The paper examines inventory management as a backbone of supply chain management. It provides an argument to support the claim and then proceeds to discuss other components of decision-making, system development and management in regards to the implementation of inventory management in different organization types.
The paper only relies on secondary data and follows the relation of inventory management with information technology developments, e-commerce businesses, retailer and manufacturing organization.
It highlights the key motivations for having an inventory management system, the challenges that respective business types highlighted above will experience and the opportunities that inventory management provides. Using a brief case study of Zara, the paper also demonstrates real life applications of improved inventory management to increase business efficiency.
Inventory management is the backbone of supply chain management: True or False?
Supply chain management works to make a business run smoothly working as a management link to a company, its distributors and suppliers in a way that ensures there is consistency in appropriating resources. With supply chain duties, a business handles inventory, sales, production planning, payment and shipment tracking.
Here, the core elements of the activities around supply chain management narrow down to inventory. In fact, business work on their demand forecast and their strategy in this aspect affect their eventual structure of their supply chain. The activity of dealing with suppliers and distributors of a company’s services or goods is in other terms inventory management practice. Therefore, the statement is true.
Throughout its business application, inventory management covers the oversight and control of raw material handling and use in production. It also includes the goods finished after production and handling of their quantities for sale. Failure to undertake the process carefully leads to inventory glut or shortage, which ends up being costly to a business.
While a company may not necessarily incur financial losses due to mismanagement of its inventory, it will still incur additional costs of remedying the situation to ensure that demand for products matches storage capacity and movement capacity within the business supply and distribution nodes. It is with the above explanation that the role of inventory management in supply chain management becomes apparent.
With a good inventory management, a business makes sure that is has a purchasing plan that covers all the potential capacity from supplies and all the storage capacity in the business, including the preferred shelf life of items for sale. A link to supply makes it possible for supply chain management to have a significant source of information for decision-making.
In fact, in many instances, practitioners interchange their use of inventory management system a supply chain management because their organizations operate a holistic system with no clear boundary between the two. This point further highlights the inseparable nature of the two components of the business.
The Influence of Information Technology in Inventory Management
For a product to be successful in the market, the organization delivering the product needs sufficient capabilities in its supply chain. Information is a critical component of supply chain management and inventory management. With the application of information technology in appropriate areas of an inventory management system, business increases the speed of decision-making, accuracy and responsiveness of operations to changes in demand and supply.
New technologies, such as radio-frequency identification (RFID), continue to emerge and combine with new management principles like forecasting. The result is an increase in the defragmentation of inventory management applications and increased demand for skills to deal with technology as a way to realize inventory management goals.
Technology allows organizations in different parts of the world to share the same inventory management systems such that they can coordinate supply and demand forecasting information. At the same time, improved analysis of raw data collected from different points of stock movement provide an informative response to management teams regarding the efficiency of their inventory system such that management finds its possible to assign employees essential tasks of solving errors in the system.
Without an appropriate information technology system integrated into the inventory management system, management, and different inventory management teams operate blindly. They are only aware of immediate roles affecting their job but do not have an overall picture of the business functions that they handle. As a result, many organizations are unable to optimize their operations without sufficient integration of technology in inventory management.
Given that inventory management is the most costly aspect of supply chain management, technology plays a significant role in reducing costs of business. It allows rapid communication and capturing of data on the communication of stock by customers to vendors. It also facilitates communication of stock outs by organizations to its clients (Fasanghari, Roudsari and Chaharsooghi 88). In this regard, information technology enhances the agility of an organization’s inventory management system.
In fact, many companies have gone on to implement Just-In-Time inventory management solutions due to their investments in information technology. They can cut idle inventory times within their distribution network significantly, and as a result, they free resources to become leaner as an organization or to provide enough room for dealing with extraordinary demand with ease.
For service related businesses such as retailers, investment in information technology especially communications technology for business to customer relations increase the ability of an enterprise to meet customer expectation, such as stocking the right quantity and style of goods in stores when the customer will most likely demand them.
It also allows business to gather additional customer information to facilitate future inventory decisions that further enhance a business reputation as a listening partner for customers (Fasanghari, Roudsari and Chaharsooghi 89).
Inventory Management in Manufacturing Organizations
Manufacturers that succeed in cannibalizing their markets and earning highest revenue margins in their businesses have a keen focus on frugality, cost tracking, inventory tracking and sales monitoring (Felt para. 1). When a manufacturing firm is growing, a fundamental challenge that it will face is inventory tracking. It needs to be accurate and timely with information concerning which product needs reordering.
