Inventory Management Concepts in Supply Chain Management

Inventory management aims to handle all function correctly with tracking and management of material. Inventory management is very wide definition like to replenishment lead time, carrying costs of inventory, asset management, forecasting, valuation, visibility, future inventory cost, space, quality etc. The ultimate aim of supply chain management is how well you manage your inventory. Manufacturers face a number of challenges which require not just exceptional planning but also an effective communication setup that keeps you updated at the spur of a moment. From rapid changes of customer demands, globalization or even natural calamities can cause your inventory to be stuck up paving way for no wages to the employees. Therefore there should be a quick information system to discuss the inbound and outbound issues affecting the demand and supply. For this there should be a well managed supply chain inventory management in order to keep the business running without any interruptions.

There are benefits and risks of holding inventory as mentioned below;

  1. Avoiding risks of sale: If a desired amount of inventory are stored that are ready to be sold, can bring in return to the company. It can avoid losing its customers for non supply of products. Shelf-stocks are those products which are sold to its customers with little or no modifications; an example of such a product is automobiles.
  2. Quantity discount: When goods are purchased in bulk quantity the suppliers offer a discount. This is in fact helps the buyer to make a more margin in profit. Even sometimes suppliers are ready to supply goods on credit for time period like one week /month that’s all capital invest in other source for time being help to cash cycle.
  3. Reducing ordering costs: Each time an order has to be placed it incurs certain expenses like mailing costs, typing, approving and the like, so if inventory is stored in bulk it can reduce the ordering costs to a great extend.
  4. Reducing the set up costs: Start up costs is incurred each time a product is produced. Maintaining large stocks of inventory helps in reducing the set up costs.
  5. Reducing risks of production shortage: If any part of a product is unavailable it may result in the production to stay at a halt. Therefore it is good to hold inventories to maintain sufficient flow of supply to the customers.
  6. Avoiding risks of holding inventories: Reduction or decline in the market price: It faces the risks of price cutting by competitors or the arrival of a new product. In such situations holding inventories in large   amount would only prove to be a loss for the holding firm. Also inventories more money on new product like advertisement, launching, promotion offers, discount schemes etc.
  7. Deterioration of the product: Product may get worse when it is held for longer periods.
  8. Obsolescence of the product: The product may become obsolete and outdated when the customer’s tastes and preferences change.

While dealing with inventory management in the supply chain it is also advised to go through the costs of holding inventory. The costs associated with inventory are of two types; direct costs and indirect costs. The direct costs of holding inventory are the materials cost, ordering costs and carrying costs. The indirect costs of holding inventory are costs of funds tied up in inventory (opportunity cost) and the costs of running out of stock (stock-out cost).

When critically evaluating the inventory management we can sum up the objectives like;

  • To ensure that the materials are available for production without interruption,
  • To maintain sufficient stock of raw material in times of shortage,
  • To ensure that inventory of finished goods are readily made available to meet the customer demands,
  • To maintain a balance between the inventories,
  • To prevent the inventory from deterioration by providing proper warehousing and insurance.

From the above mentioned points it is evaluated that inventory if not controlled properly may either way prove to be wastage to the concern. This has induced the need to find out techniques to control the inventory.

Economic Order Quantity (EOQ)

EOQ is the level where total demands of product is constant over and each new order is delivered in regularly when in the inventory is reach at zero level. It is important to note that only the right amount of the inventory has to be stored. EOQ means the determination of the right quantity to be purchased. A balance has to be maintained between the carrying costs and the ordering cost. EOQ is the point where the total cost of ordering and the cost of carrying the inventory would be the minimum. For EOQ we assume that the ordering cost, rate of demand, purchase price and delivery quantity are constant with fixed lead time. The main point here to be noted is whether you increase or decrease the purchase the total of all the costs should be maintained at a minimum.

Inventory Management Concepts - Economic Order Quantity (EOQ)

ABC Analysis

ABC analysis is a technique of exercising selective control over inventory items. It is a method of controlling material according to its value. It’s a mechanism for impact on inventory cost by identifying items. A concern need not exercise the same degree of control over all materials. Materials of high value should be closely controlled than materials of low value. Accordingly, the materials will be grouped as A, B and C. A category material constitutes only a small percentage of the total items but they have the highest value. By category items constitutes a higher percentage of the total items but have only a medium value and the C category items constitutes the highest percentage in the total inventory but it has the lowest value. ABC analysis is based on the principles of Selective Inventory Management.

Inventory Management Concepts - ABC Analysis

Re-Order Level

Re-order level is that level of inventory at which the firm should place orders in order to maintain stock of the inventory. It is with regard to the timing of purchase. When orders are placed new products will reach the before it runs out of stock. Last minute order placing is not found here as the orders are placed slightly above the minimum stock level.

Inventory Management Concepts - Re Order Level

The above techniques can go on a long way to control the sufficient inventory. As inventory forms the life blood of a concern not a minute carelessness can be made in maintaining adequate stock of inventory. As there is a supply chain all over the globe it is high time to forgo with traditional inventory management process and continuously manage inventory through the global supply chains to optimize the inventory. The excellence in supply chain is required to strike a balance between the lead times, budgets, inventory costs and the risks. In order to maintain optimum utilization of inventory it is necessary to balance the supply chain management against the business policies, changing market demands, risks and other constraints. It makes it important to know what inventories to carry, how, when and in what form.