Part One: Inventory Management and its role within the Supply Chain Inventory management is a method through, which a business handles tangible resources and materials to ensure availability of resources for use. It is a collection of interdisciplinary processes including a full circle from the demand forecasting, supply chain management, inventory control and reverse logistics.
Inventory management – is the optimization of inventories of manufactured goods, work in progress, raw materials, and other features of companies in order to reduce storage costs while providing a high level of service and smooth operations. Inventory management in logistics is the optimization of operations directly related to the processing and registration of goods, and to the coordination with the procurement and sales service, it is the calculation of the optimal number of stores and their locations. Effective inventory management allows an organization to meet or exceed customers’ expectations.
Several technical applications of inventory management models are incorporated by the inventory management so as to achieve efficiency. Critical role of the inventory management is therefore played by the concepts such as safety stock, cost of goods, economic ordering quantity, customer managed inventory, a vendor managed inventory, and the inventory turnover. The key principles of inventory management remain the same across all the industries; however, some critical areas of emphasizing these principles may vary from one sector of business to another. Inventory management in the supply chain is a complex of supply chain optimization techniques. This is a key element in the supply chain management.
Experts emphasize companies’ attention on what constantly improving efficiency in the supply chain has become a market requirement and prerequisite for competitiveness. Global trends for the largest industrial and commercial companies integration lead to the formation of the global system with integrated supply chain, procurement, etc. That is why inventory management in the supply chain cannot be separated from the overall system, a single ‘logistics organism” of the company. Information technology can help to integrate the management of inventory in the supply chain. The purpose of the usage of information technology to manage inventory in the supply chain is to increase the efficiency of all processes. (Supply chain management consulting 2002)
The important aspect of the inventory management lies on the correct application of the right inventory management tools. Understanding of all the details of inventory management leads to the effective control of inventory. When lean practices are applied to all aspects of the inventory management cycle, this means that business can effectively reduce the investment in shipping costs, plant rentals, reverse logistics, and standing inventory while improving or maintaining customer service levels in its overall performance. (Purchasing and Procurement Center, 2012). Therefore, inventory management is important and need to be effected at all levels of business operations to keep the inventory levels stable and to avoid costly errors and inconveniences (Winsner, 2011).
1. It is often difficult to find reliable costs of stock. With shortages this seems almost impossible. Discuss how we can find cost of loss of good well or reduced future sales, and to what extent we can have reliable estimates for such costs.
Often, it is difficult to find reliable cost of stock because market factors such as shortages come into place. The most important element, which must come into place pertaining to this situation, is intelligence pricing. Intelligent pricing is an element, which will ensure a successful business venture, and without this business will not find reliable costs of stock. Before launching a new business, it is always important for entrepreneurs to have adequate knowledge about the various pricing strategies and components available. Market place factors ought to be weighted by the business owners before prices of goods and services are set. Therefore, factors such as the market, competition and the distribution costs need to be put in place so as to arrive at reliable cost of stock. In any analysis of the inventory management system several factors should be considered: the demand forecast and delivery time, as well as the costs associated with the system operation.
The cost parameters must be considered as well. Firstly, the costs of holding reserves, which include the cost of dead capital in stocks, keeping costs and other costs associated with physical presence of goods in a warehouse. Secondly, order and reorder costs which includes the cost of placing an order, the cost of record-keeping, as well as the cost of set-closing operation if the output is considered in batches. Another important indicator are the costs due to lack of or inability to meet demand(shortage costs), the costs due to changing nature of the products, production costs , as well as losses due to obsolescence or damage.
Lets consider shortage costs in details. These are the costs associated with the occurrence of shortage and can show up in those cases when the product is required, but cannot be supplied because it is out of stock. The impact of shortage is wider than lost profit, as it involves the loss of image, goodwill and potential losses from the reduction in the number of sales in the future. These costs may also include such payments for actions ,aimed at reducing the deficit, as freight forwarding, sending a rush order, payment for special types of products, the usage of more expensive suppliers.
Most companies believe that shortage is always expensive, so they try avoid it. In other words, they are willing to pay relatively low costs for stock keeping in order to avoid relatively high costs associated with shortage. These costs represent a penalty to be paid by the owner of an enterprise in case when the demand exceeds the supply. It is very difficult to ensure that demand will always be satisfied and, in addition, it is likely for a firm that such guarantees can be joint with extremely high costs.
The shortage can be offset by emergency delivery, in this case, penalty is the difference between ordinary value of product and the cost of emergency delivery. Sometimes shortage is offset by back-ordering, i.e. goods are delivered to the customer as soon as they come in stock. In this case, penalty is the loss of goodwill, this can affect customer’s behavior in the future. In extreme case this shortage can lead to the loss of customer, then the penalty will include not only lost sales cost, but also losses of many customers in the future.
