What is an inventory policy? Quite simply, it is how often a company will review its inventory. There are two inventory policies mentioned this week – continuous review policy and periodic review policy (Simchi-Levi & Kaminsky, 2008).

QUESTION

Why is it important for companies to have inventory? Two of the key reasons for inventory is due to customer demand and lead times. The customer always drive demand. Therefore, companies must make sure they have the product where it is needed when it is needed. This means they must have the inventory in stock and in the right place to meet this demand. Meeting this demand also has an impact on customer service levels and a company’s bottom line. What about forecasting? Great idea! However, let’s remember that forecasting and the use of historical data is not 100% accurate nor is data always available to make this determination especially with new product lines. This is when decisions are made as to how to control inventory. Which inventory control model is most appropriate? Do you need to consider one product or several products? Each model implies certain trade-offs between cost and inventory; hence, the importance of understanding the most appropriate model to use in managing inventory.

Another factor that plays into this is lead time. How much time will it take to get the product to the end customer? Companies need to think about how much time is involved from the time they order the product until the time it is received. What if the product is not purchased? What are the costs associated with unsold product? These are all things to consider in managing inventory and also deemed as lead time variability.

Demand and lead time are impacted by uncertainty as each have unique challenges that arise. Remember, uncertainty is one of the issues and challenges in logistics and supply chain management.

What is an inventory policy? Quite simply, it is how often a company will review its inventory. There are two inventory policies mentioned this week – continuous review policy and periodic review policy (Simchi-Levi & Kaminsky, 2008).

The continuous review policy means a company will keep up with inventory levels on a continuous basis and reorder product once it reaches a particular level. This is where automation and technology become quite useful but the policy is determined on the type of product as demand will be different based on the product lines.

Whereas, the periodic review policy occurs at certain intervals. You probably have heard people say, “we are taking inventory this week.” Well, this is when they are reviewing their inventory levels and restocking the items needed. This is not an instance in which technology or automation is used. This can be time consuming and of course instances in which human error can occur.

Risk pooling is a term you may have heard in some of your other courses. This means that demand variability decreases if a company distributes its product (or inventory) across different locations. So, if one company orders more than their usual stock and another company orders less than their normal stock, this is considered to decrease variability because they offset each other. This is another reason why companies use centralized distribution centers. The distribution center can service multiple customers from one location and thus, reducing their risk across their network.

Which brings us to network planning. Network planning is important because it is the infrastructure and layout of the network. The network being plants, manufacturers, distribution centers, and retailers as well as where they are located. This network requires decision-making at the strategic level and plays a huge part in the efficiency of the supply chain. Of course, as we have mentioned, these decisions should be based on historical data (if available) which means a company is reviewing inventory levels (policies, models), warehouse layout, demand, suppliers, flow patterns, etc. Then, there is also transportation costs associated with each move between these locations. As you can see, there is a lot to think about in network planning.

This week we briefly reviewed the reasons for having inventory on-hand, inventory policies, and how risk pooling can reduce demand variability.

References

Simchi-Levi, D., Kaminsky, P., Simchi-Levi, E. (2008). Designing and Managing the Supply Chain: Concepts, Strategies and Case Studies, 3rd Edition. New York, NY: McGraw Hill.

https://www.youtube.com/watch?v=qkZQxXJuqKo&feature=youtu.be

ANSWER

The importance of having inventory for companies cannot be overstated. There are several key reasons why maintaining inventory is crucial for the smooth functioning of a business.

First and foremost, inventory is essential to meet customer demand. Customers are the driving force behind a company’s operations, and it is vital to ensure that products are available when and where they are needed. This requires having the right amount of inventory in stock and in the appropriate locations. By effectively managing inventory, companies can satisfy customer demand, which ultimately impacts customer service levels and the overall profitability of the organization.

Forecasting plays a significant role in inventory management. While it is a great idea to utilize forecasting techniques and historical data to predict future demand, it is important to acknowledge that forecasts are not always 100% accurate, especially for new product lines where data may be limited. Therefore, companies must make decisions on how to control inventory effectively (Diezhandino, 2022). This involves selecting the most appropriate inventory control model, considering factors such as cost and inventory trade-offs. The choice of model may vary depending on whether the company is dealing with one product or multiple products.

Lead time is another critical factor in inventory management. It refers to the time taken from ordering a product until it is received by the end customer. Companies need to consider the time involved in the entire process and evaluate the costs associated with unsold products. Lead time variability adds to the complexity of managing inventory, as it introduces uncertainty and challenges into the supply chain and logistics operations.

An inventory policy defines how frequently a company reviews its inventory. Two common policies are the continuous review policy and the periodic review policy. The continuous review policy involves monitoring inventory levels continuously and reordering products once they reach a certain level. Automation and technology can be utilized to facilitate this process, but the choice of policy depends on the nature of the products and their respective demand patterns. In contrast, the periodic review policy involves conducting inventory reviews at specific intervals, which may involve manual processes and can be time-consuming, potentially leading to human errors.

Risk pooling is a concept often mentioned in supply chain management. It refers to the reduction of demand variability when a company distributes its inventory across different locations (Editorial Staff, 2014). By doing so, the company can offset demand fluctuations. This is one of the reasons why companies opt for centralized distribution centers, as they can serve multiple customers from a single location, thereby reducing risk across their network.

Network planning is crucial as it determines the infrastructure and layout of a company’s supply chain network, including plants, manufacturers, distribution centers, and retailers, as well as their respective locations. Strategic decision-making is required to optimize the efficiency of the supply chain. Historical data, if available, should be considered in making decisions regarding inventory levels, policies, warehouse layout, supplier selection, flow patterns, and transportation costs associated with moving goods between different locations. Network planning encompasses a comprehensive evaluation of various factors and plays a pivotal role in ensuring a well-functioning supply chain (Cube, 2023).

In conclusion, having inventory is vital for companies due to customer demand and lead times. Forecasting and historical data may not always provide precise insights, necessitating the selection of appropriate inventory control models. Managing inventory helps mitigate uncertainty, and lead time variability must be considered. Inventory policies, such as continuous or periodic review, influence how companies monitor and restock their inventory. Risk pooling and network planning further contribute to reducing demand variability and optimizing supply chain efficiency. By effectively managing inventory and making informed decisions, companies can meet customer demands, enhance customer service, and improve their bottom line.

References

Cube. (2023, January 3). Network Design in supply Chain. 20Cube Logistics. https://www.20cube.com/blog/network-design-in-supply-chain/ 

Diezhandino, E. (2022, July 4). Importance and Benefits of Forecasting Customer Demand – Keepler | Cloud Data Driven Partner. Keepler | Cloud Data Driven Partner. https://keepler.io/2022/07/importance-and-benefits-of-forecasting-customer-demand/ 

Editorial Staff. (2014, April 15). The Most Important Concept in Supply Chain Management – Risk Pooling. SUPPLY CHAIN MINDED. https://supplychainminded.com/the-most-important-concept-in-supply-chain-management-risk-pooling/