Inventory Management

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The Role of Inventory in the Supply Chain.’

$1.6 billion, it is an estimation of manufacturers’ and trade inventories in the United States in august 2012 (according to the US Department of Commerce). Inventory represents a significant part of company budgets. They are costly and can be risky, but the company spend a lot of money in inventories because they also provide some security for businesses. But what is exactly the role of inventory? Why it is required and what is its purpose? This essay explains in a first part what supply chain is. Then in a second part, it defines the term of inventory and this purpose. Finally the last part considers the key role of inventory in the supply chain and how is controlled.

What is a supply chain?

In order to evaluating the role of inventory in the Supply Chain, we need first to explain what the Supply Chain is.

Cecil C. Bozarth and Robert B. Handfield (2006) define the Supply Chain as “a network of manufacturers and service providers that work together to convert and move goods from the raw materials stage through to the end user”. The Supply Chain can be dividing in three different functions: to supply products to a manufacturer, the manufacturing process and the distribution of finished products to the end consumer. All actors of this network are linked together through flow of materials and information. It is very important for a firm to manage and develop efficiently all the supply chain activities. Bhattacharya et al. (1996) revealed that Supply chain Management is seen as a key to delivering higher customer satisfaction with reduced lead times and costs. Thus, it contains all the tools, resources and methods to improve the supplying by reducing inventory costs and delivery deadlines. It is obvious that Supply Chain management play a critical role in corporate effectiveness. It is necessary for a company to anticipate needs and be able to deliver the right product, where and when it is needed, while ensuring optimum control of costs and quality. Companies increasingly realize that they must have effective supply chain management. This effectiveness can be, for instance, a perfect inventory control. Indeed, inventory is a factor that can influence the supply chain performance. We therefore define, in a second part, what inventory is and why is required.

Defining inventory and the reasons it is traditionally required.

Inventory, or ‘stock’, is a stock of items kept by an organisation to meet internal or external customer demand (Russell and Taylor III, 2003). So, the inventory is the accumulation of materials resources in a store. Why inventory exists? Inventory is traditionally necessary because there is a difference in the timing of demand and supply. Thus, it plays the role of buffer between the suppliers and customers of a company. It allow to buy in large quantities and therefore to group transports or to take advantage of discounts.

We can classify inventory in a number of different ways. In the first place, we can identify two different type of inventory: independent demand and dependant demand for inventories. Independent demand inventory include (cover) items which the demand is not dependent upon the demand for another item. On the other hand, if the demand for inventory of an item is linked upon another item, such demand is dependant. It is important to make a distinction between them because the inventory management systems are different for both types. We can also distinguish inventory according to the type of items: raw materials, components, WIP (Work-In-Process-Inventory), finished goods or MRO items (Maintenance, Repairs and Operating).

N. Slack, S. Chambers and R. Johnston identified four types of inventory according to their usefulness, their role: • Buffer (or safety) inventory • Cycle inventory • Anticipation inventory • Pipeline inventory

We will see, in the next...
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