur. If inventory is represented by I, flow time by T, and throughput by D, the three can be related using little’s law as follows:
I = DT
For example, if the flow time of an auto assembly process is 10 hours and the throughput is 60 units an hour, Little’s law tells us that the inventory is 60 x 10 = 600 units. If we were able to reduce inventory to 300 units while holding throughput constant, we would reduce our flow time to 5 hours (300/60). We note that in this relationship, inventory and throughput must have consistent units.
The logical conclusion here is that inventory and flow time are synonymous in a supply chain because throughput is often determined by customer demand.
Role in the Competitive Strategy:-
The form, location, and quantity of inventory allow a supply chain to range from being very low cost to very responsive. Large amounts of finished goods inventory close to customers allow a supply chain to be responsive but at a high cost. Centralized inventory in raw material form allows a supply chain to lower cost but at the expense of responsiveness. The goal of good supply chain design is to find the right form, location, and quantity of inventory that provides the right level of responsiveness at the lowest possible cost.
Components of Inventory Decisions:-
CYCLE INVENTORY
Cycle inventory is the average amount of inventory used to satisfy demand between receipts of supplier shipments. The size of the cycle inventory is a result of the production, transportation, or purchase of material in large lots. Companies produce or purchase in large lots to exploit economies of scale in the production, transportation, or purchasing process. With the increase in lot size, however, comes an increase in carrying costs. As an example of a cycle stock decision, consider an online book retailer. This retailer’s sales average around 10 truckloads of books a month. The cycle inventory decisions the retailer must make are how much to order for replenishment and how often to place these orders. The e-retailer could order 10 truckloads once each month or it could order one truckload every three days. The basic trade-off supply chain managers face is the cost of holding larger lots of inventory (when cycle inventory is high) versus the cost of ordering product frequently (when cycle inventory is low).
SAFETY INVENTORY
Safety inventory is inventory held in case demand exceeds expectation; it is held to counter uncertainty. If the world were perfectly predictable, only cycle inventory would be needed. Because demand is uncertain and may exceed expectations, however, companies hold safety inventory to satisfy an unexpectedly high demand.
SEASONAL INVENTORY
Seasonal inventory is built up to counter predictable seasonal variability in demand. Companies using seasonal inventory build up inventory in periods of low demand and store it for periods of high demand when they will not have the capacity to produce all that is demanded. Managers face key decisions in determining whether to build seasonal inventory, and if they do build it, in deciding how much to build. If a company can rapidly change the rate of its production system at very low cost, then it may not need seasonal inventory, because the production system can adjust to a period of high demand without incurring large costs. However, if changing the rate of production is expensive (e.g., when workers must be hired or fired), then a company would be wise to establish a smooth production rate and build up its inventory during periods of low demand. Therefore, the basic trade-off supply chain managers face in determining how much seasonal inventory to build is the cost of carrying the additional seasonal inventory versus the cost of having a more flexible production rate.
LEVEL OF PRODUCT AVAILABILITY:-
Level of product availability is the fraction of demand that is served on time from product held in inventory. A high level of product availability provides a high level of responsiveness but increases cost because much inventory is held but rarely used. In contrast, a low level of product availability lowers inventory holding cost but results in a higher fraction of customers who are not served on time. The basic trade-off when determining the level of product availability is between the cost of inventory to increase product availability and the loss from not serving customers on time.
INVENTORY-RELATED METRICS:-
Inventory-related decisions affect the cost of goods sold, the cash-to-cash cycle, and the assets held by the supply chain and its responsiveness to customers. A manager should track the following inventory-related metrics that influence supply chain performance:
Cash-to-cash cycle time is a high-level metric that includes inventories, accounts payable, and receivables.
Average inventory measures the average amount of inventory carried. Average inventory should be measured in units, days of demand, and financial value.
Inventory turns measure the number of times inventory turns over in a year. It is the ratio of average inventory to either the cost of goods sold or sales.
Products with more than a specified number of days of inventory identifies the products for which the firm is carrying a high level of inventory. This metric can be used to identify products that are in oversupply or to identify reasons that justify the high inventory, such as price discounts or being a very slow mover.
Average replenishment batch size measures the average amount in each replenishment order. The batch size should be measured by SKU in terms of both units and days of demand. It can be estimated by averaging over time the difference between the maximum and the minimum inventory (measured in each replenishment cycle) on hand.
Average safety inventory measures the average amount of inventory on hand when a replenishment order arrives. Average safety inventory should be measured by SKU in both units and days of demand. It can be estimated by averaging over time the minimum inventory on hand in each replenishment cycle.
Seasonal inventory measures the difference between the inflow of product (beyond cycle and safety inventory) and its sales that is purchased solely to deal with anticipated spikes in demand.
Fill rate (order/case) measures the fraction of orders/demand that were met on time from inventory. Fill rate should not be averaged over time but over a specified number of units of demand (say, every thousand, million, etc.).
Fraction of time out of stock measures the fraction of time that a particular SKU had zero inventory. This fraction can be used to estimate the lost sales during the stock out period.
Obsolete inventory measures the fraction of inventory older than a specified obsolescence date
Bibliography:
Supply chain management : strategy, planning, and operation / Sunil Chopra, Peter Meindl