The amount of inventory an organisation keeps will compromise the costs of keeping and maintaining the inventory against the lost sales opportunities of the inventory not being available to fulfil demand: inventory allows an organisation to sever the link between demand and sales order fulfilment.
The amount invested in inventory will depend on the sales policy of the organisation concerned. If the service is seen as a sales driver, the organisation will keep sufficient inventory to meet an “on time in full” delivery service of higher than 99%. The higher the service levels offered, the higher the required inventory levels, increasing inventory costs exponentially.
Inventory will be kept at lower levels where service is not seen as a sales driver. Therefore, inventory costs will be proportionally lower. Still, the inventory level will be kept at levels that satisfy the end user: inventory can comprise raw materials, work in progress, subassemblies, parts, MRO, finished products and consumables.
Many organisations are looking to maximise customer service levels whilst minimising inventory levels and costs which has resulted in supply chains “pulling” inventory through the supply chain rather than “pushing” it through, where the amount of inventory kept is driven by the actual demand based more on purchase order requirements rather than anticipated demand patterns.
Some organisations have tried to eradicate the need for inventory by adopting cross-dock operations, where only the exact amount of inventory required to fulfil immediate demands is ordered and processed through the supply chain. This is becoming typical of the food industry, where waste levels have in the past been high but are being eradicated through the reduction of inventory lead times and the increased accuracy of demand data management and analysis.
Managing inventory within an organisation enables it to decouple the vagaries of demand from fulfilling customer sales orders. Inventory allows customer sales orders to be fulfilled within the requirements of an organisation’s customers. It is a resource that allows the “oil” on the conveyor belt movement of products and/or services to smooth the flow of goods through the organisation at minimum cost whilst achieving the highest levels of customer service.
However, the amount of inventory an organisation invests in is directly proportional to the level of customer service an organisation can achieve. The higher the level of inventory, the higher the level of service that an organisation can achieve.
The biggest impact in determining how an organisation’s manufacturing/distribution and distribution facilities will be used will be in terms of the inventory policy used to support the various methods of manufacturing/distribution. To summarise:
- Maximising manufacturing/distribution capacity by using long production runs utilising continuous flow manufacturing/distribution methods of production will result in low production unit costs but will mean that finished goods inventory levels will increase, the amount of raw materials, parts and subassemblies can be planned to be delivered as and when they will be needed within the production cycle to enable inbound inventory levels to be reduced.
- Semi-continuous manufacturing processes will shorten manufacturing/distribution lead times and will reduce the amount of finished goods inventory but will increase the production cost per unit and the amount of raw materials, parts and subassemblies inventory as flexibility may be required to enable the manufacturing/distribution facility to manufacture alternative products at short notice.
- Batch manufacturing is invariably used when “make to order” is required to offer customers the ultimate service levels with reduced manufacturing/distribution lead times. This will have the effect of increasing production unit costs to their highest but will reduce finished goods inventory to the lowest level as goods are normally dispatched as soon as they have been manufactured: raw materials, parts and subassemblies inventory are normally fairly high to enable the required flexibility to manufacture different products at short notice.
- The storage of raw materials and finished goods within the various warehousing facilities that comprise the logistics system will need to support the manufacturing/distribution processes that are used: where demand is more stable, inventory is more easily planned and delivered by suppliers as and when required, however as the volatility of demand increases the amount of inventory will also increase to meet the vagaries of demand.
- Inventory acts as a buffer between manufacturing/distribution and customer demand to enable manufacturing/distribution costs and lead times to minimise both. Flexibility is crucial in environments where customers demand high service levels whilst paying minimal costs per unit to purchase the products and/or services.
- The degree of control and planning that is undertaken within the manufacturing and distribution chain will have a direct impact on lead times and inventory levels, both will reduce where manufacturing and distribution are meticulously planned in detail and the amount of effort put into planning will be proportional to reducing lead-times and inventory to their minimum levels.
- Where the requirements of the customer require a continuous flow of products and/or services and the demand is constant, continuous flow manufacturing/distribution will reduce both unit production costs and inventory levels but are extremely difficult to manage where demand patterns change as lower production levels will increase unit production costs and increases in demand above the levels that the manufacturing/distribution facility cannot handle will result in lost sales.
- Semi-continuous or batch manufacturing processes will reduce customer lead times for products and/or services but will increase production unit costs and inventory levels. The service levels of manufacturing/distribution and inventory are proportionally linked as flexible manufacturing/distribution processes increase the unit cost of production and the levels of inventory and hence inventory costs in general to support such methods.
- As the levels of inventory increase, the required warehouse space to house it also increases, and storage costs will also increase. High inventory levels can be a commercial risk to an organisation as whilst they hedge against the potential loss of sales by not having the inventory, the risks of pilferage, wastage through obsolescence and deterioration also increase.
Inventory
is the lifeblood of organisations that must meet stringent service levels to
maintain their position in the market or where customers are placed at the
centre of a customer service pledge.
Inventory
enables the vagaries of inventory demand and supplier service to be decoupled
from organisational customer requirements. However, Inventory is expensive and
must be managed to ensure maximum customer service whilst maintaining stock
levels that minimise organisational commercial and inventory obsolescence and
wastage costs.
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