Inventory Functions

Inventory management is a strategic area in logistics operation and has an impact on efficiency and effectiveness of the overall supply chain system. As the cycles of production and consumption never match, goods have to be kept in stock to get over the uncertainties in demand and supply. However, higher inventory levels will affect the bottom line of the company. This is a high-risk and high-impact area, which has to strike a balance between the two polemic goals of lower cost and a higher level of customer service.

Companies block sizable funds in their inventories, which would otherwise have been invested in more productive areas. The general categories of inventory are as follows:

• Raw material and components inventory
• Work-in-progress inventory
• Finished goods inventory
• Maintenance, repairs and operating supplies inventory
• Pipeline or in-transit inventory

To give an idea of inventory-related investments, Table 7.1 indicates the values of the different categories of inventory in the various industries.

Not only external customers make demands on the inventories but internal customers such as the top management, manufacturing, finance and distribution also have different expectations (see Figure 7.1).

Inventories are held in warehouses that have an inescapable accountability for the inventories in their charge. The inventory levels in the company also affect the efficiencies of the other divisions. Inventory acts as a protective cushion for continuous operation in the customer supply chain. The top management views inventory as cash investment and expects to derive profits from it through effective and efficient customer service. Investments in inventory can cause cash-flow problems if the inventories are poorly managed by way of inaccurate forecast and excess production. Inventory management is both an art and a science and is concerned with the following:

• Right level of inventory
• Trade-off between inventory cost and customer service
• Treating inventory as a liability or asset

The industry will have to manage basically three types of inventories that are held at the various stages of the supply chain of a company. These are:

1. Raw materials and components on the procurement side
2. In-process or work-in-progress inventory
3. Finished goods inventories (at source and distribution centers)

In outbond logistics we are mainly concerned with the finished goods inventories, which again are divided into the following three parts:

• Non-excise paid goods at plant warehouse
• Inventory in transit
• Channel inventory

Inventory blocks capital; that is, investments in inventory cannot be used for creating assets, producing other goods or investing in other productive ventures or projects. Inventory carries the risk of theft, pilferage or obsolescence. However, the nature of risk varies with the enterprise’s position in the distribution channel.

1. Manufacturer

As the manufacturer has to simultaneously keep inventories of raw materials, work in progress and finished goods, the depth of risk is highest among the other members of the supply chain. Inventory commitments of the manufacturer are of a longer period, even though his product lines are narrower as compared to wholesalers or retailers. Inventory commitments are closely related to the investments made in anticipation of the returns budgeted; lead time of the raw materials and components; complexity and width of the distribution network; unit value of the product; and the nature of demand.

2. Wholesaler

The product lines handled by the wholesaler are more than for the manufacturer. The wholesaler’s risk is spread over the different products. These different products may face cycling variations in the market at different points of time and hence the risk factor is limited to the non-performing product lines. For seasonal products, the wholesaler purchases the inventory in advance in antici­pation of future sales, thus widening the risk element. Inventory commitments of the wholesaler are not of a longer duration than for the manufacturer.

3. Retailer

The retailer’s risk duration is much shorter than for the wholesaler and manufacturer. His commit­ment to inventory is not deep. Moreover, the risk is spread over a range of products. The retailer basically buys and sells and does not stock the material for a longer duration. He faces the risk of marketing rather than of inventory.

Source: Sople V.V (2013), Logistics Management, Pearson Education India; Third edition.