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, 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 be split into tiers, as suppliers can be in the inbound supply chain.
However, how organisations' supply and demand 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 from 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. This ensures that their inventory
records are accurate and up-to-date, which is essential for managing inventory
levels effectively.
Cycle counting is more
effective in generating precise inventory results than traditional annual
stock-taking methods. This is because only part of the inventory is counted once.
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 unavailability of finished goods. It
helps prevent stock-outs and keeps 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 the 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 ensuring 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
regarding 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. 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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