Meaning of Inventory and Supply Chain Management (Research Paper Sample)

Inventory
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Inventory
Meaning of Inventory
In a rapidly changing global market, business organizations are exposed to many uncertainties that may be detrimental to the normal functioning of the business processes. One of the most practical ways of providing a buffer to such uncertainties is keeping inventories. Inventory management is a subsection of the broader supply chain management. Each party in the supply chain has a responsibility of keeping a certain level of inventory. Given the high dependency of the actors on others, there is no reason for one to fail others in terms of failure to deliver the specific order in the right quantity, condition or time. The term ‘inventory’ is also sometimes referred to as ‘stock’, is the physical stock that in available in the store kept purposely for meeting the anticipated demand. Businesses should have the physical stock known as the inventory to meet the anticipated demand because the shortage of stock will ultimately lead to delays in the production process.
It is important to point out that keeping inventory due to fear of uncertainties is not entirely free. There are hidden opportunity costs of holding stock such as storage costs and refrigeration that a business must be prepared to incur. This leads to one fundamental dilemma that the business must carefully examine; that the firm needs inventory, but is not desirable or optimal to have inventory because it is an added expense (Muller 2011). Thus, such a situation ushers in the concept of inventory management where it is advisable to have a high inventory turnover ratio. Inventory management is primarily about the way a business can specify the size and placement of the goods to be stocked. Different departments or locations within the organization need to ensure that they enough stock that keeps the production process running flawlessly.
Types of inventory
Basing on the definition stated above, inventory can be categories into several groups depending on the location, stage of production, and the spectrum of the situations. The inventory can be grouped into manufacturing, distribution, and service systems. The manufacturing system requires materials that are considered as input to the production or part of the product output. These include; raw materials, intermediate products, finished products, component parts, repair and maintenance supplies, as well as work-in-progress inventory. In the distribution system, inventory is normally referred to as in-transit, meaning that it is in the process of being moved from one warehouse or distribution center to another. Some distribution centers can serve as retail sites where the inventory is also sold to some particular customers, usually other businesses. In a service system, inventory is regarded as those tangible goods waiting to be sold alongside their specific supplies that enable the process of administering the service.
Irrespective of the sector or process either manufacturing, distribution, services or retail, the main purpose of having a well-structured inventory analysis is to ensure that there are clear specifications on the time when the items should be ordered and the size of the order. This explains why businesses today are trying their level best to maintaining long-lasting relationships with credible suppliers to prevent future disturbances in the supply. Thus, it is no longer the notion of ‘when’ or ‘how’ many to order but rather ‘when’ and ‘how’ to deliver the materials.
Purposes of Inventory
From an economic point of view, it is needless for the business of having idle resources in the name of inventories. However, considering the extent of the uncertainties in the market, the absence of enough inventories would mean that there would be inevitable shortages, delays in production and even unprecedented delays in the project. For that matter, there are credible reasons as to why inventories should be kept in the system for avoidance of interferences.
1 To maintain the independence of operations
A timely supply of materials to a production center enhances the flexibility in the operations of that particular center. For instance, given the fact there is always an associated cost of creating a new production setup, having inventory in place reduces the possibility of creating too many setups. Similarly, the assembly lines rely on their independence to facilitate faster and efficient operations. The time is taken to accomplish similar tasks will vary depending on the availability of the components parts in each unit (Sarkar 2013). Thus, it is advisable to have several component parts within the workstation so that the units which take longer performance times are compensated by the availability of the parts. This not only ensures a fairly constant average output but also reduces the overall time required in the assembling a product.
2 To meet the unprecedented variation in the product demand
If the demand for a product in the market can be precisely determined, then firms world be producing quantities that exactly meet the demand. However, this is not the case in the real world. As the forces of demand and supply interact in the market, it reaches a point where no one can determine or predict the level of demand in the near future, and hence it becomes imperative and economical for businesses to have a buffer stock specifically meant to absorb any variation that may arise.
3 To allow flexibility in production scheduling
Having a stock of inventory in place reduces the pressure on the production system to release goods as fast as possible. This lengthens the lead times thus allowing for the effective production planning that facilitates smooth flow of the operations at lower costs. Therefore, having a more flexible schedule enhances efficiency that leads to producing of a large number of units.
4 To provide a buffer for the time lag in the delivery of raw materials
It is important to note that under normal circumstances, there exists a time lag between placing an order and getting the supplies to the point of production or consumption. Delays can be caused by shipping challenges, shortage of materials in the suppliers’ premises, unexpected shut-down in the supplier’s plant or shipment of incorrect or defective materials. Thus, it necessitates the need to keep inventory to act as a buffer under such circumstances.
5 To take advantage of the economic purchase order size
The process of placing an order is always accompanied by some costs such as typing, postage, labor, telephone calls and so on. Thus, when a business makes larger orders, it implies that it will have fewer orders to make or write and that saves the costs. Moreover, large orders have an advantage when it comes to shipping compared to small orders because of the reduced per-unit cost. It also comes in handy when the products are being distributed over long distances.
Inventory Models
The aim of an inventory model is to present an inventory problem on which a purchase decision is made. Using inventory models, business organizations can make a rational decision pertaining to how much to buy and the point in time when buying in necessary. In coming up with a model, there must be a combination of the decision variables and situational parameters. Situational parameters include demand, lead times, and unit purchase price. Under certain circumstances, special features such as quantity discount, budgetary or space constraints and inflationary factors can be regarded as some of the situational parameters in an inventory model. Inventory models fall into two broad categories; deterministic and probabilistic inventory models.
Deterministic Models
These are inventory models that assume that demand D is known (deterministic) and occurs at a constant rate (uniform).
Economic Order Quantity (EOQ) Model
Economic order quantity (EOQ) model is applied where the demand for an item is uniform and occurs at a constant rate. It is also applicable when the entire quantity ordered is delivered by a supplier at one given point. A constant demand rate means that a business takes the same number of units from the inventory at any given time. For example, taking ten units every day, 50 units every week, 200 units every four-week period and so on maintains a constant demand rate. This model assumes that the level of inventory increases instantaneously at one given point in time should an order be received (Michalski 2009). It is worth noting that for an EOQ model, shortages are not permitted since the inventory control decision is made in the short term. The cost parameters, unit cost c, ordering cost k and holding cost h are known and constant.
Probabilistic/Stochastic Inventory Models
It is undeniable that uncertainty plays a significant role in the majority of the inventory management activities. For instance, a grocery may want to get enough supply of fruits and vegetables that may satisfy the customer demand, but in ordering too much of the products, he is likely to face incurred high holding costs and increase the risk of losses through spoilage. Similarly, if he makes a too small of an order, then there are chances that he will lose sales and end up having unsatisfied customers. These situations are very common in business but cannot be solved using the deterministic analysis because it does not provide for the evaluation of the uncertainty at present. In a probabilistic inventory model, demand is assum...