Inventory Management in the Supply Chain - Essay Example

How to manage inventory in the supply chain and Section # of This essay seeks to highlight the process of managing inventory in the supply chain effective. It begins with an introduction to the supply chain. The movement of goods or information from suppliers to the end consumer. It then goes on to explain the various issues in supply chain which abound from time to time and which must be kept in mind while formulating an inventory policy. The warning signs of inventory management are also given so that company professionals would know when the inventory needs attention. Recommendations for managing inventory for companies are also given, followed by advantages of managing inventory. The Supply Chain - An introduction Due to the ever increasing size of the market, technological advancements and complex functions the supply chain is an emerging function today. Organizations have realized by now that to have an edge in this competitive scenario they need to manage their supply chain well. That brings us to the question what exactly is supply chain 'A supply chain, logistics network, or supply network is a coordinated system of organizations, people, activities, information and resources involved in moving a product or service in physical or virtual manner from supplier to customer. Supply chain activities (aka value chains or life cycle processes) transform raw materials and components into a finished product that is delivered to the end customer. Supply chains link value chains.'1 Simply put we can also say that supply chain is the 'process that integrates co-ordinates and controls the movement of goods, materials and information from a supplier through a series of customers to the final consumer.'3 As depicted in the diagram below: Essentially the supply chain begins with the extraction of the raw material, there are then value additions along the supply chain along with several production links before the product finally reaches the end consumer. The Global Supply Chain Forum(GSCF) introcduced a supply chain model which included the following business processes which are cross-functional and cross-firm in nature. These processes and components include; customer relationship management, customer service management, demand management, order fulfillment, manufacturing flow management, supplier relationship management, product development and commercialization and returns management/ reverse logistics.2 Therefore supply chains are an integral component of any business. The term 'Supply Chain Management' was coined in the 1980s to express the need of integrating the key business functions from the supplier to the end user. The original idea behind supply chain is that companies involve themselves in sharing of information regarding market dynamics and production capabilities. COMPANY BACKGROUND DaimlerChrysler was formed in 1998 as a result of the merger of Daimler-Benz and Chrysler Corporation. It is a company that manufactures passenger cars and light trucks. n 2007 DaimlerChrysler sold 80% of its Chrysler operations to private equity concern Cerberus Capital Management for about $7.4 billion. Daimler will retain a 20% equity stake in Chrysler. The company today is the largest producer of commercial vehicles in the world. Among passenger cars Daimler is responsible for manufacturing the prestigious Mercedes-Benz brand as well as Smart and Maybach. DaimlerChrysler is known to be driven by innovation and that has contributed to its success. 7 The Industry The automobile industry has experienced a boom in recent years with automobile demand soaring up. However today it faces a lot of challenges including ; cost reduction and performance improvement, emerging markets, excess labour, production capacity and inventory, retail and distribution performance and environmental sustainability. In this situation it has been imperative to examine all areas of the value chain in the industry including the supply chain. This is because companies today operate long-reach systems in a bid to reduce costs. 'Much of the cost reduction effort has involved automakers passing more responsibility down the chain to lower-tier suppliers, who often have neither the experience nor the capability to perform the tasks they are being assigned. As a consequence, instances of supply chain failure are rising driven by lack of communication on such key issues as demand signaling and the effect of constraints in the system.' 11 Therefore, we can see that for the automobile industry a lot depends on the supply chain which must be managed well in order that it may reap the fruits of its labour. Issues in inventory management IN THE supply chain There are various issues in managing inventory for supply chain. It is therefore a critical area of interest of the company which wishes to maintain an edge over competition. A basic concern with inventory management is that there must be enough inventory to satisfy demand. If this is not the case then the company would lose out on much needed revenue. On the other hand keeping excessive inventory could lead to higher carrying costs and even obsolescence. This will result in lower profits for the company. The supply side of the organization has several key units, which includes; A materials handling group A plant programming, scheduling, and releasing group A group to handle inbound parts movement and outbound vehicle transportation A customs group However all this was eliminated and grouped into fewer functions when the company decided to eliminate costs and improve its supply chain. These functions include procurement, materials and worldwide transportation.9 INBOUND Inventories Inbound Logistics is the receiving and warehousing of raw materials and their distribution to manufacturing as they are required' 10 When managing inventory there are certain issues that must be kept in mind with regards to procurement and distribution of raw materials . These include lead times, average demand, the number of different products, the length of planning horizon and costs. Other than this service-level requirements are also a concern for companies wishing to manage their inventories well in the supply chain. Managing