Supply chain inventory management is integral to planning, implementation, and control throughout the whole supply chain. The process begins from sourcing to product delivery and ultimately impinges upon the overall functionality and performance of businesses. This article explores key components and the types of inventory management.
What is supply chain inventory management?
It is a strategic procedure; it manages and controls production and service delivery to the customer's final destination. While doing so, it optimises and coordinates all supply chain activities, including production planning, scheduling, transportation, order fulfilment, finance transactions, different types of logistics, and customer service.
With the supply chain market rising and now nearly $37.5 billion strong in the industry, the relevance of supply chain management (SCM) is more significant than ever. Read on to find out what makes inventory management in the supply chain crucial to business success and ultimate client satisfaction.
Types of inventory
There are generally four high-level inventory types, those being raw materials, work-in-progress (WIP), merchandise and supplies, and finished goods. These four major classifications help businesses group and track the items that are currently in stock or that they may require in the future. Further breakdowns of the main categories can be worked out, however, to help companies control their inventory as accurately and efficiently as possible.
Four main types of inventory are:
Although all of these types of inventory serve specific purposes in the production process, they work together to create the whole value chain and the financial health of the business. Current assets on balance sheets are categorised as such, as they are likely to be turned into cash within a year. In addition, all of these incur costs, other than the purchase cost, that may include costs for storage, management, and/or financing.
1. Raw Materials
Raw materials are raw or partially raw materials used in the finished product preparation. The manufacturer should not keep low levels of raw materials, meaning there are intermittent production flows. The raw material is often unrecognisable by the time the product is complete; for example, oils that would go into the production of shampoo. Examples are steel, plastics, minerals, and wood. But it has to be remembered that some raw materials, such as perishable constituents, have a shorter shelf life and must be managed very tightly to ensure they are used before they become expired or obsolete.
2. Work in Progress or Process (WIP)
“Work-in-progress” inventory contains the “P” for “process”, that is, items with relatively short production cycles, that is, partially finished goods which are still in the stream of manufacturing. Thus, in WIP inventory for a bicycle manufacturer, we will include bicycle frames that have been built but not painted or assembled with the rest of the bike components, whereas for the designer of women’s clothing, such inventory would include cloth cut for dresses but not yet sewn together or embellished with buttons and zippers.
The "P" in WIP, when interpreted as long-term, refers to a set of working conditions that take a longer amount of time to complete across more than a fiscal period. In addition, long-standing capital projects are also commonly referred to as WIP. Either way, closely monitoring the WIP inventory helps to ensure further smooth movement of the production line.
3. Finished Products
Finished goods inventory constitutes items that have been through the entire production process and are available for marketing. Examples include computers, televisions, medical instruments, office supplies, boxes of cereal, and winter coats. Good finished goods inventory management can help a company answer customer demand for its products. By doing that, the company may escape lost sales and lost revenue. By being able to analyse the amount and value of finished goods on hand, companies can learn much about their financial situation, estimate future budgetary needs, and decrease unnecessary expenditures on raw materials and storage space.
4. Inventory of MRO
MRO inventory involves anything from materials to equipment to supplies that a business may need for the maintenance, repair, or operations of that business. It may comprise anything from spare parts to fix a broken-down machine to cleansing the break room to even basic office supplies. Since MRO items are crucial to keep the business alive, controlling MRO inventory levels is important. This might also be one of the more complicated and tedious categories of inventory to handle, as it can include hundreds or thousands of items coming from diverse sources.
Key components of supply chain inventory management
Supply chain inventory management involves several complex processes encompassing planning, execution, and control along the entire supply chain. Successful and continuous inventory management is the core competency for coordinating and optimising at all stages of the chain. The pipeline is populated with a plethora of data, including serial numbers, product cost, and dates of product movement and storage.
These are the standard components of supply chain management.
Planning: Much of the planning is about creating an overall approach, collecting demand forecasts, setting up inventory levels, and preparing production schedules beforehand.Sourcing: Finding suppliers, negotiating contracts, and managing relationships with vendors.Production: Supervision of the manufacturing processes includes scheduling, quality control, and operational optimisation.Inventory Management: Manage stock levels and forecasts of demand, and manage order quantities to accommodate the needs of customers and yet not have excess stock.Logistics and transportation: Tracking the movement of the products (usually transportation, warehousing, and distribution) from suppliers to consumers.Collaboration: There are many active parts along the supply chain. Therefore, inventory management requires joint effort from suppliers, manufacturers, distributors, partners, and customers.Information Management: It would enable internal and external data flows, provide transparency, and promote the sharing of information across the entire supply chain. Why is inventory management in the supply chain important?
Inventory management assumes an important role in the supply chain as it leads to greater efficiency, transparency, and profitability. Within the supply chain, inventory management takes into consideration the flow of goods and materials, keeping in view tracking, storage, and distribution. Gain in-depth skills in inventory control with specialised Inventory Planning & Control courses offered by the British Academy for Training and Development.
Simply put, its goal is to keep optimum stock levels in order to have a product in the right place at the right time. The closer the flow of products and services is monitored, the more chances there will be for success in quality and customer satisfaction. Better inventory management in supply chain efficiency along with overall performance whilst cutting costs while speeding up lead time for some competitive advantage over its market rivals. Inventory management in supply chains has three important sets of activities: sourcing, the manufacture of goods in their raw state, and consumption by the consumer user level.
Buying inventory entails procuring initial materials or components and safely transporting them to the warehouse. Maintaining the inventory means that the inventory is strategically stored in the warehouse until it is needed. Selling means controlling the quantities of final goods available for sale. Orders are shipped to customers, and profits are observed.