The supply chain is all about the process that gets products from their raw form all the way to their completed form and into the hands of customers. Involved in this process is a myriad of activities including production, transportation, storage, information transfer, analysis and sales.
Given that this whole process revolves around the product, inventory management is a significant component of this process. In this article, we take a closer look at some aspects of inventory which affect the entire supply chain.
What are the effects of too much or too little inventory?
To understand the role inventory has in the supply chain, we must first understand what the effect is of too much or too little inventory.
Inventory must be stored, meaning that it costs money for the entire duration of its storage even though it hasn’t been sold yet. Therefore, too much inventory will cost the company a lot in storage fees – opportunity costs, warehouse leasing, overheads and risk of obsolescence or theft. This may well end up being more than what the inventory is worth in sales depending on the length of time it is stored and if it is indeed eventually sold, and therefore, the profit margin can be significantly eroded.
However, it is still vital to have some inventory on hand to ensure customers’ demand will always be met. It is imperative to get the required levels of inventory right from the start, at which point you can work back and analyse how those values impact the rest of the supply chain.
Responsiveness and demand
Something the business must consider about its products is responsiveness. This is the ability to respond to altering conditions and customer demand. The responsiveness requirements for different products and industries will vary.
To identify a target level of responsiveness for your product, you must consider what would happen if you could not meet customer demand as soon as it was presented to you. For example, in the apparel industry, if an item was not available when a customer was shopping in-store, they would simply head to another store or the competition rather than wait for the products to arrive. In this case, it is better to hold inventory in order to satisfy demand.
However, if your product is a larger ticket item that is perhaps more niche or even custom-designed, then indeed, customers might be quite prepared to wait for the perfect product. In this case, inventory might be better ordered as required. The different requirements of responsiveness for the various industries will affect the supply chain and how it is managed.
The shelf life of raw ingredients, as well as the finished product, have a massive effect on the supply chain as a whole. This is because the predicted demand and shelf life of a product determine when the product is required. This then determines when a product should be ordered which subsequently indicates to your suppliers when they should be initiating production or ordering on their end.
Material time refers to the time taken for raw ingredients to be turned through the manufacturing process, into the final product. This must be analysed and optimised in order to obtain efficient manufacturing processes, decrease storage of raw material, and increase sales.
How do you optimise it all?
It’s no secret that analysing all these different aspects of inventory is challenging and tedious. However, businesses can use inventory management software to manage their inventory. A great inventory management software will analyse sales and demand, track inventory, and remind you when stock levels are getting low. The software will make these processes act together to ensure the supply chain functions as efficiently as possible.