The amount of inventory an organisation
keeps will compromise the costs of preserving 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 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 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 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 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 demand volatility
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, enabling
manufacturing/distribution costs and lead times to be minimised.
Flexibility is crucial in environments where 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 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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