Inventory management in The Tate and Lyle Sugar Company - Essay Example

?International Logistics By of 2751 Words Introduction The delivery functions of a business are often characterised by activities and procedures such as logistics, supply chain management, and inventory-related activities. Importantly, it is noteworthy that all the functions in business organisations are intertwined or overlap, thus there is a need for good coordination for their efficient implementation. As a result of this interconnection among these various business processes, it is important that each of these processes is taken seriously by a firm’s management, whether logistics, sales, marketing managers or financial controllers (Cahill et al., 2011). Particularly important for the health and effectiveness of an organisation’s supply chain is inventory, whose sound management has implications for the financial stability of an organisation. Therefore, it is imperative that every business ensures that its inventory is performing optimally at all times, cognizant of the fact that such practices ensure it avoids over or under inventory, which would affect the financial standings of any firm. Because inventory is a dynamic business aspect, it is essential that firms constantly evaluate, monitor, review and plan the internal and external factors of inventory management. In many businesses, inventory management functions are assigned to separate and specific departments made up of personnel competent in inventory control, monitoring, and reviewing inventories. Importantly inventory departments ensure healthy relationship and interface between inventory and procurement, production and finance departments (Cannella & Ciancimino, 2010). This paper explores the reasons for which manufacturing and production firms such as Tate and Lyle and Silvertown still use various types of warehouses despite the assertion by many theorists that inventory holding is a practice that should be minimised. The Reasons Tate and Lyle and Silvertown Invest in Inventories The use of warehouses by Tate and Lyle at various stages of its production processes is apparent in its facilities. For instance, Tate and Lyle require holding inventories for their raw materials (sugar cane) and consumables such as molasses and other sugar by-products. There are also inventories for goods that are yet to be completely processed or semi-finished goods by different departments of the firm. In addition, Tate and Lyle hold finished good inventories at distribution centers, plant sites and stores to avoid process stoppages. The other important components of inventory for Tate and Lyle are raw materials and finished goods in transit in different locations, away from the firm’s premises. However, whether these inventories are under the jurisdiction of Tate and Lyle depends on the ownership of an inventory at a given time. That is, Tate and Lyle or its dealers/partners may own a finished goods inventory before it reaches the market and end consumers. The other type of inventory important for Tate and Lyle is a spare part inventory, for spare parts used in servicing its sugar production processes. Generally, Tate and Lyle categorises its inventories based on their functions as input, process and output inventories. Under its input inventories are raw materials, consumables for processing such as fuel, stationary, bolts, and nuts. Others are maintenance items/consumables, packing materials and local purchased items required for production (Twede, 2005). Among process inventories are semi finished production in various stages in different departments such as production, marketing, quality assurance, packing and packaging. In addition, production wastes and scrap, rejections and defectives also form part of the firm’s process inventories (Napolitano, 2003). Tate and Lyle’s output inventories cover finished goods, finished goods in transit, spare parts stocks and bought out items, repaired stock and parts, finished goods with dealers, defectives, rejects and sales returns, sales promotion and sample stocks. One of the issues or challenges for which many authors have postulated theories calling for the minimisation of warehouse use by firms such as Tate and Lyle is holding cost. In business management, holding cost refers to the financial obligations arising due to the keeping and maintaining of stocks of goods in storage facilities. For Tate and Lyle, holding costs mainly result from rent paid for warehouse space. The other causes of holding cost are labor, insurance cover, material and equipment for operations at a warehouse. In addition, the interests earned on any money invested in inventory holding are also part of holding cost just as warehouse security fees. It has been observed that processed goods could become obsolete while at a warehouse, implying that their contribution to Tate and Lyle’s revenues would be reduced. However, there contribution to the holding cost would remain. While in a warehouse, the sugar goods could be damaged by weather, poor handling or lost by poor record keeping, mishandling and theft (Soroka, 2002). Despite the issue of holding cost being cited as among the reasons for the call to minimise inventory holding, there are several management practices that would go a long way in ensuring warehouse use remain an integral and beneficial aspect of Tate and Lyle’s operations and viability. To manage and reduce holding cost, Tate and Lyle must consider inventory management a core and critical function of its operations. Specialist and competent planners and managers should therefore be assigned to ensure profitable inventory levels are maintained at all times. Fortunately, Tate and Lyle has continued to excel in inventory management, ensuring the practice remains popular for the firm, more so given that it deals in manufactured goods. However, Tate and Lyle recognise that excesses in inventory have the negative effect of increasing holding cost, due to inventory maintenance costs. Similarly, under inventory due to stock out could also hamper the market share of the firm as customers’ orders remain