Inventory management represents one of the most important functions of an organization in the supply chain process. It primarily refers to the process of controlling and overseeing the ordering, storage and the ultimate use of various components and items for production of goods and services. It further extends to the control and oversight of the quantities of goods produced as finished products for sale. In essence, inventory management is critical in ensuring smooth operations in an organization, as well as low operating costs and accountability. It keeps track of the movement of goods and services. The items dealt with include raw materials for production, the items in work-in-progress and finished products.
The Role of Inventory Management
Inventory management is concerned with two core functions. Creating a purchasing plan is important for any organization. Technically, it has to be determined the quality of goods and quantity of inventory that is to be purchased or stored at a time. This amount can neither be too little or too much. Little inventory would result in a situation where operations have to be interrupted from time to time due to stock run-outs. Keeping too much inventory than is necessary would only lead to more costs. This would come in the form of administration costs, storage and monitoring. Capital costs would also set in, which imply to the lost value that would have been created in the case where the funds are used in other projects (Waller and Terry 4).
The second core function of inventory management is primarily keeping track of the existing inventory, as well as its use and distribution. Inventory needs to be monitored in a bid to reduce over usage or under usage. It is done in a bid to control quality and quantity of goods that are produced (Tempelmeier 10). As an example, if raw materials are under used, it may imply two different scenarios. The production team may be releasing low quality products, or the level of activity may be lower than is required.
There are various strategies that are mainly used in ensuring that the right level of inventory is maintained. Just-in-time technique is used in reimbursing inventory when required, or when stocks have almost run out. Items are received for the sole purpose of continuing with operations, rather than storage for future use. The main advantage of this technique is that more and more funds are available for carrying out other projects. It significantly reduces the amount of capital that is tied up to inventory. Furthermore, it involves less cost in terms of storage and monitoring (Tempelmeier 12).
The most commonly used strategy is the material requirement planning, where records and market information are all incorporated in making forecasts of the expected sales. The demand for goods is the most common measure used in determining the level of stock inventory or raw materials to maintain (Waller and Terry 22). In a store which experiences high volumes of sales as well as movement of goods, there is absolute need to maintain high inventory levels. The levels should be kept in line with demand through thorough planning, analysis and prediction of market changes relative to the prevailing conditions in the market.
Inventory management aims to maintain appropriate levels of inventory for the following reasons:
Reasons for Keeping Inventory
Keeping Operations Running and Meeting Demand
One important reason for maintaining inventory is to keep the overall operations in an organization running (Muller 8). Interruptions are subject in situations where good planning and inventory maintenance is not achieved. The most common issue is that raw materials often run out of stock. In this case, production is halted, and huge losses are experienced in the form of labor costs, diverted sales and time. The time taken from the moment when an order is placed to the delivery of the raw materials, also known as lead time, contributes to the inconvenience that an organization has to go through in this situation.
In a different case, suppliers may encounter various challenges when delivering goods and raw materials to be used in production. For instance, bad weather conditions may greatly hinder the transport of the same, or even destroy them completely. The result is that no on-time deliveries would be made, resulting into a shortage. Such shortages are normally addressed or covered by the stock of raw materials in store until the next delivery is received (Muller 15).
In stores, customers get disappointed when products run out of stock. This situation is not favorable to business, especially in the highly competitive markets. Clients would opt for other sources and alternatives, while their loyalty is put to test. The business world requires that businesses try to maintain the market share that they have to avoid running out of business due to competition (Tempelmeier 4). It is critical to have extra stock in the warehouse to avoid losing customers and other costs.
Hedging refers to the process of covering price increases or the effects of inflation in a manner that market prices remain fairly constant. Normally, suppliers inform the manufacturers of an impending increase in prices before it happens (Song, Jing-Xin and Jingjing 19). This means that the manufacturer has time to buy more stock in anticipation of such price changes. Inflation is also factored in here. The overall result is maintenance of prices despite changes higher up in the supply chain.
Economies of scale are normally achieved where firms and businesses operate in large scale, and the same case applies to purchasing of inventory. Discounts are normally applicable in situations where bulk buying is involved. Businesses, therefore, go for this option with the anticipated discounts in mind, whose overall effect would be increased profit margins (Song, Jing-Xin and Jingjing 20).
Elements of a Good Inventory System
Inventory management is characterized by having effective and efficient ways and means of controlling the movement of materials into and out of the organization. Primarily, this requires a good inventory system, which involves the following elements:
- Well organized locations labels. Such locations should have names that are easy to read and avoid ambiguity. This is probably the most crucial step in organization of warehouses and stores. Different locations are labeled to avoid time wastage in looking for one or more items. It is also important to avoid storing items in the wrong place, mixing stock and referring to the same space with two or more names. Technically, storage warehouses have a lot of space, which may not be utilized completely. It follows that employees will utilize any unused space to store any other items for convenience purposes. This may not go down well with the principles of proper maximization of storage space. Labeling should, therefore, be done on those rooms or spaces that are empty too.
An emerging trend is that the naming of locations is done following a certain design (Waller and Terry 25). This is to ensure that they are all unique and clear to everyone. Sometimes, the names applied can be subject to logic and meaning. Problems arise when a name is interpreted to mean something else.
- Item descriptions and numbers should also be availed to facilitate faster identification. The descriptions should be clear and in understandable language, and provide illustrations where necessary (Muller 6). Item numbers are used to even make the process faster especially in a situation where software is being used. It is easier using numbers that descriptions, since one may need several characters to put up a description.
