Question

Why is inventory management important for merchandising and manufacturing firms and what are the main tradeoffs for firms in managing their inventory? This is a thought-provoking question because the text doesn’t clearly cover the tradeoffs.

Answer 1

Inventory management important for merchandising and manufacturing firms due to the following reasons-

1. Tracking Inventory-A good system will help us to keep track of our inventory and offer a centralized view of stock across sales channels – how much is in stock, and where. It will also allow allocating inventory to specific sales channels, which is important if we have warehouses and distribution centers at multiple locations, thus, enabling warehouse management.

2. Control our costs-Keeping reports about our inventory helps us to understand what stocks are doing well, versus which are just taking up shelf space. Lack of the right inventory at the right time can mean back orders, excess inventory, etc. These drive up costs.

3. Improve our delivery-Late delivery due to stock-outs is bound to give us a bad reputation. For tracking, it is important for us to know when the vendor is shipping inventory and when it will arrive. This helps us manage customer expectations by delivery as, when, and where they want.

4. Manage planning and forecasting-The software can help us improve demand forecasting by analyzing data trends from well-performing stocks. This minimizes your holding and handling costs, improves revenues, and frees up cash flows. Also, by planning and forecasting – deliver on customer expectations better.

5. Reduce the time for managing inventor- With a good inventory management solution, we can reduce the time taken to keep track of all the products we have on hand and on order. Additionally, we save the time taken up in inventory recounts if your records are in place.

Inventory sits as a trade-off between customer satisfaction and material availability. With the globalization of organizations, Indian companies need to match their international peers in terms of sophistication and maturity of supply chains.

Some important and main tradeoffs for firms in managing their inventory are-

1. Infrequent Parameter Reviews-The parameters used for managing inventory, such as safety stock quantity, replenishment order quantity, reorder point in a continuous review policy, review period in a periodic review policy, use factors such as service levels, demands, and supplier replenishment lead times as inputs for their calculation.

Solution-A periodic review of key planning parameters is required for ensuring proper inventory management. Tools and applications are effective enablers of such reviews.

2. Misaligned Service Level Measurement-The service level target is a key factor in the determination of inventory levels. Yet, despite its influence, rarely enough attention is paid to the calculation of this measurement. Implicit in most service level discussions is that poor service levels result in lost sales and vice versa. Therefore, an effective service level measurement should reflect customers' performance expectations and buying behavior.

Solution: Create an approach to service level calculation that can provide multiple differentiated measurements of serviceability and include all functions in determining which measurements and values should be used when developing inventory plans.

3. Failure to Align Inventory Policies-Reduced inventory helps in greater working capital productivity. However, resistance from sales and marketing, due to the risk to service levels, is high. An approach that simulates various inventory policies and parameters can bring transparency in the decisions and their impacts.

Solution-Invest effort in building organizational alignment around inventory policies, potentially using simulation capabilities to anticipate the expected results of your inventory parameter decisions.

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