Question

This week is inventory management. This is an important concept for operations managers, because inventory, typically, is a large money investment for companies. Because of this, it is important to reduce costs by optimizing inventory levels. Organizations throughout the supply chain try to find ways to reduce inventory costs and still be responsive to customer needs. There is a short video with some key elements to inventory management.

Please discuss why it is important to optimize inventory and how it is done. Also, in light of the craziness recently in retail and grocery stores caused by the pandemic. What affect does mass purchasing have on inventory management? Not just the empty shelves, but what about reordering? Bull whip effect? Future inventory levels?

Answer 1

It is important to optimize inventory to minimize the cost of average on-hand inventory. It helps to save money and time along with efficiency and productivity. Inventory optimization also helps in timely customer order fulfillment, increased working capital etc..

Inventory Optimization can be done by the following ways

• Critical Analysis: Critical analysis of each stock keeping units by analyzing suppliers or OEM, price, market conditions, commodity classification and applications.
• Demand Forecasting: Demand forecasting can be done using appropriate forecasting techniques, automatic selection of algorithms for each stocks.
• Lead Time Forecasting: Forecast average lead time using purchase orders and oder receipts history. Calculating lead time variance is also important.
• Economic Modeling: It helps in inventory trade off decisions by understanding inventory holding costs of different types of items, replenishment cost of re-ordering, stock out costs etc.
• Optimized re-ordering: This will take care of maximum and minimum stocks to be maintained which can be done using ERP systems.

The effects of mass purchasing are adverse and give rise to multiple issues such as difficulty in stock replenishment as there will be large demand from the consumer end but lack of supply from the supplier.

This also gives rise to a condition called as bull whip effect which results in inefficiency on the supply chain network moving above the supply chain link. Due to the large demand at the customers end, the supplier tends to order more quantities than actual demand with a mindset of expecting more sales and demand, this carriers to the next level on the chain where the manufacturer starts manufacturing more due to the fact of economies of scale/quantity. Leaving behind additional inventory with limited movement occupying more space on warehouses and adding up the costs.

As these conditions or pandemic situation will end soon or later and eventually the buying pattern will change as the people tend to adjust to the circumstances. Under this condition, maintaining a correct inventory level through accurate forecasting becomes tidious and end up in chaos.