The Tactical Management of Inventory

The Materials Inventory Cycle

Understanding the term "inventory cycle" is vital for organisations across various industries. It encompasses managing inventory, from sourcing raw materials to assembling products, storing them, and delivering them to customers. The inventory cycle process enables organisations to optimise production processes, reduce waste, and balance inventory levels to meet customer demand.

Raw materials, subassemblies, parts, and finished goods inventory undergo multiple stages and processes as they move through the product lifecycle. Starting as raw materials, the products are manufactured into finished goods and placed into retail stock before being sold to customers, where they are consumed.

Once products have been consumed and are no longer needed, they can move into the recycling phase of their lifecycle. Throughout this conversion path, the inventory makes many stops in and out of its lifecycle's logistics systems, from where it is vitally important that it is tracked, monitored, and managed to ensure that it is efficiently distributed to maximise its value.

The Tiering of Inventory Cycles

The materials management process involves careful planning, organisation, and communication to ensure that inventory is managed correctly and that products move through their logistical systems as smoothly as possible. Typical material flows inbound to an organisation might include:

• 3rd tier supply – mining raw materials.
• 2nd tier supply – converting raw materials into ingredients, products, or subassemblies.
• 1st tier supply – subassemblies for manufacturing / finished retail products.

An organisation's customers can also be split into tiers, as suppliers can on the inbound supply chain. However, how organisations' supply and demand supply chains are tiered will depend upon the industry and market sector in which the organisation operates. An organisation might serve only the first tier, a combination of first and second-tier customers, or a mix of all three. Customers are typically made up of the following:

• First-tier customer who purchases products or services as a manufacturer.
• Second-tier customers who might purchase finished products from a manufacturer to act as wholesalers of the first-tier manufacturer's products or services.
• Third-tier customers who act as retailers of the second-tier wholesaler's products or services, allowing end customers to purchase various products and services from locations with high footfall or within high-density conurbations.

An organisation's ability to manage inventory cycles is critical to maximising its financial health and well-being. Through diligent monitoring of inventory levels, organisations can prevent stock-outs and overstocking, which can result in substantial economic losses. Inventory management processes can increase efficiency and productivity across diverse industries.

This systematic approach safeguards an organisation's cash flow, instilling confidence in its ability to effectively plan production schedules, accurately forecast demand, and make necessary price adjustments. In essence, the inventory cycle plays a vital role in any organisation that deals with inventory. By fully understanding and optimising this process, organisations can improve efficiency, reduce costs, and ultimately enhance profitability.

Increasing Inventory Accuracy

The inventory cycle counting process is essential to ensure accurate and efficient materials inventory. Cycle counting is a popular method that involves auditing a portion of the inventory at a designated time, leading to more accurate inventory results. This could be a specific location, range of products, or end-to-end range of lines. The primary objective of cycle counting is to count all items in inventory within a set period, usually a year.

The process enhances inventory accuracy by reducing the risk of errors and facilitating the swift identification of inventory-level discrepancies. By assessing on-hand inventory, organisations can prevent stock-outs and maintain sufficient inventory levels that meet customers' needs. By doing this, organisations can ensure that their inventory records are accurate and up-to-date, essential for managing inventory levels effectively.

Cycle counting is more effective in generating precise inventory results than traditional annual stock-taking counting methods. This is because only part of the inventory is counted at any one time. By counting a limited range of product lines, people remain more vigilant than when counting the total inventory, where concentration levels reduce, and people can become bored. This approach helps to minimise errors and ensure the accuracy of inventory counts.

Retailers must carefully track inventory on shelves and in warehouses. Cycle counts should match on-hand inventory to avoid stock-outs and optimise costs. Regular monitoring and cycle counts help retailers meet demand and avoid excess inventory, tying up cash flow and increasing storage costs.

Inventory Safety Levels

Safety stock is additional inventory that organisations keep, preventing stock-outs due to fluctuations in supply and demand. It's a buffer against uncertainty in demand, supply, or manufacturing and protects against the non-availability of finished goods. It helps prevent stock-outs and keep customers satisfied, especially when launching new products.

The level of forecast inaccuracy determines the level of safety stock required. This means that the less accurate the sales and demand forecast, the more safety stock is needed to ensure a given level of service. This is especially important when safety stock is used within a material requirement planning (MRP) process.

