Identification Of Inventory Waste To Optimize Inventory Commerce Essay

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Supply chain management (SCM) integrate the planning and control of inventory, throughout the entire network of cooperating organizations from the source of supply to the end user ranging from the ordering and receipt of raw materials throughout the manufacturing processes to the distribution and delivery of products to the customers. In the last two decades, the enterprises had observed the transition phase of change unparalleled in the history of the world in terms of advances in technology especially in terms of computer and its industrial applications, globalization of markets and stabilization of political economies. Globalization has strained the enterprises to improve their internal and external processes rapidly in order to stay competitive. Competitiveness develops the ability to develop at lower price and faster than competitor. The core competencies result in unanticipated and innovative products. In our paper, we have identified some constituents of inventory which is being proposed as inventory waste. These wastes may be further reducing for optimization of inventory.

Keywords- SCM, Inventory waste, Information flow


In the market, the participants of a supply chain not only face the uncertainties of product demands and raw material supplies but also face the uncertainties of commodity prices and costs [5]. The development of the internet has changed the meaning of manufacturer, supplier and customers. Newer Approaches to Supply Chain management organize the supply chain as a network of cooperating intelligent agent, each performing one or more supply chain functions and each coordinating actions with one another [4].

The inventory management is the most important activity of supply chain. Majority of inventory models are having certain assumptions but in real situation these assumptions behave in entirely different fashion and results in different inventory level. The difference of actual and requisite inventory level is termed as inventory waste.

The literature lacks an identification of the inventory wastes. Since these wastes have a very important role in the optimization of inventory. Therefore proper identification of all such inventory wastes is a matter to be explored. The paper is organized as follows: Section 2 reviews the literature in terms of SCM, inventory, inventory models and inventory waste. Inventory wastes have been identified in section 3. Conclusion has been presented at the end of paper.

Literature Review

The traditional supply chain and manufacturing processes are placed on experience and intuition of managers and were designed with long supply cycle times, large batch sizes, capacity based on annual volumes, volume-driven technology, and numerous suppliers for the same parts on the short-term base contracts. Their objectives were to maximize the efficiency of an individual functional unit by achieving competitive edges based on cost reduction. Under the traditional supply chain, efforts of manufacturers to meet the increased changing of customer requirements caused decreased margins, poor service performance, increased overhead costs, poor production process reliability, increased downtime due to changeovers, and high inventory levels. None of these conditions are practicable for a manufacture to be competitive.

Davis (1993) has presented why SCM needs renewed attention: reduced profit margins due to pressure from increasing competition, needs for administrating multisite manufacturing, cut-throat marketing channels, maturation of the world economy, customer service demands for quick and more reliable delivery, and pressure to reduce inventories. SCM is designed to reduce inventory investment in the chain, to increase customer service, satisfaction level and to help be competitive [1]. Enterprises are realized that maximization of efficiency in one department or one functional unit is less desirable than optimal performance for the whole company.

The concept of SCM is relatively new to academics and practitioners, appearing first in 1982. Although the term, supply chain management, has been used since the 1980s and the academic and trade presses have given extensive attention to the concept, confusion still persists in defining what is SCM [6]. In the manufacturing of a product, the product passes through various successive manufacturing stages to achieve the desired shape. These stages may include number of operations starting from purchase of raw material and semi finished and/or finished components, inspection while receiving, storages of these materials, processing, quality control and dispatch for distribution. Integration of all stages of the manufacturing system/ organization which are involved directly or indirectly in fulfilling a customer request structure supply chain. The supply chain includes not only the manufacturer and suppliers, but also transporters, distribution channel (warehouses and retailers) and even customers









The physical movement of products through a supply chain for the manufacturing of a product is represented in the fig 1.

Fig. 1 Inventory in various Stages of Supply Chain (SC)

The materials start movement from suppliers/vendors as raw materials/semi-finished or finished components to the factory. These materials/components either manufacture products or assemble them. The finished products are sent to warehouses or to distribution centers/retailers for customers. Therefore Inventory has to maintain stating from holding the raw material and components, intermediate and final stages of production till production of finished product. Organizations should not only consider the impact of any business decision on their own performance but also on the bottom line of their suppliers, distributors and transporters Inventory personnel have a vital role of optimizing the inventory level at all stages of supply chain. This huge competition has enforced the enterprises to reorganize their supply chain.

