People who believe you can't have too much of a good
thing obviously haven't worked with inventory! Operations managers know
inventory dispels this adage and face the constant challenge of keeping
inventory levels as low as possible without increasing overall costs or
negatively impacting product availability. This isn't an easy job, especially
since inventory rears its head throughout any organization--from raw materials,
to work-in-process, to finished goods.
"Making the Supply Chain Management Business Case" in the
April 2004 issue of Strategic Finance made the point that
effective
inventory management is critical to overall corporate performance. Savvy supply
chain management (SCM) techniques drive profits. In fact, companies using
advanced SCM techniques are 40% more profitable than companies that don't.
This time around I'll motivate you to review--and
challenge--the techniques and processes that support inventory management
policies and practices by walking you through the following topics:
* The role of inventory,
* The basis and motivation for commonly used techniques
to determine inventory policy, and
* The potential impact that technological advances can
have in these areas.
I hope this article whets your appetite for an article in
a future issue that will look more deeply at the actual techniques and
underlying calculations.
First, let's look at the role of inventory. Although
inventory plays a variety of crucial roles, there are two main types--cycle
inventory and safety or safety stock inventory.
From one perspective, inventory allows organizations to
reduce total costs through achieving wide-scale operational efficiencies and
economies of scale. From another perspective, safety or safety stock inventory
acts as insurance by improving product availability and buffering against the
everyday uncertainty the organization faces.
CYCLE INVENTORY
Cycle inventory allows a company to minimize total supply
chain costs. This is based on the assumption that the future unfolds as expected
(for example, future demand, yields, costs are all known in advance). Yes, you
have a crystal ball. Still, virtually every operations department can realize
benefits in one way or another if using cycle inventory techniques. Table 1
shows economies of scale that the purchasing, manufacturing, distribution, and
sales departments can realize when they use the cycle inventory approach.
The natural question that arises is, "How much should be
ordered and when?" Over the years, professionals have used various approaches
and techniques to answer questions such as how much inventory should be on hand
for each item at each location now and in the future.
