The Materials Inventory Cycle
Understanding
the term "inventory cycle" is vital for organisations across various
industries. It encompasses managing inventory, from sourcing raw materials to
assembling products, storing them, and delivering them to customers. The
inventory cycle process enables organisations to optimise production processes,
reduce waste, and balance inventory levels to meet customer demand.
Raw
materials, subassemblies, parts, and finished goods inventory undergo multiple
stages and processes as they move through the product lifecycle. Starting as
raw materials, the products are manufactured into finished goods and placed
into retail stock before being sold to customers, where they are consumed.
Once
products have been consumed and are no longer needed, they can move into the
recycling phase of their lifecycle. Throughout this conversion path, the
inventory makes many stops in and out of its lifecycle's logistics systems, where
it is vitally important that it is tracked, monitored, and managed to ensure
that it is efficiently distributed to maximise its value.
The Tiering of Inventory Cycles
The
materials management process involves careful planning, organisation, and
communication to ensure that inventory is managed correctly and that products
move through their logistical systems as smoothly as possible. Typical material
flows inbound to an organisation might include:
- 3rd
tier supply – mining raw materials.
- 2nd
tier supply – converting raw materials into ingredients, products, or
subassemblies.
- 1st
tier supply – subassemblies for manufacturing / finished retail products.
An
organisation's customers can be split into tiers, as suppliers can be in the
inbound supply chain. However, how organisations' supply and demand chains are
tiered will depend upon the industry and market sector in which the
organisation operates. An organisation might serve only the first tier, a
combination of first and second-tier customers, or a mix of all three.
Customers are typically made up of the following:
- First-tier
customer who purchases products or services from a manufacturer.
- Second-tier
customers who might purchase finished products from a manufacturer to act
as wholesalers of the first-tier manufacturer's products or services.
- Third-tier
customers who act as retailers of the second-tier wholesaler's products or
services, allowing end customers to purchase various products and services
from locations with high footfall or within high-density conurbations.
An
organisation's ability to manage inventory cycles is critical to maximising its
financial health and well-being. Through diligent monitoring of inventory
levels, organisations can prevent stock-outs and overstocking, which can result
in substantial economic losses. Inventory management processes can increase
efficiency and productivity across diverse industries.
This
systematic approach safeguards an organisation's cash flow, instilling
confidence in its ability to effectively plan production schedules, accurately
forecast demand, and make necessary price adjustments. In essence, the
inventory cycle plays a vital role in any organisation that deals with
inventory. By fully understanding and optimising this process, organisations
can improve efficiency, reduce costs, and ultimately enhance profitability.
Increasing Inventory Accuracy
The
inventory cycle counting process is essential to ensure accurate and efficient
materials inventory. Cycle counting is a popular method that involves auditing
a portion of the inventory at a designated time, leading to more accurate
inventory results. This could be a specific location, range of products, or
end-to-end range of lines. The primary objective of cycle counting is to count
all items in inventory within a set period, usually a year.
The
process enhances inventory accuracy by reducing the risk of errors and
facilitating the swift identification of inventory-level discrepancies. By
assessing on-hand inventory, organisations can prevent stock-outs and maintain
sufficient inventory levels that meet customers' needs. This ensures that their
inventory records are accurate and up-to-date, which is essential for managing
inventory levels effectively.
Cycle
counting is more effective in generating precise inventory results than
traditional annual stock-taking methods. This is because only part of the
inventory is counted once. By counting a limited range of product lines, people
remain more vigilant than when counting the total inventory, where
concentration levels reduce, and people can become bored. This approach helps
to minimise errors and ensure the accuracy of inventory counts.
Retailers
must carefully track inventory on shelves and in warehouses. Cycle counts
should match on-hand inventory to avoid stock-outs and optimise costs. Regular
monitoring and cycle counts help retailers meet demand and avoid excess
inventory, tying up cash flow and increasing storage costs.
Inventory Safety Levels
Safety
stock is additional inventory that organisations keep, preventing stock-outs
due to fluctuations in supply and demand. It's a buffer against uncertainty in
demand, supply, or manufacturing and protects against the unavailability of
finished goods. It helps prevent stock-outs and keeps customers satisfied,
especially when launching new products.
The
level of forecast inaccuracy determines the level of safety stock required.
This means that the less accurate the sales and demand forecast, the more
safety stock is needed to ensure a given level of service. This is especially
important when safety stock is used within a material requirement planning
(MRP) process.
