Inventory management has changed over the years. In the past, there wasn’t much concern about inventory. Manufacturers held large stocks of raw materials, work-in-process, etc.
Today, companies want inventory for customers when they need it, and minimal inventory if there aren’t any sales. Implicit here is the fact that inventory is a function of the company’s business model, e.g., whether it is a ‘build-to-stock’ or a ‘build-to-order’ operation.
In this article, inventory is discussed as a ‘direct’ expense or part of the cost of goods sold. In manufacturing, there are three classes of inventory:
- Raw materials and assemblies. This includes purchases and the products manufactured in-house
- Wok-In-Process. Items that are manufactured in-house where work has begun
- Finished Goods. Products that are available for shipment to customers.
The Deadly Sins of Inventory
The purchase and storage of raw materials typically represents the single largest investment for a manufacturing company.
Inventories allow a company to build the right products at the right time to ship to customers. However, if not planned properly, inventory (or the lack of it) can become a burden to the company.
The first deadly ‘sin’ of inventory is what is known as a ‘Stock-out.’ In this case, there isn’t enough material to build a product for a customer.
On the other hand, the second deadly ‘sin’ of inventory is ‘excess.’ If too much inventory is purchased and not used it can become ‘excess,’ i.e., there isn’t a valid forecast to consume or sell the material.
If the material maintains its status as ‘excess’ for a predetermined period, then the ‘excess’ material is reclassified as obsolete. Once a product is declared obsolete, the company must take a charge for this material.
In either case, inventory that ties up cash or is written-off creates a burden to the company.
What is Inventory Management?
The idea of inventory management appears to be a ‘straightforward’ easy equation. Basically, it means controlling the amount of inventory at a company, over time, to serve customers. The netting of inventory is found by adding and/or subtracting inventory, from some starting point, based upon the different material transactions.
But managing inventory in ‘real-time’ can be difficult as changes in the market, sales, cross-utilization of materials, and product non-conformances (to name a few) can quickly modify the equation making inventory management a much more complicated task.
As a result, any ideas and tools that can improve inventory management, such as streamlining the tasks and/or increasing the speed and accuracy of communication, should be undertaken.
There are usually multiple company objectives, and these can conflict with one another. For example, the sales department never wants to lose a sale, so they would prefer plenty of material on-hand. By way of contrast, the company’s Controller prefers that the Purchasing reduce the amount of inventory on-hand (that ties up cash).
In view of these circumstances, it may be necessary to have executive management determine the exact objectives or corresponding service (and inventory) levels that it wants the company to follow.
The Effects of Supply and Demand on Inventory, Past, and Present
Historically markets and industries operated at much slower pace than today. Companies transmitted business via the US Postal Service and production took more time since more manufacturing processes were manual.
In today’s economy business is transacted electronically and more manufacturing processes are automated. These changes have significantly affected the ‘time-to-market.’
Increasing Communication and Efficiency. The importance of the ‘availability’ of materials is obvious. Likewise, the faster rate at which the markets are moving requires more speed and accurate communication in the supply chain.
One opportunity is to better manage the sourcing and selection of suppliers that can support such a volatile business model. Likewise, with Purchasing managing inventories, the day-to-day tactical coordination between the suppliers and the company for materials can result in better operational results for the company.
This has led to the holistic and integrative approach of Purchasing and Inventory Management.
The Bottom Line
When inventory management becomes a responsibility of Purchasing, and the sales order and production schedule processes are synchronized, the company is more successful managing inventory.
And that means fewer ‘stock-outs’ and less ‘excess.’
Manufacturing and Supply Chain Services
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Supply Chain Management. Managing inventory can be made much easier when Purchasing looks at the supply of materials in a holistic sense. To do this, the Purchasing department must ensure that the Supply Chain is included in the overall materials plan. For more on this topic, please follow this link – Supply Chain Management.
Transforming Procurement Operations. Today, procurement is expected to play a much larger role and bring value to the entire business enterprise. Some organizations have difficulty migrating their legacy processes to more advanced procurement models. For more on this topic, please follow this link – Transforming Procurement.
Organizational Structure and Performance. Top performing organizations require structure, culture, and resources to produce high performance. Departments designed around four specific areas achieve higher performance levels. For more on this topic, please follow this link – Purchasing Organizational Structure.