OM/U3 Topic 5 Supply Chain Management, Inventory Planning and Control
SUPPLY CHAIN MANAGEMENT
In commerce, supply chain management (SCM), the management of the flow of goods and services, involves the movement and storage of raw materials, of work-in-process inventory, and of finished goods from point of origin to point of consumption. Interconnected or interlinked networks, channels and node businesses combine in the provision of products and services required by end customers in a supply chain. Supply-chain management has been defined as the “design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand and measuring performance globally.” SCM practice draws heavily from the areas of industrial engineering, systems engineering, operations management, logistics, procurement, information technology, and marketing and strives for an integrated approach.
Supply chain management is a cross-functional approach that includes managing the movement of raw materials into an organization, certain aspects of the internal processing of materials into finished goods, and the movement of finished goods out of the organization and toward the end consumer. As organizations strive to focus on core competencies and become more flexible, they reduce their ownership of raw materials sources and distribution channels. These functions are increasingly being outsourced to other firms that can perform the activities better or more cost effectively. The effect is to increase the number of organizations involved in satisfying customer demand, while reducing managerial control of daily logistics operations. Less control and more supply chain partners lead to the creation of the concept of supply chain management. The purpose of supply chain management is to improve trust and collaboration among supply chain partners thus improving inventory visibility and the velocity of inventory movement.
Supply chain activities aren’t the responsibility of one person or one company. Multiple people need to be actively involved in a number of different processes to make it work.
It’s kind of like baseball. While all the participants are called baseball players, they don’t do whatever they want. Each person has a role – pitcher, catcher, shortstop, etc. – and must perform well at their assigned duties – fielding, throwing, and/or hitting – for the team to be successful.
Of course, these players need to work well together. A hit-and-run play will only be successful if the base runner gets the signal and takes off running, while the batter makes solid contact with the ball. The team also needs a manager to develop a game plan, put people in the right positions, and monitor success.
Winning the SCM “game” requires supply chain professionals to play similar roles. Each supply chain player must understand his or her role, develop winning strategies, and collaborate with their supply chain teammates. By doing so, the SCM team can flawlessly execute the following processes:
- Planning – the plan process seeks to create effective long- and short-range supply chain strategies. From the design of the supply chain network to the prediction of customer demand, supply chain leaders need to develop integrated supply chain strategies.
- Procurement – the buy process focuses on the purchase of required raw materials, components, and goods. As a consumer, you’re pretty familiar with buying stuff!
- Production – the make process involves the manufacture, conversion, or assembly of materials into finished goods or parts for other products. Supply chain managers provide production support and ensure that key materials are available when needed.
- Distribution – the move process manages the logistical flow of goods across the supply chain. Transportation companies, third party logistics firms, and others ensure that goods are flowing quickly and safely toward the point of demand.
- Customer Interface – the demand process revolves around all the issues that are related to planning customer interactions, satisfying their needs, and fulfilling orders perfectly.
Seven Principles of SCM
More than ten years ago, a research study of 100+ manufacturers, distributors, and retailers uncovered some widely used supply chain strategies and initiatives. These ideas and practices were distilled down to seven principles and presented in an article in Supply Chain Management Review, a magazine widely read by SCM professionals.
Principle 1: Segment customers based on the service needs of distinct groups and adapt the supply chain to serve these segments profitably.
Principle 2: Customize the logistics network to the service requirements and profitability of customer segments.
Principle 3: Listen to market signals and align demand planning accordingly across the supply chain, ensuring consistent forecasts and optimal resource allocation.
Principle 4: Differentiate product closer to the customer and speed conversation across the supply chain.
Principle 5: Manage sources of supply strategically to reduce the total cost of owning materials and services.
Principle 6: Develop a supply chain-wide technology strategy that supports multiple levels of decision making and gives clear view of the flow of products, services, and information.
Principle 7: Adopt channel-spanning performance measures to gauge collective success in reaching the end-user effectively and efficiently.
The process of determining the optimal quantity and timing of inventory for the purpose of aligning it with sales and production capacity. Inventory planning has a direct impact a company’s cash flow and profit margins especially for smaller businesses that rely upon a quick turnover of goods or materials.
Every organization that is engaged in production, sale or trading of Products holds inventory in one or the other form. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model.
When in case of raw material inventory management function is essentially dealing with two major functions. First function deals with inventory planning and the second being inventory tracking. As inventory planners, their main job consists in analyzing demand and deciding when to order and how much to order new inventories. Traditional inventory management approach consists of two models namely:-
- EOQ – Economic Order Quantity
- Continuous Ordering
- Periodic Ordering
EOQ: Economic Order Quantity method determines the optimal order quantity that will minimize the total inventory cost. EOQ is a basic model and further models developed based on this model include production Quantity Model and Quantity Discount Model.
Continuous Order Model: works on fixed order quantity basis where a trigger for fixed quantity replenishment is released whenever the inventory level reaches predetermined safety level and triggers re ordering.
Periodic System Model: This model works on the basis of placing order after a fixed period of time.
In one sentence inventory control is nothing but to give uninterrupted service towards the Production / Sales /Maintenance etc. with minimum stock. Inventory control is an important aspect for the growth of company. Stores inventory is the heart of an industry Inventory control or stock control can be broadly defined as “the activity of checking a shop’s stock”. More specifically inventory control may refer to:
- In operations management, logistics and supply chain management, the technological system and the programmed software necessary for managing inventory
- In economics and operations management, the inventory control problem, which aims to reduce overhead cost without hurting sales. It answers the 3 basic questions of any supply chain: When? Where? How much?
- In the field of loss prevention, systems designed to introduce technical barriers to shoplifting.
Top 5 Benefits of Inventory Control and Planning
- Cash Flow — Inventory control and planning allows small business to manage their cash flow opportunities. Small businesses aren’t always able to purchase large amounts of inventory, as the capital simply isn’t available to them to do so. By having better control of their inventory, they are able to know exactly how much inventory they will need and when they need it. This can free up other capital to re-invest in other areas of the business.
- Business Intelligence — An inventory control and planning solution allows small business to gain insight into what products are selling more than others. This allows them to adjust their product line and to make intelligent business decisions.
- Maximize Profits — By being able to make better business decisions the inevitable outcome for a small business will be an increase in profits. This is because the stock in their inventory will only be stock that’s actually selling. Other stock that doesn’t grab customer’s attention can be deemed obsolete and can be abandoned. This makes the general business practice more efficient.
- Limits Employee Mishandling — Inventory planning and control limits the ability of employees to steal from the inventory. Often employees use items from a businesses inventory for personal use. Without inventory control, the business owner would be none-the-wiser. This practice ultimately reduces the profitability of the business. By limiting the ability of the employee to steal, the employer is reducing potential ‘hidden’ costs.
- Reduce Labour Costs — Improved inventory planning and control techniques allow small businesses to reduce labour costs associated with inventory. These include the time spent counting stock and the transportation of stock. Employing and intelligent inventory planning and control solution can significantly reduce all these labour-intensive activities.