The amount of inventory an
organisation keeps will compromise the costs of keeping and maintaining it
against the lost sales opportunities caused by 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 organisation's sales policy. 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 more 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 been high in the past but are being
eradicated through reduced 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 an organisation’s customers' requirements. It is a resource that will
enable 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 it can achieve. The higher the level of inventory, the higher
the level of service.
The most significant impact
in determining how an organisation’s manufacturing/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 reduce
the amount of finished goods inventory. However, they 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 increase production unit costs to their highest level, but will
reduce finished goods inventory to the lowest level, as goods are usually
dispatched as soon as they have been manufactured. Raw materials, parts,
and subassemblies inventory are typically relatively high, enabling the
required flexibility to manufacture different products on short notice.
- The storage of raw materials and
finished goods within the various warehousing facilities comprising the
logistics system will need to support the manufacturing/distribution
processes used. Where demand is more stable, suppliers can more easily
plan and deliver inventory as and when required. However, as demand
volatility increases, the amount of inventory will also increase to meet
the vagaries of demand.
- Inventory acts as a buffer between
manufacturing and distribution and customer demand, minimising
manufacturing and distribution costs and lead times. Flexibility is
crucial when customers demand high service levels while paying minimal
costs per unit to purchase the products and/or services.
- The degree of control and planning
undertaken within the manufacturing and distribution chain will directly
impact 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 inventory levels, and hence
inventory costs in general, to support such methods.
- As inventory levels increase, warehouse
space and storage costs will also increase. High inventory levels can be a
commercial risk to an organisation, as while 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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quality, efficiency, and effectiveness of their product and service supply to
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