Inventory management and supply chains

Last time

Before we start: last time, in The nature of marketing, you learned these points. Here they are again on one card. Keep them in mind, because today builds on them.

Holding the right stock

Too much inventory ties up cash and space; too little stops production and loses sales. Inventory management finds the balance. This lesson covers buffer stocks, reorder levels, just-in-time, and supply chain management.

Why hold inventory

Firms hold raw materials, work in progress and finished goods, to keep production running and meet demand. Holding costs: storage, insurance, the opportunity cost of cash tied up, and the risk of waste or obsolescence. Stock-out costs: lost sales, idle workers, and damaged reputation.

Inventory control

The buffer stock is the minimum level held to cover unexpected demand or delays. The reorder level is the inventory level at which a new order is placed: buffer stock plus usage during the lead time. With a buffer of 300, usage of 100 a week and a lead time of 2 weeks, the reorder level is 300 plus 200: 500 units.

Inventory control charts

An inventory control chart shows stock falling as it is used, then jumping up when a delivery arrives. It shows the maximum level, the reorder level, the buffer stock, the lead time and the reorder quantity. If usage rises or deliveries are late, stock falls into the buffer.

Just-in-time

Just-in-time production orders inventory to arrive exactly when it is needed, so little stock is held. Benefits: lower holding costs, less waste, more space, and cash freed up. Drawbacks: depends on reliable suppliers; any delay stops production; and bulk-buying discounts may be lost.

Supply chain management

Supply chain management coordinates the flow of materials, from suppliers through production to customers. Good SCM uses reliable suppliers, shared information, and technology to track inventory. It cuts costs and delays, and improves quality and customer service.

How important is supply chain management?

For a firm relying on many suppliers, such as a food business, SCM may be vital for freshness, cost and reliability. But success also depends on marketing, finance and product quality. And improving SCM costs money and time, so its importance depends on the firm's current weaknesses.

Inventory approaches

Just-in-time compared with holding buffer stocks.

Technology in inventory

Computerised systems track inventory in real time and reorder automatically. Barcodes and RFID tags speed up counting and reduce errors. But systems cost money and depend on accurate data.

Mistakes that lose marks

Mistake one: calculating the reorder level without the buffer stock. Mistake two: saying just-in-time has no risks. Mistake three: evaluating SCM without the case context. The fix: the formula, both sides, and the case.

The full-marks tip

The full-marks tip: use reorder level = buffer stock + usage during the lead time. Judge JIT and SCM by supplier reliability and the type of business.

On one card

So, on one card: inventory management. Keep it for revision.