In SCM each constituents within a company or between companies, including supplier, manufacturer, distributor, and customer, should be involved in the chain activities and collaboration between members. The second component is the flow of materials and information in terms of supply and demand i.e. materials (raw materials or finished goods) and information flow simultaneously both upstream and downstream in the chain. Third, to manage the flow of materials and information and to provide high customer value, integrated and coordinated value-added activities are required (i.e., cross-functional approach, joint planning and forecasting, flexible operations).

Strategic management decisions impact all areas of a firm. Once such decisions have been made, the criteria for making subsequent operational decisions must be re-examined. New strategic directions may require new criteria and/or a re-emphasis of existing criteria used in making the operational decisions necessary to implement them. An important area of operational decision making is that of purchasing [10]. The common characteristic among supply chain leaders in all the industry segments is the extent to which the various supply chain constituents engage in supply chain collaboration. Organizations need to break the traditional paradigm of looking at the supply chain as a set of inter-connected constituents. There is an urgent need to employ systems thinking to supply chain management [4].

The inventory is a stock of goods required to facilitate the continuous production of goods and services. It may also define as the stock kept for future use to synchronize the inflow and outflow of goods in a transaction. The raw material inventory contains in terms that are purchased by the firms from others and are converted into finished goods through the manufacturing process. The work-in-process inventory consists of items currently being used in the production process. Finished goods represent final or completed products that are available for sale. The inventory of such goods consists of items that have been produced but are yet to be sold.

It may further define as aggregate of those items of tangible personal property which (1) are held for the ordinary course of business; (2) are in process of production for such sales; and (3) they are to be currently consumed in the production of goods or services to be available for sale. Inventory is required to get advantage of the economic features of a particular technology, or to synchronize human tasks, or to cushion the production process to meet the changing trends in demand. In the situation of uncertainty, inventories are used as a protection against risk of stock-out. Inventory can also be defined as any idle resource or tangible asset which can be seen, weighed, and counted e.g. supplies, raw materials, work in process (WIP), and finished goods [9].

The inventory is temporary which is required to hold brief period. However, due to the ongoing nature of the firm's operation, aggregate or total inventory is continually being reordered and replenished. The net effect of the processes of replenishment is that the firm has to retain "permanent investment" as inventory. It contributes to a greater part of total cost of a product or service and by efficient and effective Inventory Management, this cost can be reduced to a greater extent and customer satisfaction can/must be enhanced. There is a high correlation between the inventory levels and service efficiency.

Carrying a large amount of inventory provides protection against uncertainty in demand and allows companies to take advantage of economies of scale when ordering material. This type of system is relatively easy to manage; however, the inventory holding costs can be very expensive. On the other hand, a distribution centre may choose to carry very little inventory (similar to a Just-In-Time system). In this case, inventory holding costs are typically much lower, but managing the system to ensure parts are available when and where they are needed can be challenging.

inventory waste

Inventory turnover is the rate of inventory passing through an organization calculated by dividing the annual sales by the average on hand inventory. The inventory personnel have to make number of decisions: decisions related to controlling inventory costs, determining order quantity and replenishment level and selecting forecasting techniques or handling the inventory. Inventory costs include two components. One which could be controlled i.e. controllable component. Other which could not be controlled i.e. uncontrolled component e.g. holding costs, setup costs, ordering costs, and shortage costs. Within inventory management, these decisions affect inventory performance.

Our research work has focus on inventory performance as measured by level of inventory: raw material purchasing, production, and shipment. Inventory level is coupled to the volume and timing decisions of a company, Inventory management as well as its control has been a matter of great concern for academics as well as practitioners because overall investment in inventory accounts for relatively large part of a company's assets. Inventory may account for huge part of total assets. Too high level of inventory can be as problematic as having too little.

So which is the right approach? The answer to this is dependent on the relevant inventory costs. These typically include the inventory holding costs, the order costs (which include fixed and variable components), and the penalty costs. Inventory holding costs include expenses such as storage costs, rent/depreciation, labour, and obsolescence, overhead, and opportunity costs. Ordering costs include expenses such as the labour cost of processing orders, and costs associated with quality assurance (inspections). Finally, penalty costs represent the cost of not having sufficient stock on hand to satisfy demand when it occurs.