unfulfilled. Thus, it is important that Tate and Lyle strikes a balance in holding lean inventories. To this effect, the firm has incorporated good planning, decision-making and continuous monitoring strategies to establish the right inventory levels. The holding of inventories continues to prove to be of great importance to Tate and Lyle, particular in certain economic circumstances. First, the role inventories play in alerting the firm of invisible problems has proved vital in the identification and timely response to these problems. In fact, inventory build-up in manufacturing and processing firms such as Tate and Lyle indicates problems that would otherwise have not been detected at the surface level. Inventories are thus built up as safety stocks to cover up inefficiencies in the firm’s internal systems. One of the problems indicated by stock build up is supplier inefficiency. That is, should Tate and Lyle fail to ensure the flow of its raw materials or have unreliable vendors; there is highly likelihood to hold buffer raw material inventories. Tate and Lyle also depends on holding inventories to identify quality problems in its products. For example, an increase in the firm’s inventory cost due to increased storage costs is particularly attributed to high quality costs. If the firm’s goods are rejected in the market, this situation would be reflected in an increased holding cost. Production delay is the other problem that holding inventory has helped Tate and Lyle to identify. Among the possible causes of production delays that Tate and Lyle may address upon increased inventory holding cost are lengthy process times, production layout inefficiencies, bad design of the product, production stoppage due to breakdowns. Advantages In addition to the above advantages, there are several more direct benefits that Tate and Lyle derive from storing their finished, semi-finished goods and raw materials in warehouses. The first and the most obvious advantage of warehouse use is its role in the storage of goods. The instances in which goods may require to be stored include when there is no intention to sell certain goods that need to be stored to be sold later. Thus a warehouse would ensure that such goods remain effectively stored and in good order until their time for sale (Piasecki, 2003). In this regard therefore, warehouses help ensure that Tate and Lyle’s goods are stored carefully to avoid any damages, more so if the warehouse employs the latest equipment and technology in handling and storing goods. The second advantage of using warehouses for Tate and Lyle is that they allow for the continuous production of goods. Since warehouses are also used to store raw materials, continuous production is made possible as raw materials, in prepared state, are already in store and always within reach. Third, warehouses enable Tate and Lyle to ensure a regular and continuous supply of goods, particularly of seasonal raw materials such as seasonal crops. Therefore, by storing goods in warehouses, farmers and wholesalers ensure that a firm’s raw materials and products respectively are in continuous supply (Coulter & Shepherd, 1995). The location consideration in warehousing also ensures that warehouses are located near the appropriate and adequate means and modes of transport relevant to the sugar industry. The transportation costs for Tate and Lyle are thus reduced. Although many believe that warehouses are only recommended for big business, recent trends have indicated that even small business enjoy a lot of benefits from using warehouses. These businesses simply need to select the right type of warehouse for their goods and sizes then pay the rent for the storage and other services rendered. Similar to big businesses, small businesses also enjoy effective handling of their goods at warehouses in which the right and the latest mechanical appliances are used, more so for heavy and bulky goods (Tempelmeier, 2011). Warehousing thus helps Tate and Lyle to handle heavy and bulky goods with reduced or minimal chances of breakage or damage, thus lowering handling costs and wastages. Therefore, generally, the use of warehouses helps in cost-reduction for Tate and Lyle due to good security and insurance. That is, warehouse use compensates for any damages and losses incurred by the firm. By understanding the advantages derived from warehouses, Tate and Lyle recognises and appreciates the need for safe and appropriate storage services. This statement is generally true for businesses that may not have reached their full potential due to lack of warehousing services. By outsourcing for external warehousing, Tate and Lyle has also managed to take its businesses to the next level. For Tate and Lyle and other similar firms, the storage needs for their products may impede their progress and jeopardise their competitiveness. The need for warehousing would also be apparent if Tate and Lyle opts to create more products and is in need of more and bigger storage facilities. Warehousing is also important for Tate and Lyle if it intends to invest in warehouse facilities but it does not have enough and immediate finances to facilitate such an investment. To achieve this feat, Tate and Lyle should not wait and hope that they finally acquire the needed funds. The fact that this wait could be long and detrimental to the firm’s market competence implies that the available warehouse services and facilities should be used. Thus, all the problems encountered as Tate and Lyle seeks solutions to in-house storage problems may be solved by outsourcing for public warehousing. Instead of the worries, anxieties, and delays associated with the accumulation of funds for warehouse construction, Tate and Lyle may contract the services of the available warehouses at seaports or airports. Advantages of Outsourcing Warehouse Facilities There are several benefits that Tate and Lyle derive from outsourcing public warehousing services at the ports. As mentioned earlier, outsourcing helps an organisation to evade the problems and challenges associated with the attempts to solve in-house storage and handling services (Bardi