Inventory availability is the most important aspect of customer service. Without an adequate level of product in stock, companies cannot meet customer needs. However, holding too much inventory dramatically cuts companies’ profit margins because they must pay for it to be stored.
Inventory can refer to raw materials, finished items available for sale, components being used for production or items in the process of being manufactured. In terms of supply chain management, inventory is normally used to refer to the sum total of all goods and materials on hand.
The basics of inventory management
There is a wide range of terminology associated with inventory management. Here are some of the most common terms, concepts and issues regarding global supply chains:
Economic order quantity (EOQ) is a model commonly used within inventory management that defines the optimal quantity to order that will minimize the total inventory costs.
Inventory levels are simply the amount of inventory a company has. Common phrases about inventory levels include:
• On-hand stock (the amount of inventory in storage)
• Net stock (on-hand stock, minus product back orders that must be delivered to customers)
• Net inventory (on-hand stock, plus purchase orders, plus pipeline inventory, minus back orders)
A stockout occurs when there is insufficient stock available to meet customer demand. To avoid stockouts, companies can stock high levels of inventory. However, the costs associated with this are very high. There is also no guarantee that the excess inventory will ever be required.
Is the FITTskills program for you?
Developed by business for business, FITTskills meets the needs of those who are
- seeking to enhance their import-export career standing,
- new to exporting or importing,
- and those who simply want add to their expertise or gain valuable educational credits.
Instead of storing excess inventory to mitigate against possible stockouts, companies can use backordering or can provide a substitute product. In backordering, the customer request is placed on a special order called a backorder and this order is filled as soon as possible. The order will often be shipped directly to the customer as soon as it is available.
Financial terms involved in inventory management are as follows:
• Average inventory value: The average value of the inventory investment over a year
• Inventory carrying cost: The cost of holding the annual inventory investment
• Lost sales cost: The revenue lost from not meeting customer demands
• Total policy cost: The inventory carrying cost plus lost sales costs
Every product will have a specific set of demand circumstances. In inventory management, common demand terminology includes the following:
• Annual demand: The amount of a product demanded in a year
• Forecast annual demand: The expected amount of a product that will be demanded in a year
• Lead time: The time taken from placing an order to fulfilling the order
• Lead time demand: The amount of a product demanded by customers during the lead time
Inventory and global supply chains
Inventory will also need to be considered as an aspect of global supply chain management. In order for customer service levels to be adequately maintained, some goods will need to be held in foreign markets. Inventory managers will need to make decisions regarding how much inventory to hold, and how the supply chain will need to function effectively to meet consumer need. Other considerations that need to be taken into account when establishing inventory in a foreign market are:
• geography and infrastructure;
• availability of qualified labour; and
• tax and industry regulations.
These factors will enable an organization to choose optimal locations for serving the foreign market, and will help identify any issues that may add complexity to the global supply chain.