inventory in the supply chain therefore requires constant attention and supervision on the part of the company. Handling small problems is easy but as soon as big problems loom large things can get out of hand. 5 Purchasing of $28 billion goods and services every year has lead DaimlerChrysler to have a complex supply chain. To overcome this complexity the company has highly effective supply chain management strategies. The company was recently able to save around $ 442 million due to process improvement efforts over the past three years. Outsourcing Outsourcing is a prominent issue in the world of supply chain management. Many companies outsource all or part of their supply function to third parties in order that they may be able to concentrate on their core processes. Daimler Chrysler for instance acquired the services of TDS automotive to provide inbound logistics services to DaimlerChrysler Windsor and Pillette Road Assembly plants. Use of Technology All this requires sharing of information. Only better sharing of information can lead to an agile supply chain, able to respond better to changes in any of the tiers of the supply chain; be it in the supplier or in the customer. My company DaimlerChrysler has used this idea appropriately in order to benefit from increased sharing of information. The Global Supplier Portal allows it to reach into all areas of the business. The Global Supplier Portal has enabled the company to achieve deftness, agility and promptness in its operations. It has made problem solving easier. So that small problems in inventory are identified at the very outset and can now prevent them from getting bigger than they are. DaimlerChrysler's MOPAR parts division was revolutionized by a warehouse management system built by IBM that allows the company to automatically track inventory and place orders from 34 different parts distributors. MOPAR needed an integrated warehouse management system to provide real time viewing of inventory stock in order to improve efficiency, productivity and accuracy. When realtime information is present management can more effectively deploy resources between areas of the warehouse where they are most needed; therefore making the supply chain more agile and able to respond to changing business requirements. 6 My company; DaimlerChrysler uses Powerway a web enabled a web enabled quality management system and supply chain collaboration network. This software has enabled Chrysler to identify potential design and engineering conflicts even before they have been realized allowing the company to save time, effort and energy and becoming more efficient. It has allowed the production of cars at a much faster rate than before in order to repsond to the rapidly changing market dynamics and fickle customers. Inventory-The Right Quantity It is imperative that the inventory of a company be watched closely. Often certain warning signs become apparent when managing an inventory. These signs must be carefully analyzed and efforts must be undertaken to reach to the root cause of these signs. The two key measures are: 'The turnover ratio. This is calculated by dividing cost of goods sold by average inventory balance; and The number of days of inventory on hand. To calculate this, divide total inventory by average daily sales' These ratios should be calculated for small subsets of the inventory. In addition to these other warning signs include; changes in the inventory mix, changes in the sales mix and large book to physical differences (shrinkage) in the inventory. 7 OUTBOUND INVENTORIES Out bound inventories on the other hand focus on the aspect of the supply chain whereby the distribution of finished goods has to be managed. It has been pointed out that the art of managing inventory in the supply chain requires certain basic ground measures. One must make it a priority and should do logistics management like they do production management. Secondly information should be made more abundant, more accessible, inventory should be replaced with information. Thirdly, especially for the automobile industry, a better collaboration with the supply chain partners is needed. Lastly, new and updated software should continually be implemented. Lean Inventory Lean inventory should be implemented. Inventory either results from variability or ignorance. In the first condition you may have an abundance of inventory but you may still be unable to match the seasonal variations and thereby take advantage of rising demand. In the second case on the other hand you keep inventory due to ignorance. This means that you are unaware of what is going to happen or upstream and you retain goods just in case. You cannot expect inventory to disappear. It will keep moving from one partner operation to another when you push it to and fro. Therefore it will move out in either direction; the finished inventory or down to suppliers. This may seem appropriate in the short run due to the reduction of localized costs. However, in the long run such an approach leads to accumulation of carrying costs and too much instability. It is recommended therefore to practice 'lean' business operations. Therefore instead of fighting change and bringing stability into the supply chain, the organization could come up with ways to respond to change faster and more efficiently even if that takes having more inventory at hand. Better inventory management requires certain practices to be implemented in the organization. These include continuous review policy and periodic review policy. The continuous review policy is characterized by the re-order point i.e when new stock must be ordered and the order up-to level. As soon as the inventory position reaches below the reorder point the company places an order to make its inventory reach till the order up to level. On the other a periodic review policy is also acceptable. In this case inventory level is reviewed periodically and an appropriate quantity ordered after each review. 5 Collaboration and Cooperation Gaining visibility is a tried and technique of better managing inventory in a supply chain. Therefore supply chain collaboration must be implemented to reduce the cost in supply chain management. Collaboration is defined as 'real, two-way communication' where everything to be done is first discussed. Joint capacity planning could be a beginning in collaborations where partners determine capacities in consultation with each other. 