It must also have the right information on the inventory that is on its way to the manufacturing facilities and the duration before it reaches the destination. Manufacturers must also know the quantity and other product details of inventory at hand.
In some cases, the information must also accompany addition data on the implication of the current stock on storage costs, movement costs, opportunity costs and any other cost that the business in incurring or likely to incur in its manufacturing processes. This would be relevant for a manufacturing organization that has many input nodes in its processes such as products from one division are inputs in another.
Manufacturing companies pay a high cost for inventory glut, in fact, too much production can lead to significant losses when an organization is stuck with stock that it cannot sell or destroy to create raw materials. On the other hand, delays in delivery of orders can negatively influence the business supply capacity to customers and force it to cancel orders and even pay fines for neglect of supply contract requirements.
As inventory management demand increases, companies whose core activity is manufacturing have to consider accuracy of their counts, the general flexibility of their operations, the opportunities for reducing lost sales and a robust framework for avoiding overstocking.
With interments in a good model for inventory management, manufacturing companies increase their demand forecasting abilities. They can then work backward from demand for their input and manufacturing process. This strategy ensures that they have efficient operations at all levels and can plan well for increase or decrease in their manufacturing capacity.
Besides, a company with a good inventory management system will still face challenges that manufacturing companies face. However, the system plays a huge role in facilitating personal delivery of solutions.
Staffs rely in inventory management to respond to market volatility in demand and supply, changes in customer requirements, rush orders by clients and regulatory conditioned that affect manufacturing operations. Therefore, the biggest aim of inventory management for manufacturers is to shield an organization from external environment risks that can affect the business.
According to Owoeyea and Babatope (275), the cost of purchasing and holding inventory attributes to 60-70% of the expense of a product. This implies that if manufacturers can cut the inventory holding costs, they can reduce the cost of their products and theoretically increase their competitive advantage. An able inventory management is germane to all manufacturers. When faced with the task of building an inventory management system, manufacturers have a choice of four basic frameworks.
A manual inventory management is the simplest to build, but the most difficult to scale. A company can use spreadsheets, record books, and other manual recording options. Use of barcoding is another option, and this offers rapid scalability as most data-entry functions are only done once throughout the manufacturing process, yet the data is available throughout the organization. Barcoding is excellent when tracking inventory in warehouses. Use of radio frequency identification (RFID) tags is another option.
It works like barcoding only that it provides remote identification of items and allows remote tracking of goods, thus reducing actual demand for human intervention. The last option is a comprehensive warehouse management system that integrates the other options to provide control for goods movement, storage, processing of transactions within and beyond the organization, and handling of shipping, receiving, put-away and picking tasks.
Such as system involves the physical resources such as warehouses, and the software components for management as well as staff roles for sustaining communication, managing the system and address challenges (Owoeyea and Babatope 277).
Inventory Management in Retail: a Case Study on Zara
In retailing business, inventory management is an important issue for executives; otherwise, the business will be failing at its top management level. When a stock plan goes correctly, the resulting success of a retail business is significant.
When retail businesses hold stock, they incur inventory holding costs; otherwise, they would have the funds available to commit in other ways for the enterprise. The work of inventory management is to ensure that any incremental margin expected from a product proliferation ends up meeting or superseding the additional cost of funding, holding and clearing additional inventory produced.
The following is a brief case study of the Spanish-based retailer, Zara, which highlights inventory management in the business. The business faces some challenges that motivate its inventory management goals. For example, it has short product life cycles. Any product that overstays in a retail store risks being a cost, as the business will have to sell it at a loss through heavy discounting of the price.
At the same time, the business also runs a policy across all its stores that affect the number of items that can be stocked in a store. When an article is in a store and its most popular size is exhausted, the store has to remove the remaining articles that are not critical sizes. This is done to prevent the creation of negative customer perceptions of Zara being a store that stocks oversized or undersized articles (Caro and Gallien 258-260).
Zara faced a problem of distributing merchandise inventory to all stores in its retail network. The company had to come up with a method of deciding the quantity of a specific article that it would include for its shipments to particular stores. Its business model for inventory management was to consider assortment decisions, store inventory and past sales data as information sources for store managers. The store managers would then request shipment quantities for each reference and size.
Additional data would come from inventory in stores and past sales. There was also data coming from warehouse inventory. The collective information at this stage would be used to inform the warehouse allocation team of the demand for each store, and this would then inform the shipment decisions. Based on this process, store managers got a weekly statement of articles available in Zara’s central warehouse. They would use the information as a basis for requesting shipment to a store (Caro and Gallien 258).