Identifying shortage costs is exceptionally difficult task, and it does not arise barely because the administration of an enterprise is not interested in reduction of these costs. Direct shortage cost figures were obtained only in a few cases, and only with limited accuracy. One of the most important elements of the intangible assets of the company is its goodwill. At the same time it cannot be said that the formation of goodwill and maintaining it at a high level is something new and unique for today’s businesses. Goodwill represents the kind of “good name” of a company and is accounted in its intangible assets, along with copyrights, know-how and trademarks. Goodwill may be either positive or negative. The positive goodwill of a company may help: – To add psychological value for products and services;
– To attract new customers in case they have a choice between functionally similar products or services; – to bring a company more qualified employees and increase job satisfaction of an existing staff; – To increase the effectiveness of advertising and sales, to support distributors, advertising agencies, suppliers and business partners; – To raise funds on the stock market and survive in the event of a crisis. Any competitive producer knows that in order to gain the consumer recognition and profit, it is needed to invest primarily in itself. After all, a good name works better than any advertising. It is impossible to generate a goodwill from scratch. The company should enjoy really significant achievements and benefits which lay the foundation for goodwill. The process of generating a goodwill takes a long time and considerable amount of money. This is a long-run, very complicated process that cannot be insured against dangers, losses and risks. (Lean manufacturing and and operations management, 2012)
One of the most important trends in recent years has been towards e-commerce. How does this affect inventory management? Electronic Commerce is a type of trading, which applies the use of modern technologies such as mobile commerce, supply chain management, electronic funds transfer, internet marketing, electronic data interchange, online transaction processing, and inventory management systems among others. (Practical Ecommerce, 2010). Through the application of computerized technology in inventory management, business organizations are able to have a complete inventory description in real-time basis. Investing in e-commerce technology allows business owners to have a strong inventory management backed, which includes bar codes that allow streamlining of the inventory processes.
A streamlined process leads to accurate planning due to improved forecasting, product turnover leading to increased profits and better customer services. E- Commerce inventory management system also means that the business owner can easily integrate with customers through various technologies such the internet and the smart phones. Through this, customers are able to access the available products and their prices and business owners will be able to place their products in the market with ease. Measuring of the inventory turns is also achieved by e-commerce with the use of the appropriate software and proper techniques. Therefore, more frequent inventory turns are achievable, and this boosts the profits.
E-commerce is also applied in managing vendors, and maintaining good ties with vendors enables business owners to negotiate favorable terms and conditions for business. Elimination of obsolete inventory in a timely manner is achieved through e-commerce as the seller can easily identify such inventory through real-time observation of the market changes. Inventory items are also reduced through e-commerce since business owners are able to keep just enough items because they know their market capabilities in real-time without false anticipation. Therefore, the overall impact of e-commerce in inventory management is that accurate information is attainable and efficient, and effective operations can be achieved by business owners because the amount of warehousing space required is reduced and constructively used with minimal wastage associated with unpredictable approximations and anticipations (Coyle et al, 2008).
Now it is quite obvious that the Internet is changing the image of the world economy. The Internet has the greatest impact on e-commerce between businesses (B2B). Companies form strategic alliances and build relationships with suppliers. The rate of development and growth of e-commerce, as well as promising prospects for increased supply chain efficiencies – all these facts have a significant impact on the companies’ activities engaged in B2B commerce. Such businesses are forced to reduce operating and handling costs and at the same time to accelerate the supply chain activity. Those B2B companies that do business effectively have achieved a leading market positions in their industries. The supplying funds savings can be directed at the enhancement of IT infrastructure operations, and ultimately at the improvement of customer service B2B. The differences between e-commerce B2B and B2C are more significant than between the retail and wholesale trade.
From a business perspective, this means savings within the organization, a willingness to enter into profitable alliances with suppliers, a reduction of operative costs in the delivery of goods and services, the precise regulation of the complex coordination within the union in respect of procurement, timely delivery and electronic payments. (Network solutions, 2012).
A company may command a hefty price on its product or service, but it is amazing how such companies may sometimes observe to be making minimal profit, making no profit or even running at a loss. This means that the cost of the product is different. Perhaps, to arrive at a reliable cost of stock means that business owners need to develop appropriate pricing strategy and to implement it so as it will result in generation of profits. Inventory management is a method through, which a business handles tangible resources and materials to ensure availability of resources for use.
Efficient technology such as the application of e-commerce leads to effective inventory management. This is likely to lead to cost efficiency and effectiveness and therefore generate profitability. Main advantages of e-commerce for companies are: global scale, reduction of inventoty costs, supply chain development, fast time-to-market etc. For customers they are: large product variety, personalization, low prices, etc. The high emphasis should be placed on costs parameters when analyzing inventory management. The impact of shortage cost is wider than the lost profit, as it involves the loss of image, goodwill and potential losses from the reduction in the number of sales in the future. Identifying shortage costs is exceptionally difficult task, and it does not arise barely because the management of an enterprise is not interested in lowering these costs.
Sometimes the shortage is offset by back-ordering. Shortage costs may lead to the loss of goodwill, this can affect the customer’s behavior in the future. Under present-day conditions, goodwill may change in the shortest possible time. A number of different factors can contribute to this, and therefore the organization’s security policy should include measures to manage reputational risk. Is is evident that the goodwill in the current market environment is the most important competitive advantage for any company.