8 E-Commerce and Electronic Data Interchange In my organization DaimlerChrysler due to the implementation of Supplier Network Collaboration instead of transmitting a series of ever-truncated electronic data interchange (EDI) commands from one tier to another which used to take at least 14 days, it now broadcasts information through all tiers of the supply chain using email. In this way all the partners in the supply chain get notification within 24 hours and can respond accordingly to smooth out any ruffles in the process. In addition to this a better decision support system is necessary for effectively managing inventory in supply chain. Deere and company recently implemented a transportation command and control system with the help of Manguistics supply chain applications. This has enabled it to optimize its logistics scheduling and maximize the load of transportations in accordance with real-time data. Therefore Deere was able to reduce logistics cost by 10%. Thereby it is recommended that supply chain managers open their eyes to the world of technology in order to analyze and eventually implement the integrated enterprise application soft wares which are taking the world by storm today. Marketing Other than that an improvement in marketing is needed to smooth out demands, limit options resulting in effective managing of inventory in the supply chain. Knowing what the customer wants is very important in every aspect of the business. This should comprise a careful and organized market analysis to understand the customer's needs and wants. Just because a company manufactures yellow cars and customers buy them does not necessarily mean that they want them. Therefore marketing is an essential component of supply chain. Another approach to managing inventory in supply chain is the practice of vendor managed industry (VMI). VMI is the practice of managing the inbound supply side inventory by keeping it with the vendors. The vendors are thereby responsible for managing the inventory mainly by keeping it in their warehouses as finished goods. Companies in order to better manage inventory in supply chains must get back to basics. Just because a technology and system looks good does not mean that it will work for you. A system can only be in place and working if it is in conjunction with the organization's processes and systems and complements its strengths. It also needs acceptability in the eyes of the employees. If an excellent system is something employees are unable to cope with and make best use of, it is useless for the organization. Therefore one must remember that a key measure of evaluating a technology is its adaptability to the organization. Only then would it enable the company to excel.8 Advantages of Managing Inventory in the Supply Chain Managing inventory in the supply chain is the core focus of many organizations. The reason for this is that well managed inventory and a flexible supply chain leads to various benefits for any organization. It leads to better cash flows. It boosts the flexibility of the company allowing it to better respond to changes It saves time and effort It leads to greater customer satisfaction 8 CONCLUSION Managing inventory in the supply chain lies at the centre of many business organizations. Effective inventory management entails addressing various issues such as lead times, customer demand patterns, the length of planning horizons and the number of different products available. It must be kept in mind that the more the variety of products available the more inventory management becomes a hassle. A critical issue to managing inventory is that inventory must not be so little that it cannot be used to adhere to the changing demand cycle. On the other it must not be so much that carrying costs become huge and obsolescence becomes a norm. To reach the right balance certain methods and techniques are used. To manage inventory certain measures have been suggested. This includes ensuring that lean systems are introduced throughout the organization. Collaboration and sharing of information must be ensure between channel partners. Such a collaboration results in faster and effective operations.It is also recommended that better, fast paced integrated logistics softwares be used in order to keep pace with technological development and allow the companies to leverage them into existing business growth. Technology reduces the time and effort that goes into various tasks being performed. Thereby companies must keep abreast with developments such as electronic data interchange and decision support times. Marketing and therefore an understanding of consumer needs must be taken into consideration for improvements in managing the supply chain. This is because keeping too many types of products increases hassles and thereby result in rising costs. On the other hand keeping less variety means that the needs of many consumers are not being met. Market analysis needs to be performed and consumers needs therefore must be known. Lastly, these internal inventory management can be outsourced to vendors. This means that inventory does exist but not with the company. It is placed in warehouses etc in the vicinity. Bibliography 1. Nagurney.A. 2006. Supply Chain Network Economics: Dynamics of Prices, Flows, and Profits, Edward Elgar Publishing 2. Lambert.M.D. 2004. Supply Chain Management. Processes, Partnerships and Performance. Sarasota, Florida. Supply Chain Management Institute 3. Stuart.E. 2006. Supply-chain rules. Logistics & Transport Focus, 8(6), p.p. 38-39 Kaminscky.P, D.Simchi and E.Simch. 2004. Managing the Supply Chain: The Definitive Guide for the Business Professional. NewYork. McGraw-Hill Professional 4. Viale.J.D. 1996. Inventory Management: From Warehouse to Distribution Center. Thomson Crisp Learning 5. Toomey.J.W. 2000. Inventory Management: Principles, Concepts and Techniques. Springer 6. 2007. Daimler technology and Innovation. Daimler [Internet]. Available from [Accessed 12 October 2007] 7. Gould.S.L. 2002. 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