The warehouse was making an offer to managers. It would receive requests for specific sizes and quantities by store managers and then reconcile them with available amounts in the warehouse. As Zara’s business grew to encompass more than 1000 stores, the system became problematic because it was not easily scalable.
Reconciling demand by many store managers became hectic for warehouse employees. On the other hand, store performance targets prompted managers to request more than their true demand for articles, and this caused a glut in inventory held at stores. Besides, store managers often faced other job pressures for their duties of managing staffs and dealing with marketing needs. Meanwhile, the warehouse management team had too many data to consider when making decisions and this created pressures on their job performance.
With the help of researchers and consultants, Zara adopted a new model of inventory management that placed demand forecasting at its core (Caro and Gallien 272). The model takes input from store managers and their requests for shipments. With the new system, the communication plan used before remained.
In the second stage, the retailer used demand forecasts, inventory in stores, and warehouse inventory to feed relevant data to an optimization model that reduces warehousing decision-making time and increase accuracy of shipments to specific store demands. As a result, the new model recommended shipments that had a high likelihood of being removed from display relative quickly and this was good for the business.
The warehouse team also moved from repeated data entry jobs to scenario analysis. They also became instrumental in implementing other aspects of the system; highlighting the fact that, people element is important in logistics, especially when it is handling distribution issues (Caro and Gallien 272).
Inventory Management for E-commerce
Today’s consumers operate in a fast-paced ever-connected environment. Retailers have to face the challenges presented by the interconnectedness of the internet and the demands for the fast response by consumers in stocking and shipment of production. The most visible area where the problem is apparent is in e-commerce.
Companies offering goods, shipments and payment options electronically perform traditional duties of retailing, with some of them also being manufacturers, and in addition to that, they must handle the challenges presented by their electronic platform. Inventory management for e-commerce covers updates of product information and inventory. Management of order spikes while making sure selling does not surpass current stock.
Keeping track of inventory levels and management of order flowing through multiple channels as also other tasks. An e-commerce business also has to keep all data synchronized so that it does not sell what is not available or provide shipment guarantees that are not feasible.
Patil and Divekar (561) conducted a study on Business-to-Consumer (B2C) online retailers and revealed that inventory management problems of demand fluctuations, reverse logistics, stock outs, managing of stock keeping unit (SKU) are rampant. Other problems highlighted in the study are keeping count of inventory, dealing with multi-channel shoppers, addressing bottlenecks in the system or the weak points in inventory management and dealing with bullwhip effect or distressed stocks (Patil and Divekar 561).
The researchers had looked at different categories of products, and they reveal that many e-commerce businesses prefer to hold a high inventory for products with fast demand because they can sell more and increase their profit margins. Workable strategies for dealing with challenges that e-commerce companies faced include the use of drop ship strategies or hybrid strategies to protect the company against risk and to ensure that customer satisfaction remains high.
This essay reveals that inventory management is a critical component of supply chain management. It provides reasons for agreeing with that statement and then proceeds to evaluate inventory management in different types of organizations. The highlighted areas are manufacturing, e-commerce and retailing.
Besides that, the essay has also provided a brief case study on Zara, a fast fashion retailer, to show how improvement in inventory management system can have a positive effect on overall business function and employee productivity. Also, the essay also shows that the challenges of inventory management are universal in terms of the aim to keep only the necessary stock to prevent a business from being a victim of external market factors.
However, with respective business types such as manufacturing, e-commerce and retailing in the traditional sense, the challenges and opportunities for inventory management differ. A significant contribution to information technology to inventory management is automation and increase in accuracy and timeliness of information to advance decision-making roles.
Caro, Felipe, and Jérémie Gallien. “Inventory Management of a Fast-Fashion Retail Network.” Operations Research 58.2 (2010): 257-273. Print.
Fasanghari, Mehdi, Farzard Habibipour Roudsari, and S Khamal Chaharsooghi. “Assessing the Impact of Information Technology on Supply Chain Management.” World Applied Sciences Journal 4.1 (2008): 87-93. Print.
Felt, Malcolm. “Four Manufacturing Tips for Good and Tough Times.” Industry Week, 2012. Web.
Owoeyea, Emmanuel Seye, and Samuel Babatope. “Computerised Inventory Management for a Manufacturing Industry: A Case Study in Nigeria.” African Journal of Science, Technology, Innovation and Development 6.4 (2014): 275-279. Print.
Patil, Harish, and Rajiv Divekar. “Inventory Management Challenges for B2C E-Commerce Retailers.” Procedia Economics and Finance 11 (2014): 561-571. Print.