Inventory or stock (in common terms) is the central theme in
managing materials. The inventory turnover ratio (ITR) is a barometer of
performance of materials management function. In the generally understood term,
inventory means a physical stock of goods kept in store to meet the anticipated
demand. The need to keep inventory and the functions of inventory as a
decoupling agent to enable various subsystems in a supply chain to be decoupled.
Why do we need inventories?
From the resource management point of view, we should not
have inventories as these constitute the idle resources. However, if we did not
have inventories, there will be shortages, production delays, and project
delays. Some of the reasons for having inventories in the production/service
system are as follows:
1. Time lag between placing orders and getting supplies at
the point of consumption – Whenever we place a replenishment order, there is a
time lag between placing the order and getting the materials at the point of
use. This is called “replenishment lead time.” In most cases the lead time is
nonzero, and at times it is quite high. This necessitates holding of inventory
to take care of demand during the lead times.
2. Variability of lead times – In most cases, particularly
in Indian supply environment, there is some degree of variability in lead times
because the supply environment is perhaps “just-in-case” (JIC) type. Inventory
has to be maintained as a shield to cope with the supply uncertainty.
Seasonal demand and Inventory Management
The impact of seasonality on service providers is especially
important because these providers are often unable to adapt to seasonal changes
in demand through traditional methods such as inventory control and switching
manufacturing lines to counter-cyclic products.
Predictable Demand Variations: We have defined seasonality
as being predictable. In most cases, this predictability is associated with
recurring events which are beyond the control of any one firm. We must
distinguish these uncontrollable events from usual unpredictable variations in
demand. Unpredictable variations in demand often result from random chance and,
by definition, fail to exhibit well-defined cycles.
Uncontrollable Demand Variations: The second aspect of
seasonality is the inability to control seasonal variations in demand. Unlike
demand shifts made possible through promotional activities or advertising,
seasonal demand changes are beyond the control of any one firm. For example,
numerous industries, such as movie exhibitors, amusement parks and children’s
camps, experience demand related to the children’s school year. For all
practical purposes, each service provider must treat seasonal demand as
exogenous and beyond their immediate control.
Effective inventory management
Inventory control involves managing the inventory that is
already in the warehouse, stockroom or store. That is knowing, what products
are “out there”, have much you have each item and where it is. It
means having accurate, complete and timely inventory transactions record and
avoiding differences between accounting and real inventory levels. Two tools commonly
employed to ensure inventory accuracy and control are ABC analysis and cycle
Inventory management involves determining, how to order
products and how much to order as well as identifying the most effective source
of supply for each item in each stocking location. Inventory management
includes all activities of planning, forecasting and replenishment. The main
purpose of inventory management is minimization differences between customers
demand and availability of items. These differences have caused by three
factors: customers demand fluctuations, suppliers delivery time fluctuations
and inventory control accuracy
Apple’s Supply Chain Management
In July 2011, Apple sold every ipad 2 it could make,
creating no wastage with unable to sell inventory. In its recent quarterly
reports, Apple introduced a bit more details on their inventory: in Q1 2014
Apple had $2.1 billion in inventory (a good number compared to $170 billion of
sales in fiscal year 2013), split in $1.6 billion in finished goods and $525
million in components. And they are planning again to not have any inventory
unsold in time. Also, according to reports, Apple exited the Q1 2014 with
inventory almost in balance with demand for both the iPhone as well as the
iPad, unlike last year when the iPhone 5 and the iPad mini were highly
supply-constrained. Keeping as little inventory on hand as possible is very
important because of costs with warehouses and competitor’s possible hits.
Technology manufacturers can’t afford to keep too many products in stock
because a sudden announcement from a competitor or an innovation could change
everything and suddenly bring down the value of products in inventory. By 2013,
Apple was dealing with 154 key suppliers (way lower than Amazon for example),
which facilitates better supplier relationships) and kept only one central
warehouse in perfect data sync with the approximately 250 owned stores.
Foreseeing sales levels accurately and not having excess
inventory is crucial in the computer industry, especially when new products
quickly cannibalize the old.