Join Eddie Davila for an in-depth discussion in this video Understanding inventory, part of Supply Chain Foundations.
- When you turn on the faucet at home, what are your expectations? Water, not later, right now. In order to do that, the faucet, the pipes, and the city's water source need an inventory of water. So often we think of inventory as stuff on a shelf at the store, or perhaps, in a warehouse. Let's think of inventory as water in a plumbing system. Let's say you want a gallon of water out of your faucet. We all understand that there needs to be a gallon of water in the plumbing system. But the water can't be back at the source, or a mile from your home, it has to be right there.
Ready to flow out of the faucet the moment you turn the handle. How about if you want two gallons, twenty gallons, a hundred gallons? Or what if you want to fill your pool? Those pipes need to be ready to satisfy the customer's need for water, no matter how big or small. Some of that water is ready to flow right now, let's call that finished goods. Some will be a mile from your house, let's call that work in process. Some of that water is still at the treatment plant, let's call that raw materials inventory.
Just like a city must be ready to satisfy the water needs of its population, so too, must a supply chain be ready to satisfy the demand of its customers. Does your supply chain have enough inventory to satisfy demand today, tomorrow, next week? How long does it take from the time your company's raw materials enter the inventory pipeline, until they come out the other end, ready for the customer to purchase? That is what supply chain managers think about, why? Because the supply chain manager that's responsible for inventory, needs to make the customer and the marketing department happy, by always having products in stock.
Marketing folks always wonder, well, why don't they just have tons of inventory? Well, don't forget, a supply chain manager also needs to satisfy the boss, by keeping costs low. Inventory comes with lots of costs. Of course, you have to buy the inventory, but, you also have to negotiate the purchase. You have to pay for delivery and store it, plus, it could get lost, broken, or stolen at any time. Inventory is an expensive investment. And as with any other investment, making a mistake can be costly.
Is your company prepared for change and variability? What happens if a snowstorm hits? Does your hardware store have enough snow shovels to meet demand? What happens if a designer's top dress suddently goes out of style? They're stuck with a bunch of inventory nobody wants. What happens if a grocery store bought too many tomatoes this week? Perishable inventory is a big risk. How about if there's a fire at your warehouse? Where will you get the inventory needed to meet next month's demand? How about if a stock of medicine spoils? How will your hospital treat sick patients? Managing inventory is a big responsibility, I mean, very often, having the inventory available is what sets you apart from your competitor.
So let's think about inventory plumbing in your company. How much of your company's inventory needs to come out of that faucet each day? Let's say it's only 200 units. How long does it take from the time you buy the raw materials, until they are ready to sell to the customers? Again, let's just say it takes 10 days. Does your company have 2,000 units in the pipeline? If not, you'll probably run out of stock in the next 10 days. What happens if there's a leak in the inventory pipeline? Are items getting stolen or lost? How will you deal with those lost units? Do you have to deal with seasonal inventory, perishability, product innovation? These are all questions to consider as you're designing your supply chain.
So, the next time you go to the store, and they're out of whatever you wanted to buy, remember, managing an inventory pipeline is not easy. That's why the world needs more supply chain managers.
- Identify parts of a supply chain.
- List the keys to successful global supply chain management.
- Describe the concept of inventory in supply chain.
- Explain how to choose a supplier.
- Work with SCMs in different industries.
- Describe how to transport and distribute your product.
- Integrate and coordinate the entire supply chain.
- Create ethical and sustainable supply chains.