Managing Inventory in the Supply Chain - Coursework Example

Managing Inventory in the Supply Chain Introduction Successful inventory management may involve the creation of a management plan which ensures the availability of items when needed, while keeping the record of the existing inventory. Inventories exist for various reasons and forms throughout the whole process of supply chain. They may exist as raw material, WIP or finished goods at any point in the manufacturing process. Carrying the inventories may cost the firm 30-40 percent of their value every year; however the firm must maintain a minimal level of inventory in scientific manner that makes economic sense. For managing the inventory the firm needs to have an effective inventory system. There are different inventory management systems that are being followed by firms all around the globe; however selecting an effective management system can be a critical job for any firm. Managing Inventory There is no doubt about the fact that effective management of inventory is the basic of the supply chains’ excellence. The management of different types of inventories does not only include the finished product but also the raw material and the work in process. Yet the understanding of the inventory management practices is not as easy as it seems to be. It was in the last decade that the link between the effective management of inventory and high generation of cash flow was discovered. The firms that effectively use their supply chain for generating high cash flow will usually end up having higher stock price than their competitors. Due to recession, the inventories level in most industries had stayed flat for years. The flat inventory levels indicate that the firms’ supply chain was being outsourced. While coming out from the recession period, the firms are still exposed to several issues which are adding complexity to their supply chain network. Today many of the firms are facing network pressures like: Critical network changes which are the result of divestiture, mergers and acquisitions Challenges which are the result of multiple channel marketing strategies Increase in the global scope Increased in virtualization, resulting in loss of control and visibility The companies have now realized that effective management of the level of inventories is not good enough. There is a need of managing the challenges and problems more holistically, taking into account the tools and strategies that may slow down the rapidly developing network inventory in a way which will maintain the accurate inventory level, while improving the levels of customer services. However the growing complexity in the supply chains is making it difficult for the firms to manage their inventories effectively. Inventory Management Systems Being Commonly Used Two of the most widely used methods of inventory management are material requirements planning and just in time inventory system. Material Requirement Planning Material requirement planning or MRP is an inventory controlling and planning system which is widely being used by the firms for managing their manufacturing processes. Most of the MRP systems are usually software based; however, MRP can also be conducted manually by a person. The major objectives of the MRP system include: Ensuring the availability of material for production processes Managing the availability of the products for delivering it to the customers Maintaining the lowest possible inventory level for cost savings Planning, purchasing and manufacturing activities and delivering schedules The major functions of the MRP system may include controlling inventory, elementary scheduling and billing the processes. It helps the firms to maintain low inventory levels for the purpose of cost saving. MRP can also be used for delivering, purchasing and manufacturing activities. A firm needs to have control over the different quantities, types of material it is purchasing and the quantity of product that will be manufactured from that material. The firm must also ensure that the product produced is able to meet the present and the future demands of the customer, and that too at a competitive cost. Making ineffective decisions in any of these areas will make the firm lose a lot of money (Material Requirements Planning). The MRP system is being widely used by the firm but still there are certain problems associated with the functioning of the system. The major problem in the system is with the integrity of the data. If any error is found in the billing of materials, in the production schedule or the inventory data, then the output of the data will be incorrect. Data integrity of the MRP system can also be affected by the errors present in the shipping input and output, waste and scrap that has not been reported, etc. The problem associated with the system indicates the fact that the firm must switch to a more reliable and effective inventory management system. Just In Time Inventory The philosophy behind the just-in-time approach is that unused inventory is considered as a waste of resources for business. Just in time is an inventory management system in which the firm acquires or produce products based on the demand. During the 21st century, this approach of managing inventory became increasingly popular as the firm and the suppliers collaborated to decrease the cost of inventory while effectively meeting the customers’ demands. The purpose of the Just in time inventory system is: Avoiding situations where the inventory exceeds the product’s demand Carrying enough inventory to meet the immediate demands of