Traditionally, inventory has been considered as an asset. In a JIT environment, inventory is considered a liability. First, in a JIT philosophy inventory is waste. It adds to cost, but does not contribute to the value of the final product. Second, the JIT philosophy involves a never-ending cycle of problem identification and solution. Inventory permits many problems to be hidden, and thus is a hindrance to never-ending improvement [3]. Waste may be anything that is not necessary for the manufacturing of the product or, is in excess, for example, buffer inventories to cover for defective parts in the production lines or nonlinear building rates, labour hours spent producing products that are not necessary, labour hours spent reworking products because of poor quality or engineering rework orders, and time invested in setting up machine tools before they start processing parts. All this wasted time and material increases the cost of the product and lowers its quality. It is also a drive to simplify the manufacturing process in order to quickly detect problems and force immediate solutions.

Waste of Overproduction can be eliminated by reduced set-up times, layout modification and reduced work in process. Make only what is needed to eliminate overproduction.

To reduce waiting of men, machine and material, eliminate bottlenecks and balance uneven loads by flexible workforce and equipments. Certain modifications in layout can also reduce wastage in waiting.

To minimize transportation activities, modify layouts by using 'U' shape production line, reduce conveyors and use standard containers.

Ask questions regarding the reason for existence of the processes and then why each process is necessary.

To reduce inventories initiate JIT purchasing, produce only required quantity of products, follow pull type of production and reduce all other wastes.

Study motion for economy and consistency, which improves the quality. Products or services having high quality mean less rejection which reduces the waste.

Reduce work in process. Follow pull system of production. Produce only that much items which will be consumed immediately in next process. That will give immediate warning about defective quality

how to reduce waste

Based on literature review some recommendation has been proposed to reduce as well eliminate the inventory waste.

Management Commitment to Reduce Waste

Manufacturing company will have to walk on the edge of disaster for quite some time. Its employees are going to do more with less. They are going to point out defects and problems as soon as they occur they are going to stop a production line if there is a problem and not start it again until the problem is solved. The company is going to make commitments to single source suppliers for a longer time and refrain from always buying the cheapest parts. All these actions need the support of a solid commitment by management. Management is a very important force in any company.

Commitment at All Levels

One of the problems encountered in eliminating the waste manufacturers get scared at the thought of more work and less results, many manufacturing organizations operate according to old-fashioned ideas that conflict head on with new inventory management approaches (JIT principles). For example, in manufacturing it was always assumed that second source suppliers were good for backup. It was also believed that buffer inventories ensured success in meeting production schedules and that the production line must never be stopped except in a matter of life and death. Finally, fixing quality problems was normally postponed for the sake of production output, possibly with the assumption that time and volume would take care of the problem.

Middle management, front-line supervisors and workers need to work for elimination of waste totally. The question becomes, how does a company make believers of these people? Probably the only way to achieve this goal is to use training and participation. The company should immediately start training program for the people involved in the program. This participation is vital to the success of the system. Therefore, the company should not try to save time and money in training.

Selection of right inventory policy

Selection of Inventory policy is one of the important functions of purchasing activities. As it involve various type of costs and its effects further on the purchasing, production processes and finally on the demand of the product. Because of the dynamic nature of the demand, the enterprise cannot forecast the exact amount of inventory. But they tend to maintain close to exact inventory level. More the closeness to inventory level less will be the waste.


In current scenario of dynamic fashion, the product life is very small. So SC should be very reactive. It should be managed in efficient and effective manner. We have presented some source of waste and how they can be minimized. The traditional supply chain and manufacturing processes are placed on experience and intuition of managers and were designed with long supply cycle times, large batch sizes, capacity based on annual volumes, volume-driven technology, and numerous suppliers for the same parts on the short-term base contracts. Their objectives were to maximize the efficiency of an individual functional unit by achieving competitive edges based on cost reduction.

Under the traditional supply chain, efforts of manufacturers to meet the increased changing of customer requirements caused decreased margins, poor service performance, increased overhead costs, poor production process reliability, increased downtime due to changeovers, and high inventory levels. None of these conditions are practicable for a manufacture to be competitive.