The Latin word “inventarium” is best translated into “inventory” (American English) or “stock” (British English) and is all about the goods and materials a business holds for the ultimate goals to have a purpose of resale or repair. To better understand the capability and potential of a (best) balanced inventory, one must step back and have a look at SCM first as naturally, there are risks and liabilities involved too.
Supply Chain Management
Supply chain management (SCM) is the active management of supply chain activities to maximize customer value and achieve sustainable competitive advantage. It is the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory and of finished goods from point of origin to point of consumption.
On a side note of what I have witnessed in my professional career: Within the value chain at least in terms of supply chain activities to maximize customer value and achieve sustainable competitive advantage, the supply chain responsible often must account for both the supply chain as well as the demand chain all the while corresponding competencies were not extensively allocated.
What you perhaps encounter is corporate management (value chain) and responsible people each for supply chain (generating profit), marketing & sales (generating revenue) and services. Companies pay their bills from revenue but what should be left is profit. Nevertheless, one might very well look into the possibility of creating ground for demand chain responsibles for the sake of a healthy mix of competencies and responsibilities. You may have met Supply Chain Managers but have you ever heard of a Demand Chain Manager?
As an element of supply chain management, inventory management includes aspects such as controlling and overseeing ordering inventory, storage of inventory and controlling the amount of product for sale. The goal is to have the right inventory at the right quantity at the right quality in the right place at the right time at the right cost.
- Stock the right amount of inventory.
- Pay the right amount for your inventory (Economic Order Quantity).
- Know your reorder point.
- Ensure you have the right amount of inventory in the right place.
Learn more about Materials Management and ABC / XYZ Analysis below:
While inventory management is primarly about specifying the size and placement of stocked goods, materials management is simply the process by which an organization is supplied with the goods and services that it needs to achieve its objectives of purchasing, storage and movement of materials mostly for production.
ABC / XYZ Analysis
In materials management, the ABC analysis (or Selective Inventory Control) is an inventory categorization technique. ABC analysis divides an inventory into three categories:
- “A items” being the most valuable ones with with highest demand and very tight control as well as accurate records.
- “B items” with less value, medium demand and tightly controlled as well as goods records.
- “C items“, the least valuable ones and low demand with the simplest controls possible and minimal records.
There is also the XYZ analysis, a way to classify inventory items according to variability of their demand.
- “X items“: Very little variation. Characterised by steady turnover over time. Future demand can be reliably forecast.
- “Y items“: Some variation: Although demand is not steady, variability in demand can be predicted to an extent. This is usually because demand fluctuations are caused by known factors, such as seasonality, product lifecycles, competitor action or economic factors. It’s more difficult to forecast demand accurately.
- “Z items“: The most variation. Demand can fluctuate strongly or occur sporadically. There is no trend or predictable causal factors, making reliable demand forecasting impossible.
Then, there is Kanban (literally meaning signboard or billboard in Chinese and Japanese) which is an inventory control system for supply chains. It is a scheduling system for lean manufacturing and just-in-time production (JIT).
The implementation of a KANBAN system as well as other lean manufacturing methods like KAIZEN with its 5S Methodology may have significant benefits for almost any type of work as it seeks to eliminate any waste of time, effort or money by identifying each step in a business process and then revising or cutting out steps that do not create value.
→ Learn more about KAIZEN
Reorder Point (ROP)
Of course, you will reorder materials / products before it goes out of stock but if you order too early, you will need to spend more on storing these excess items. If you order too late, you will be facing a disappointed boss and financial responsible but most importantly disappointed customers who will look to your competitors. Here’s how to calculate your reorder point (ROP):
- Lead Time Demand + Safety Stock = Reorder Point
To find lead time demand, you simply multiply the lead time by your average daily sales. Lead time is the amount of time it takes from the point you request an order from your supplier and when it arrives in your warehouse. Therefore, do NOT confuse lead time with delivery time!
Involving warehouse management, inventory control is about knowing where all your stock is and ensuring everything is accounted for at any given time. In one sentence inventory control is nothing but to give uninterrupted service towards the production, sales, maintenance etc. with minimum stock. The goal is to maximise profits with minimum inventory investment and without impacting customer satisfaction levels.
- Keep track of the stock that is already in the warehouse. This includes knowing what products are being stocked and how much of a particular item is available.
- Aspects of warehousing designs, such as knowing where everything is and ensuring that the products are stored well.
Generally, this refers to the detailed organization and implementation of a complex operation. In a general business sense though, logistics is the management of the flow of things between the point of origin and the point of consumption in order to meet requirements of customers or corporations.
SCM vs Logistics: Logistics refers to what happens mainly within a company, including the purchase and delivery of raw materials, packaging, shipment, and transportation of goods to distributors, for example. While supply chain management as outlined above often refers to a larger network including outside organizations that work together to deliver products to customers, including vendors, transportation providers, call centers, warehouse providers and others.