INVENTORY MANAGEMENT IN SUPPLY CHAIN MANAGEMENT
INVENTORY OPTIMIzATION AS A CENTRAL TASK
If we imagine supply and demand as macro processes consisting of numerous decision variables, an “ideal” supply process would be one that responds instantaneously to demand requests for any quantity (varying within a reasonable range). Of course, such an ideal process does not exist in reality.
Therefore, inventory is the mediator that is utilized to strike a balance—this is one of the key reasons why inventory and management of it are right at the heart of supply chain management, a task that is becoming increasingly difficult with globalization.
INVENTORY AS A BUFFER
The lengthening of supply chains due to globalization (with outsourced manufacturing as one of its main hallmarks) has led to inventory becoming the buffer of choice (above manufacturing capacity). However, as there has not been any let-up in market-facing pressures centred on speed, inventory’s ability to perform its mediation role has been adversely impacted (see key inventory influencing factors related to globalization illustrated in Figure 1). Consequently, inventory-related metrics such as inventory turns and cash-to-cash have worsened in more global industries like beverage, pharmaceuticals, consumer packaged goods, and medical devices [1].
MULTI-STAGE INVENTORY OPTIMIZATION WITH MORE SOPHISTICATED ALGORITHMS
Faced with the complex challenge of finding the sweet spot that meets responsiveness targets without sacrificing (internal) efficiency measures, supply chains are increasingly focusing on “right-sizing” their inventory, instead of simply trying to reduce inventory (the more traditional approach). Such a shift calls for a more granular treatment of inventory, one that considers both its form and function (see Figure 2)—with the implication that decisions have to optimize for not only the size and type of inventory but also the location of the inventory.
It has meant that companies trying to improve their inventory practices are moving away from traditional statistical safety stock calculation methods and to more sophisticated optimization algorithms—called multi-stage inventory optimization—that answers the questions “where to position inventory?” and “in what quantities?” simultaneously.
Software solutions that make this possible can be found, for example, at SAP as a component of the IBP Suite. For more details, see "IBP for Inventory".
[1] Cecere, L., 2015. Inventory Optimization In A Market-Driven World - 27 APR 2015. [online] Slideshare.net. Available at: <https://www.slideshare.net/loracecere/inventory-optimization-in-a-marketdriven-world-27-apr-2015?ref=http://supplychaininsights.com/inventory-optimization-in-a-market-driven-world/> [Accessed 8 May 2020].