The changing dynamics of Supply Chain Inventory Management

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Supply chain management (SCM) is the management of a network of interconnected businesses involved in the ultimate provision of product and service packages required by end customers (Harland, 1996). Supply Chain Management spans all movement and storage of raw materials, work-in-process inventory, and finished goods from point of origin to point of consumption (supply chain).

Another definition is provided by the APICS Dictionary when it defines SCM as the "design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally."

Supply chain management must address the following problems:

Distribution Network Configuration: number, location and network missions of suppliers, production facilities, distribution centers, warehouses, cross-docks and customers.

Distribution Strategy: questions of operating control (centralized, decentralized or shared); delivery scheme, e.g., direct shipment, pool point shipping, cross docking, DSD (direct store delivery), closed loop shipping; mode of transportation, e.g., motor carrier, including truckload, LTL, parcel; railroad; intermodal transport, including TOFC (trailer on flatcar) and COFC (container on flatcar); ocean freight; airfreight; replenishment strategy (e.g., pull, push or hybrid); and transportation control (e.g., owner-operated, private carrier, common carrier, contract carrier, or 3PL).

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Trade-Offs in Logistical Activities: The above activities must be well coordinated in order to achieve the lowest total logistics cost. Trade-offs may increase the total cost if only one of the activities is optimized. For example, full truckload (FTL) rates are more economical on a cost per pallet basis than less than truckload (LTL) shipments. If, however, a full truckload of a product is ordered to reduce transportation costs, there will be an increase in inventory holding costs which may increase total logistics costs. It is therefore imperative to take a systems approach when planning logistical activities. These trade-offs are key to developing the most efficient and effective Logistics and SCM strategy.

Information: Integration of processes through the supply chain to share valuable information, including demand signals, forecasts, inventory, transportation, potential collaboration, etc.

Inventory Management: Quantity and location of inventory, including raw materials, work-in-progress (WIP) and finished goods.

Cash-Flow: Arranging the payment terms and methodologies for exchanging funds across entities within the supply chain.

Supply chain execution means managing and coordinating the movement of materials, information and funds across the supply chain. The flow is bi-directional.

Inventory management is primarily about specifying the size and placement of stocked goods. Inventory management is required at different locations within a facility or within multiple locations of a supply network to protect the regular and planned course of production against the random disturbance of running out of materials or goods. The scope of inventory management also concerns the fine lines between replenishment lead time, carrying costs of inventory, asset management, inventory forecasting, inventory valuation, inventory visibility, future inventory price forecasting, physical inventory, available physical space for inventory, quality management, replenishment, returns and defective goods and demand forecasting. Balancing these competing requirements leads to optimal inventory levels, which is an on-going process as the business needs shift and react to the wider environment.

It involves a retailer seeking to acquire and maintain a proper merchandise assortment while ordering, shipping, handling, and related costs are kept in check.

Systems and processes that identify inventory requirements, set targets, provide replenishment techniques and report actual and projected inventory status.

It handles all functions related to the tracking and management of material. This would include the monitoring of material moved into and out of stockroom locations and the reconciling of the inventory balances. It may also include ABC analysis, lot tracking, cycle counting support etc.

Management of the inventories, with the primary objective of determining/controlling stock levels within the physical distribution function to balance the need for product availability against the need for minimizing stock holding and handling costs.

1.2 Rationale to the study

Most of the researches in supply chain areas are concerned about optimizing the supply chain in terms of its efficiency and competence in the product market, but only limited studies are done considering the inventory management in supply chains. Effective inventory management in a supply chain can play a vital role in cutting inventory holding costs across the different stages of the supply chain, thus emphasizing the need of a general model for managing inventories within a supply chain. Baganha & Cohen (1996) developed a stabilizing model for effective inventory management for supply chains. Supply chain materials management methods could be made complex considering a multi product scenario and discontinuous supply chains. So the models developed should have room for all kinds of supply chain variability. Lee & Billington (1993) developed a model for inventory management considering decentralized supply chains.

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1.3 Overview/Significance of the are under study

Inventory management for supply chains could be effective only when the information flow from top to bottom of a supply chain is streamlined. Cachon & Fisher (2000) developed a value shared information model and performed a comparative study with the conventional data sharing strategies and ended up with the proposed model performing better, reducing inventory holding expenses. Strategic plans for the effective 4 distribution of information are essential for supplying goods at the customer expected rate. Mutual sharing and analyzing of the information and standards between the supplier and customer at every stage of the supply chain is crucial and it also nurtures customer supplier relationships. Thus incorporating information flow standards in inventory management in a supply chain will definitely result in increased returns.