- Units of measure are very important, and can come as packets, bags, pieces or even kilograms. It all depends on the kind and nature of products that are used. Units of measure play a vital role in defining the kind of operations that go on in the locations, as well as the equipment needed to handle items.
- Sophisticated software systems may prove to be an important part and parcel of inventory management (Muckstadt and Amar 16). This is especially so when it comes to warehousing functions, which serves to make work easier and more effective. Software systems that can track the state of inventory at any given period in time and all the activities related to inventory are important tools in management. They facilitate decision making, especially in ordering and assessing the general flow of materials. Bottle necks are easily identified and addressed immediately.
- Creating policies and giving formal training to the employees of an organization regarding the inventory systems would be very important in smoothening operations (Muckstadt and Amar 14). Technically, the staff members are the ones to handle any materials used in production or for sale, and should have all the knowledge required to do the same. Information is power, and giving them such power would go a long way in ensuring mistakes and confusion are all avoided.
Policies are critical when it comes to handling or materials. Such policies would include safety of the human resources. In some cases, the equipment used in handling of materials, as well as the kind of materials that are dealt with are potential threats that can harm individuals. This might be due to their weight, size, and nature or otherwise. It is important to teach the employees on how to behave to avoid losses and getting hurt. Policies should also be laid out to guide all operations in the best and safest way possible (Muller 8).
Case Study: Walmart Experience
Inventory management of found in all types of organizations, regardless of the types of products they produce, the markets they serve or locations. However, various organizations exercise different levels of management.
Walmart is a retail giant company that is famed both locally and internationally. It is involved in a range of different products, and boast of high levels of sales and customer satisfaction. However, in the recent years, the company has experienced myriads of stock problems. Specifically, there has been a constant shortage of stock in some products (Rao and Tarun 13). This is a supply chain and inventory management problem that seems to persist and hold the company back in its expansion agenda. Typically, there has been a serious problem in the manner in which inventory on the shelves of its stores is managed. Stock-outs are many and causing serious consternations among customers. The situation has led to many of its loyal customers looking for alternatives among the many competitors in the market.
Walmart is one of the largest retailers around the world. The mere fact of its repute means that consumers expect to get the best kind of experience when they visit the store. This has turned out to be the opposite case, where customer satisfaction through the provision of the required products has gone down. Many people have been complaining of the great inconvenience they have been going through in the Walmart stores, something they had not been used to. Sometimes, what they need misses on the shelves, which is against their expectations of a large store.
The result has been a situation where customer disloyalty is experienced. News agencies have painted a picture of disappointed customers who are against the back order systems (Rao and Tarun 15). To counter the situation of running out of stock in various crucial items, Walmart has tried establishing a back order system where customers are asked to pay for what they need, and it is delivered to them at a later date after the stock is replenished. The move has not been well-received among different customers. To many, it does not really make sense having to order a necessity when there is the option of finding it easily in the next store. Most, according to press releases, said that they have to see whatever they buy on the shelves. Walmart has been losing customers as such.
Generally, the in-stock levels in Walmart hover around 90% to 95% (Muckstadt and Amar 16). From a different perspective, this figure is very impressive and shows high levels of commitment to serving customers and fulfilling demand. However, as mentioned earlier, Walmart is a giant retailer. The implication is that the company operates on a large scale basis. The 5% to 10% of out-stock represents a very significant amount of stock. This represents $1.29 to $2.58 billion undergone due to the stock outs. This figure is calculated based on the overall inventory in the 2012 report, which was $25.8 billion (Rao and Tarun 9). This is what has caused customer dissatisfaction and subsequent search for alternatives.
Walmart has a very advanced software system, which is applied in the management of its inventory systems. The current problem has, as such, been linked to lack of proper planning and management. Customers made a gradual shift from the firm due to the bad experience that they got from shopping there. Research has shown that customers would barely go back to a store where they did not like the experience the previous moment they were there (Muller 12). Walmart did not anticipate the situation that befell the company, and was caught unawares.
Inventory management is a critical function of the supply chain management. It is important in maintaining customers by fulfilling their demand, which is achieved through the maintenance of smooth operation in the organization or store. It all narrows down to proper inventory levels at all time. Losing customers due to inventory issues is an issue that has affected Walmart as a company, and it happens very easily. Regaining their confidence again would take Walmart a great deal of effort to the effect of streamlining the inventory management systems. More research and analysis of demand is necessary to ensure customers are satisfied with variety and convenience at all times.
Muckstadt, John A., and Amar Sapra. Principles of inventory management. Springer, New York, 2010.
Muller, Max. Essentials of inventory management. AMACOM Div American Mgmt Assn, 2011.
Rao, Shanteri K., and Tarun Kumar Soni. “Managing Perishable Inventory in India: Lessons from Walmart.” Available at SSRN 2357280 (2013).
Song, Dong-Ping, Jing-Xin Dong, and Jingjing Xu. “Integrated inventory management and supplier base reduction in a supply chain with multiple uncertainties.” European Journal of Operational Research 232.3 (2014): 522-536.
Tempelmeier, Horst. Inventory management in supply networks: problems, models, solutions. Norderstedt: Books on Demand, 2011.
Waller, Matthew A., and Terry L. Esper. The Definitive Guide to Inventory Management: Principles and Strategies for the Efficient Flow of Inventory Across the Supply Chain. Pearson Education, 2014.