An MRP system manages the manufacturing process by ensuring suitable materials are available at the right time. Safety stock plays a crucial role in MRP, helping to bridge the gap between expected and actual demand.

Using safety stock as a strategic tool during the first few years of a new product launch can help organisations judge the accuracy of their sales and demand forecasts. This can help optimise inventory levels and reduce stock-out risk, which can be costly for organisations. It can also prevent overstocking, leading to high carrying costs and obsolescence.

MRP processes assist organisations in determining the production required to meet sales demand forecasts without relying on safety stock. Minimising safety stock levels is a common strategy to reduce inventory costs, especially for organisations with limited resources or lean manufacturing principles.

Sales Order Processing

The inventory cycle involves identifying customer demand, raising a purchase order, processing and delivering the product to the warehouse, quality checks, shipping the product to the customer, and completing the inventory cycle. The cycle duration varies depending on the product's nature, supplier delivery speed, and customer's location. A typical example of an inventory cycle for an organisation might be:

• 12 days from identifying a demand, raising a purchase order, and receiving the products or materials.
• 35 days for the materials to be converted through the manufacturing process.
• 20 days for the finished goods consignment to be delivered to the customer.

In this example, the inventory cycle time amounts to 67 days. The inventory cycle for a retailer involves comprehending, strategising, and overseeing their inventory, which includes:

• Ordering the required inventory with precision based on product demand.
• Reducing the time to reorder products periodically.
• An accurate history of individual product sales and department sales.
• Increased customer satisfaction.

The inventory cycle process is a crucial aspect of any organisation that manages inventory. It involves steps that ensure that inventory is effectively managed, tracked, and controlled. Two of the most critical steps in this process are frequently and regularly performing inventory counts and the accuracy of sales and inventory forecasts. This helps organisations to increase the accuracy of demand forecasting for products, which is essential in making informed decisions about inventory levels, purchasing, and sales.

Reducing Inventory Safety Levels

Safety stock is an essential concept in supply chain management. It refers to the buffer inventory organisations hold to protect themselves against unexpected increases in demand or supply chain disruptions, such as delays in delivery or production.

Inaccurate planning and poor delivery performance due to variable supplier lead times can cause demand patterns to fluctuate, leading to stock-outs and lost sales. To avoid such situations, organisations hold safety stock. However, safety stock can be expensive in terms of material and management time, leading organisations to seek ways to reduce it.

Reducing safety stock levels can be challenging, as it requires a careful balance between customer service and inventory costs. One approach is to improve demand forecasting accuracy, which can help organisations better anticipate future demand and adjust their inventory levels accordingly. Another approach is improving supply chain visibility, which can help organisations identify potential disruptions and take corrective action.

Additionally, organisations can adopt lean manufacturing or just-in-time (JIT) inventory management practices to reduce the need for safety stock. These approaches rely on minimising waste and optimising production processes to ensure that inventory is only produced and held when needed. However, they require high coordination and collaboration between suppliers, manufacturers, and distributors.

It is important to note that not all items are suitable for holding as safety stock. Perishable items like food and drinks can go to waste if held as safety stock for too long. Therefore, organisations must carefully evaluate which items require safety stock and how much should be held to balance the risks of stock-outs and inventory costs. These include:

• Better use of inventory demand forecasting technology such as MRP I & II.
• Increased collaboration with suppliers where the commercial risks of safety stocks are shared with the supplier with an increased commitment from the customer.
• More accurate sales forecasting by seeking commitments from the customer base to place forward-dated sales orders.

Inventory Service Levels

In a lean supply or manufacturing environment, minimising lead times to reduce safety stock levels is essential. This will significantly decrease the likelihood and impact of stock-outs. Safety stock can be costly, so many organisations use a service-level strategy to determine their requirements.

For instance, if an organisation opts for a 95% service level, some stock-outs may still occur but may be considered acceptable. However, it is essential to note that the lower the required service level, the lower the requirement for safety stock would be.

It is worth noting that service level and safety stock are interrelated. A higher service level requires a higher safety stock to be maintained, which can increase the inventory cost. Conversely, a lower service level requires a lower safety stock and reduces inventory carrying costs.

Organisations must balance service level and inventory costs. Factors such as demand or lead time variability and forecast accuracy can affect this balance. Therefore, it is crucial to regularly review and adjust safety stock levels to ensure they are cost-effective and meet the organisation's service level requirements.

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