et al., 2006). An obvious benefit of warehouse outsourcing is that storage services offer opportunities for business expansion. For instance, although Tate and Lyle’s products may sell well, lack of enough room to facilitate mass production may obstruct the buying cycle. Since lack of space for storage may inhibit business expansion, this further implies that revenue would not reach full potential, highlighting the need for warehouse outsourcing strategies (Chopra & Meindl, 2007). However, once a popular product is manufactured in full strength and stored in an outsourced warehouse, it becomes possible for a business to meet the demands of its customers (Gwynne, 2011). Having outsourced a warehouse for its products, Tate and Lyle would the time to focus on its core business. Importantly, since Tate and Lyle needs other services, it would be beneficial to outsource a warehouse of the desired type if it cannot build an in-house one. Small and medium-sized firms are however more disadvantaged in terms of building in-house storage facilities compared to larger firms which often have the money and human resources readily available. Unfortunately, if small and medium firms concentrate on peripheral issues such as the construction of warehouses, they may lose focus of their core activities and goals. Since this distraction could jeopardise their growth, giving their competitors an advantage over them, it is recommended that Tate and Lyle outsource for warehouse services so that they remain focused on their main objectives. Outsourcing of warehousing may also save the firm’s shipping expenses, implying that the firm should utilise public warehousing vendors all over their target markets (Mulcahy, 1993). In fact, most national or regional suppliers of sugar and related products have warehouses located all over their markets, more so around their largest customer bases. Despite the above advantages of warehousing to Tate and Lyle, it requires astute management strategies and policies for it to enjoy the economic benefits of warehouses. The Economic Management of Warehouses For Tate and Lyle to optimally benefit from both in-house and outsourced warehousing, there are certain strategic management strategies and policies that it must implement. A warehouse management system (WMS) must be planned, implemented, monitored and evaluated then made a key element in the firm’s supply chain (Saxena, 2009). The main objective of such a WMS would be to ensure the control of the movement and storage of materials not only within but also into and out a warehouse. The other aims of a WMS should be to control all the processes related to transactions such as receiving, shipping, put-away and picking of stored goods. To manage warehouses properly, it is imperative that the firm uses the latest and most efficient Auto ID Data Capture (AIDC) technologies such as barcode scanners, mobile computers wireless LANs and Radio-frequency identification (RFID). The right WMS should therefore utilise computerised machineries and procedures to handle both the received, stored and released stock in addition to modeling and managing the reasonable depiction of the physical storage facilities (Ki-Eun& Lyu, 1998). The other function of WMS would be to administer the stock of the firm and ensure the existence of a flawless interconnection between product processing and logistics management. Just like other business operations and processes such as purchasing, warehouse management also has certain recommended best practices. Among these best practices is the use of effective slotting tools and bar coding. Included among the recommended effective slotting tools are the position of high-volume and bulky stocks closer to shipping points that the less bulky products and the usage of clear slotting information under each type of products on warehouse shelves (Phelan, 2009). In addition the use of the same slotting information on pick documents is also highly recommended. Similarly, the use of bar codes to control incoming and outgoing products and their quantities is also recommended for efficient warehouse management (Seung-Jin, 2007). For instance, bar code picking is not only faster but it is also accurate and less expensive in the long run. In this regard, firms have achieved and exploited opportunities for saving holding costs, the most attractive aspect of warehouse management for processing and manufacturing businesses (Frazelle, 2001). Importantly, if an organisation fixes its inefficient warehouse operations, there is a resultant saving on labour costs. Conclusion For processing firms such as Tate and Lyle Sugar Company, Inventories refer to all the physical stock that is idle but has economic value. These stocks may be in various forms waiting processing, packing, transformation, use or future sale (Schneider et al., 2010) Inventory management and practices are thus necessary for Tate and Lyle, which is involved in sugar production, trading, sale and service of products. Tate and Lyle obviously hold various types of sugar stocks for future sale or consumption. Although several theories have asserted that inventory has more disadvantages than it has advantages, Tate and Lyle have benefited in different ways by holding inventories, depending on the firm’s needs and operations at a give time. For instance, Tate and Lyle hold inventories for speculative purposes, functional purposes and for physical necessities. Nonetheless, several general observations may be made from inventory holding practices by businesses. Holding inventories helps in the facilitation of future consumption, sale and further value addition or processing of an organisation’s products. References Bardi, E., Coyle, J., and Novack, R. (2006) Management of transportation. Thomson South-Western. Cahill, D., Wallenburg, C., Knemeyer, A., and Goldsby, T. (2011) Commitment and Trust as Drivers of Loyalty in Logistics Outsourcing Relationships: Cultural Differences between the United States and Germany. Journal of Business Logistics, 32(1), 98. Cannella, S., and Ciancimino, E. 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