The Scope of Inventory Management - Essay Example

?Logistics Logistics refers to the organization of a series of operations that involves movements and storage of elements in a system. It, in business context, involves the organization of supplies and materials along the supply chain with the aim of facilitating efficient utility in the final delivery of goods to consumers at the end of a supply chain. This paper seeks to discuss elements of logistics in an organization such as BMW. The paper will answer particular questions on logistics. Question 1 Evaluation of the statement, ‘inventory generates costs that should be minimized’ Inventory refers to the set of goods or materials that are held by an entity at a particular time. It, in a manufacturing enterprise, consists of raw materials, work in progress and finished products. While the transportation cost of inventory may not be significantly variant, there is a significant variation in the cost incurred in storage of inventory. While some of the costs involved in dealing in and management of inventory are accounted for in the benefits associated with having the inventory, some of the involved costs are considered as wastes. Inventory therefore has its advantages in the form of derived benefits while it is at the same time associated with a number of disadvantages that includes induced unnecessary costs. One of the disadvantages of inventory, and which induces costs is the processes that are involved in the flow of inventory in an organization. Goldsby and Martichenko for example explains the additional costs of managing inventory as a disadvantage that an organization has to endure in order to obtain a set of inventory and finally transfer them to their point of demand. Every set of inventory held by BMW will therefore induce an extra cost to an entity on top of the cost of the goods. The additional costs such as the costs incurred when the inventory is “received, housed, paid for, and insured” are examples of expenses that BMW is most likely to incur when dealing in inventory (Goldsby and Martichenko, 2005, p. 20). Such costs add up to operational costs, costs of sales and consequently reduce an organization’s profit margin. Maintain an appropriate level of inventory at a particular time is however associated with satisfaction of consumers’ immediate demand for commodities (Goldsby and Martichenko, 2005, p. 20). A stock of goods allows BMW to deliver commodities at customers demand instead of arranging for the commodities after an order is placed. Maintaining inventory is therefore associated with both advantages and disadvantages. Another advantage of inventory that may prompt for endurance of the involved costs of its maintenance is the security of continuous supply of commodities to BMW’s consumers. This is because suppliers are not expected to regularly avail commodities in the supply chain. Seasonality or disrupted operations may also cut off flow of commodities from a supplier. Similarly, disruption in supply chain activities such as transportation systems may limit access of commodities down the supply chain. Maintained inventory can therefore allow BMW to be able to absorb ‘short-term’ disruption in supply chain to ensure continuous supply of products down a supply chain. While it adds to the costs on an organization, it also facilitates customer utility by ensuring ready availability of commodities at consumers’ demand (Goldsby and Martichenko, 2005, p. 20). Inventory management through customer relation management and supplier relations management is another process that monitors and influences inventory decisions by establishing reliable links upon which planning can be made for a continuous supply chain with minimum inventory costs. This ensures that BMW stocks inventory for immediate future needs of its commodities, by the consumers. Similarly, developed relations with both suppliers and consumers identifies needs for value addition and facilitates reduction of costs in distribution through eliminating unnecessary costs (Lambert, 2008, p. 295; Cope and Brown, 2002, p. 1). The scope of inventory management, that aims at protecting consumers from disruption of flow of goods at higher levels of supply chains and ensuring that commodities are readily availed to customers on demand means that the main objective of maintaining inventory is to meet customers’ demand. This is because the benefits of maintaining inventory aims at securing consumer’s interests while the disadvantages in costs are bore by BMW at the consumers’ benefits. Unavailability of commodities upon demand would also mean BMW’S lost sales and profit in the short run and a possible loss of customers due to dissatisfactions over unavailability of commodities (Goldsby and Martichenko, 2005, p. 20). Inventory reduction The association of every set of inventory with a cost means that the cost of acquisition of inventory as well as the cost of maintaining the inventory is directly proportional to the quantity of inventory that is maintained. As a result, BMW can reduce cost in inventory by reducing the amount of inventory that is held at a particular time. This particularly plays a role in minimising storage costs. A reliable strategy towards reduction of inventory, for cost reduction therefore lies in proper management of inventory. Application of statistical techniques such as monitoring and evaluation of process allows BMW to focus future trends in demand for commodities. Based on the focused trend, though it may not be very accurate, the company is able to only stock commodities that will be demanded for within a reasonable period. This prevents blind stocking of goods that are not likely to be demanded for by consumers in the near future. Proper planning therefore reduces the amount of inventory, and hence storage cost, held at a time because demand matches inventory (Goldsby and Martichenko, 2005, p. 20, 21). Some of the methods that may help BMW in inventory reduction include regular review of inventory to identify wastes for elimination, evaluation of “usage and lead time,” reduction of “safety stock levels,” handling inventory based on significance and “shifting ownership to suppliers.” These approaches aim at identification of necessity of inventory with the aim of minimising the level of stock to be kept (Gossard, 2005, p. 6). Inventory that is held in distribution network therefore involves costs that should be minimized. One of the approaches to minimizing these costs is through inventory reduction. Question 2: Logistic management and competitive advantage Competitive advantage refers to a