Supply chains can be streamlined in such a way that they are continuous and follow the chain of activities at any given time. But there are certain cases where the chains appear to be in a broken or discontinuous form due to lack of communication flow and other practical factors that limit them from following the supply chain policy. So in such cases it is extremely difficult to evaluate the inventory management strategies. Materials stored at various locations of a supply chain can have divergent effects on the cost and service levels of the chain (Lee & Billington, 1993). So managing inventories in such supply chains requires special focus and considerations at all levels.

Inventory exist s in the supply chain because of a mismatch between supply and demand. This mismatch is intentional at a steel manufacturer where it is economical to manufacture in large lots that are then stored for future sales. The mismatch is also intentional at a retail store where inventory is held in anticipation of future demand. An important role that inventory plays in the supply chain is to increase the amount of demand that can be satisfied by having product ready and available when the customer wants it. Another significant role inventory plays is to reduce cost by exploiting any economics of scale that may exist during both production and distribution.

Inventory is spread throughout the supply chain from raw materials to work in process to finished goods those suppliers, manufacturers, distributors, and retailers hold. Inventory is a major source of cost in a supply chain and it has a huge impact on responsiveness. If we think of the responsiveness spectrum, the location and quantity of inventory can move the supply chain from one end of the spectrum to the other. For example, an apparel supply chain with high inventory levels at the retail stage has a high level of responsiveness because a customer can walk into a store and walk out with the shirt they were looking for. In contrast, an apparel supply chain with little inventory would be very unresponsive. A customer wanting a shirt would have to order it and wait several weeks or even months for it to be manufactured, depending on how little inventory existed in the supply chain.

Inventory also has a significant impact on the material flow time in a supply chain. Material flow time is the time that elapses between the points at which material enters the supply chain to the point at which it exist. Another important area where inventory has a significant impact is throughput. For a supply chain, throughput is the rate at which sales occur. If inventory is represented by I, flow time by T, and throughput by D, the thee can be related using Little's law as follows:

I = DT

For example, if the flow time of an auto assembly process is ten hours and the throughput is 60 units an hour, Little's Law tells us that the inventory is 60 x 10 = 600 units. If we were able to reduce inventory to 300 units while holding throughput constant, we would reduce our flow time to five hours (300/60). We note that in this relationship, inventory and throughput must have consistent units.

The logical conclusion here is that inventory and flow time are synonymous in a supply chain. managers should use actions that lower the amount of inventory needed without increasing cost or reducing responsiveness, because reduces flow time can be a significant advantage in a supply chain.

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1.4 Historical Developments

In the 1980s, the term Supply Chain Management (SCM) was developed[6] to express the need to integrate the key business processes, from end user through original suppliers. Original suppliers being those that provide products, services and information that add value for customers and other stakeholders. The basic idea behind the SCM is that companies and corporations involve themselves in a supply chain by exchanging information regarding market fluctuations and production capabilities.

If all relevant information is accessible to any relevant company, every company in the supply chain has the possibility to and can seek to help optimizing the entire supply chain rather than sub optimize based on a local interest. This will lead to better planned overall production and distribution which can cut costs and give a more attractive final product leading to better sales and better overall results for the companies involved.

Incorporating SCM successfully leads to a new kind of competition on the global market where competition is no longer of the company versus company form but rather takes on a supply chain versus supply chain form.

The primary objective of supply chain management is to fulfill customer demands through the most efficient use of resources, including distribution capacity, inventory and labor. In theory, a supply chain seeks to match demand with supply and do so with the minimal inventory. Various aspects of optimizing the supply chain include liaising with suppliers to eliminate bottlenecks; sourcing strategically to strike a balance between lowest material cost and transportation, implementing JIT (Just In Time) techniques to optimize manufacturing flow; maintaining the right mix and location of factories and warehouses to serve customer markets, and using location/allocation, vehicle routing analysis, dynamic programming and, of course, traditional logistics optimization to maximize the efficiency of the distribution side.

There is often confusion over the terms supply chain and logistics. It is now generally accepted that the term Logistics applies to activities within one company/organization involving distribution of product whereas the term supply chain also encompasses manufacturing and procurement and therefore has a much broader focus as it involves multiple enterprises, including suppliers, manufacturers and retailers, working together to meet a customer need for a product or service.