An
MRP system manages the manufacturing process by ensuring suitable materials are
available at the right time. Safety stock plays a crucial role in MRP, helping
to bridge the gap between expected and actual demand.
Using
safety stock as a strategic tool during the first few years of a new product
launch can help organisations judge the accuracy of their sales and demand
forecasts. This can help optimise inventory levels and reduce stock-out risk,
which can be costly for organisations. It can also prevent overstocking,
leading to high carrying costs and obsolescence.
MRP
processes assist organisations in determining the production required to meet
sales demand forecasts without relying on safety stock. Minimising safety stock
levels is a common strategy to reduce inventory costs, especially for
organisations with limited resources or lean manufacturing principles.
Sales Order Processing
The
inventory cycle involves identifying customer demand, raising a purchase order,
processing and delivering the product to the warehouse, quality checks,
shipping the product to the customer, and completing the inventory cycle. The
cycle duration varies depending on the product's nature, supplier delivery
speed, and the customer's location. A typical example of an inventory cycle for
an organisation might be:
- 12
days from identifying a demand, raising a purchase order, and receiving
the products or materials.
- 35
days for the materials to be converted through the manufacturing process.
- 20
days for the finished goods consignment to be delivered to the customer.
In
this example, the inventory cycle time amounts to 67 days. The inventory cycle
for a retailer involves comprehending, strategising, and overseeing their
inventory, which includes:
- Ordering
the required inventory with precision based on product demand.
- Reducing
the time to reorder products periodically.
- An
accurate history of individual product sales and department sales.
- Increased
customer satisfaction.
The
inventory cycle process is a crucial aspect of any organisation that manages
inventory. It involves steps that ensure that inventory is effectively managed,
tracked, and controlled. Two of the most critical steps in this process are
frequently and regularly performing inventory counts and ensuring the accuracy
of sales and inventory forecasts. This helps organisations to increase the
accuracy of demand forecasting for products, which is essential in making
informed decisions about inventory levels, purchasing, and sales.
Reducing Inventory Safety Levels
Safety
stock is an essential concept in supply chain management. It refers to the
buffer inventory organisations hold to protect themselves against unexpected
increases in demand or supply chain disruptions, such as delays in delivery or
production.
Inaccurate
planning and poor delivery performance due to variable supplier lead times can
cause demand patterns to fluctuate, leading to stock-outs and lost sales. To
avoid such situations, organisations hold safety stock. However, safety stock
can be expensive regarding material and management time, leading organisations
to seek ways to reduce it.
Reducing
safety stock levels can be challenging, as it requires a careful balance
between customer service and inventory costs. One approach is to improve demand
forecasting accuracy, which can help organisations better anticipate future
demand and adjust their inventory levels accordingly. Another approach is
improving supply chain visibility, which can help organisations identify
potential disruptions and take corrective action.
Additionally,
organisations can adopt lean manufacturing or just-in-time (JIT) inventory
management practices to reduce the need for safety stock. These approaches rely
on minimising waste and optimising production processes to ensure that
inventory is only produced and held when needed. However, they require high
coordination and collaboration between suppliers, manufacturers, and
distributors.
It
is important to note that not all items are suitable for holding as safety
stock. Perishable items like food and drinks can go to waste if held as safety
stock for too long. Therefore, organisations must carefully evaluate which
items require safety stock and how much should be held to balance the risks of
stock-outs and inventory costs. These include:
- Better
use of inventory demand forecasting technology, such as MRP I & II.
- Increased
collaboration with suppliers where the commercial risks of safety stocks
are shared with the supplier, with an increased commitment from the
customer.
- More
accurate sales forecasting by seeking commitments from the customer base
to place forward-dated sales orders.
Inventory Service Levels
In
a lean supply or manufacturing environment, minimising lead times to reduce
safety stock levels is essential. This will significantly decrease the
likelihood and impact of stock-outs. Safety stock can be costly, so many
organisations use a service-level strategy to determine their requirements.
For
instance, if an organisation opts for a 95% service level, some stock-outs may
still occur but may be considered acceptable. However, it is essential to note
that the lower the required service level, the lower the requirement for safety
stock would be.
It
is worth noting that service level and safety stock are interrelated. A higher
service level requires a higher safety stock to be maintained, which can
increase the inventory cost. Conversely, a lower service level requires a lower
safety stock and reduces inventory carrying costs.
Organisations
must balance service level and inventory costs. Demand or lead time variability
and forecast accuracy can affect this balance. Therefore, it is crucial to
regularly review and adjust safety stock levels to ensure they are
cost-effective and meet the organisation's service level requirements.
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