firm’s capacity to endure competition from its rivals and to establish itself as a better option in the market. BMW can achieve competitive through improvement of quality towards customer utility and differentiation of products that establishes the organization’s products above those of its competitors in the market. Proper management of logistics activities contribute to competitive advantage by facilitating development of differentiated products and operational processes that aims at attaining efficiency in service delivery. Porter’s generic strategy and value chain are examples of application of logistics strategies towards competitive advantage. Porter argued that competitive advantage is developed from microelements of an organization through strategies that “contribute to a firm’s relative cost position and create a basis for differentiation” (Michail, 2011, p. 28). While BMW can move towards cost reduction through identification of strategies that identify cheaper resources, establishment of efficiencies in its operations may also lead to reduced production cost. According to Porter, BMW also needs to minimise its wastes such as inventory costs in order to achieve competitive advantage. Porter’s value chain distinguishes operations into primary activities and support activities. While primary activities include product’s development, its distribution from suppliers, within the BMW, and to consumers as well as after sales services, support activities supplements the primary activities and includes “procurement, technology development, human resource management and infrastructure” (Michail, 2011, p. 28). The Porter’s value chain framework therefore identifies activities that are involved in BMW’s operations and distinguishes the activities by priority. It as a result facilitates managerial decision making towards efficient process for higher performance and quality towards BMW’s competitive advantage. Similarly, the generic strategy identifies processes that an organization can adopt towards competitive advantage. The generic framework includes “cost leadership, differentiation, cost focus, and differentiation focus” (Michail, 2011, p. 33). Both differentiation and cost consideration can help BMW to capture market by persuading consumers to its products. While differentiation induces perceived quality among other utilities, cost considerations with respect to reduced prices persuade consumers on grounds of affordability. Differentiation also facilitates tailored services, customer responsiveness, and flexibility due to availability of alternatives for comparison. The generic framework’s cost factors, if adopted by the company, on the other hand lead to higher consumers’ purchasing power, higher turnover, and low levels of inventory and minimised wastes (Michail, 2011, p. 33). Proper logistic management through Porter’s value chain and generic frameworks therefore facilitates strategies and can help BMW towards competitive advantage. Question 3: Total quality management Total quality management refers to a management approach in which all aspects of an organization processes such operations are constantly improved for achievement of quality in processes towards a generally improved organizational performance. The management therefore results in improved quality of products. Pride et al defines total quality management as the organization of a firm’s processes towards utility among customers, employees, and suppliers. It therefore develops utility towards a stronger relationship with these parties. As a result, total quality management can help BMW to improve its corporate image, a tool to its competitive advantage. The management approach is also associated with financial advantages such as “lower operating costs, higher return on sales and on investments” and a developed capacity to raise prices based on brand imaging and hence increases profitability. Total quality management therefore establishes quality as a battleground for competition among organizations. With enhanced quality of products, a firm is able to outdo its competitors as it offers ‘higher-level’ utility (Pride, Hunges and Kapor, 2011, p. 186). Quality circle as an element of total quality management also has benefits to an organization. Defined as a group of workers who periodically meet to “identify, analyze and resolve work related problems” in their respective common fields of operation, BMW is likely to generate solutions to its possible problems through implementation of the quality circle. Group work into problem solving may also be associated with innovation at BMW toward quality improvement and identification of new products for differentiation. Implementation of a quality circle approach to total quality management is also likely to benefit BMW through building “mutual trust and corporation between management and workers,” enhance productivity, “develop knowledge management,” and facilitate general improvement of BMW’s processes (Mukherjee, 2006, p. 72). The continuous improvement approach to management also has possible benefits that BMW can reap. Such benefits include enhanced output and monitored variance in operational process for uniformity. Its application in BMW is therefore likely to enhance competitive advantage through improved output and higher efficiency (Leebov and Ersoz, 2003, p. 8). Total quality management, quality circles, and continuous improvement can therefore help BMW to gain competitive advantage through qualities and low costs. Reference list Cope, B. and Brown, R. (2002). Value Chain Clustering in Regional Publishing Services Markets. Australia: Common Ground Goldsby, T. and Martichenko, R. (2005). Lean Six Sigma Logistics: Strategic Development to Operational Success. Florida, FL: J. Ross Publishing Gossard, G. (2005). Best practices for inventory reduction. Available from: http://www.iwsmartmfg.com/presentations/GossardBestPracticesforInventoryReduction.pdf. [Accessed on 20 April 2012] Lambert, D. (2008). Supply Chain Management: Processes, Partnerships, Performance. 3rd Ed. Florida, FL: Supply Chain Management Inst Leebov, W. and Ersoz, C. (2003). The Health Care Manager's Guide to Continuous Quality Improvement. Lincoln, NE: iUniverse Michail, A. (2011). An Investigation of the Relationship Between Value Chain Activities and Generic Strategies in Small and Medium-sized Enterprises in UK Manufacturing. Norderstedt, Germany: GRIN Verlag Mukherjee, P. (2006). Total Quality Management. New Delhi, India: PHI Learning Pvt. Ltd Pride, W., Hunges, R. and Kapor, J. (2011). Business. 11th Ed. Mason, OH: Cengage Learning Read More