the customers Using material for production which is enough for meeting the demands of the retailers as well as distributors without causing any waster or increasing the inventory holding cost If manufacturers produce the product in excess than demanded by the retailers and distributors then it means that they have to hold some amount of inventory with them which will incur some cost. This will require the warehousing of the end product or the finished goods which will add to the cost of the product. Extra space will require rent and utilities expense and employees to organize store and retrieve the finished good when needed. Just in time inventory system helps the manufacturers to get rid of all the excessive cost by storing material that will be enough to meet the immediate demand of the customers. This system has turned out to be quite effective for firms however there are certain drawbacks that can be associated with it. The suppliers sometimes fail to deliver the product on time or deliver in incorrect amount which affects the production process of the firm. There are times when the firm fails to meet the requirement of an unexpectedly large order, since there is not much stock of finish good available. Natural disasters may also interfere while supplying goods to the firms which could close the whole production at once. Just in time inventory is effective when the estimated and the actual demand of the product is almost same. In the case when the demand of the product shoots or fall unexpectedly; the system may fail to produce effective results (Dooley). Strategies to improve Inventory Management It is obvious that for improving the inventory management in the supply chain and overcoming the challenges the firms have to develop some strategies that would accurately forecast the demand of the material and allow minimal wastage. Listed below are some of the strategies that will help the firms to effectively manage the inventory: Getting more technical with the Safety Stock Management Firms today continue to use much simple means for determining the level of safety stocks at various levels of the supply chain. One of the widely use approach is the stock keeping unit segmentation in which the products are classified into four categories, which is usually based on their volume or value. SKU is effective if the firm uses more attributes with it i.e. divide the products into more number of categories and assign more and different stock management strategies to all of them. Addition of the Inventory planning processes to Sales and operation processes Sales and Operation planning has been considered as a process discipline by some firms for more than a decade. While some firm are just getting started; others have moved midway through this Sales and operation planning evolution. S&OP successful delivers a forecast that can be useful for the companies to act upon. It supports the firms by developing a high level supply chain plan which is capable for meeting the important supply chain demands. S&OP may not be the cure for all the inventory management challenges but it does set a platform for taking initiative and engaging the management of the firm more in the inventory planning processes. Using Optimization Tools The optimization tools were traditionally being used at the strategic level for supporting and redesigning whole distribution network or the supply chain. As more and more firms started to use the optimization tools, its use moved from the strategic level to the tactical level. It helps the firms to make decisions about tradeoffs between customer services, transportation costs and inventory. Firms have recorded million of dollars of cost saving that can be related to inventory by the help of tactical planning tools. Inventory Optimization Software The most aggressive step that a firm may take to overcome the inventory challenge is to adopt a new and advanced type of software named inventory optimization or IO. The old supply chain software only optimizes one level of inventory at a time, without imposing any impact on the upward or the downward stream of inventories. Inventory optimization solution software on the other hand holistically looks at the inventory problems, considering the inventory level of the raw material and the finished goods. Some of these software solutions also use probabilistic modeling which relies on a single forecast for the product’s demand and supply. History and several other factors are used by IO solution software for estimating the demand pattern and lead time in order to provide a much effective inventory plan (Ganeshan). Conclusion Companies are observed using immature process for managing their inventory levels which may not help them to deal with the diverse inventory and supply chain challenges. Firms must look at the opportunities which will impose the greater impact on the success of their supply chain and try implementing them in their processes. Sticking to a single process or strategy of inventory management has not proved to be successful for firms; therefore there is a need of building innovative and effective supply chain strategies by incorporating technological improvements as they will help the firm in better management of inventories. Work Cited Dooley, Frank. Logistics, Inventory Control, and Supply Chain Management. 2014. 25 September 2014 . Ganeshan, Ram. "Managing supply chain inventories:A multiple retailer, one warehouse, multiple supplier model." International Journal of Production Economics (2000): 341-354. Material Requirements Planning. 2014. 25 September 2014 . Read More