Product vs. Service Inventory
In modern business, it is not enough for organization to have simply all the parts, but rather organization must have the parts in right place at right time. In hope of achieving such approach organization often practice different inventory strategies to gain benefits. This brings us to important topic. What is inventory? Why is it important to organization? What strategies are to be considered? And more important, how is inventory related to sales, finance, supply chain and logistics? In paragraphs to follow, these questions are discussed, as well as the challenges presented in managing inventory along with inventory strategies. In modern world inventory strategies are crucial in ensuring positive impact on bottom line. Many organizations often implement supply chain and logistical strategies in managing inventories.
”Inventories are stocks of goods and materials that are maintained for many purposes, the most common being to satisfy normal demand patterns.” (Murphy R. and Woof F, 2004) In manufacturing world, the raw material and sub components are kept in inventory to complete assembly of final product. Furthermore, the final product is also kept in inventory to meet its demand. This is also known as cycle stock which is an inventory kept in stock to meet demand. For example, if the organization consumes 10 packs of paper a day, then organization may buy in 100 packs of paper at a time. This will satisfy the demand for 10 days. Furthermore, organization may also buy few extra packs known as safety stock to ensure any uncertainty in demand. For organization to buy, store then satisfy demand many sound simple, but challenge is also pay attention to cost such as carrying cost, shrinkage, obsolete parts, storage cost, handling cost, insurance cost, taxes, interest charges, and any opportunity cost. In addition, most important challenge of all is keeping satisfied customer through service.
One of the methods of overcoming inventory challenge is by forecasting. A lot of time, effort and money are spent trying to predict most accurate forecast as it has huge impact on bottom line. Inaccurate forecast can cause material shortage, lost of sales, inventory cost, and poor profit. Therefore, it is important for one to do its best to predict most accurate forecast. There is no such thing as 100% correct forecast, however, through quantities methods, one can create a forecast which may not be 100% accurate but it is fairly close given historic data, demand pattern and assumptions. Forecasting is one thing, but that forecast also needs to be measured to see its accuracy, also known as forecast error. Forecast error is the difference between actual quantity and forecast
Another method of overcoming the challenge of inventory is Make-to-order approach. Make-to-orders is a concept where good or service is made after the order is received from customer. Usually, the product is customer per specs than the standard or combination of both. This also means that longer lead time than standard product. On other hand Make-to-stock is concept where final product is manufactured and stocked before receipt of customer’s order. For this concept, normally customer places the order and supplier take the product off the shelf and delivers it in rather short time frame. Again, with inventory on hand organization must utilize forecast to ensure stock is maintained at optimal level.
In the service industry, inventory is little different from actual physical product inventory. Service inventory are normally found in travel agencies, insurance industries, and medical industries. “service inventories allow firms to buffer their resources from the variability of demand and reap benefits from economies of scale while benefiting customers.” (Chopra S, Lariviere M, 2005) While high customer service level is important for organization, low service level may cause loss of sale due to unserved order. Achieving just right balance is difficult, however, with forecast and historic demand pattern, it is in best interest of organization to set the level to optimal.
The challenges posed in managing inventory are sometime conflicting organization goal in stocking inventories. For example, in typical organization, sales team may want to have higher inventory to make sure that there is no stock. On the other hand finance may want minimize inventory in order to reduce cost. This conflicting organization objectives make a though challenges for one managing inventories. However, managing inventories with optimal level is a critical for organization in ensuring competitive advantage regardless of product or service industry.
In final words, inventory is very important to organization. Organization that manages inventory properly can have huge impact on bottom line. While high inventory level may reduce lead time and provide better customer service, the low optimal level inventory is more appropriate choice for organization as it reduces cost while maintaining good customer service.
References
P.R. Murphy and D.F. Wood, Pearson/Prentice Hall, (2004) Contemporary Logistics (8th ed.) Upper Saddle River, NJ
Sunil Chopra, Martin Lariviere (2005) Managing Service Inventory to Improve Performance. Retrieved on August 12, 2008 from http://harvardbusinessonline.hbsp.harvard.edu/b01/en/common/item_detail.jhtml;jsessionid=VMFZ31WOZWQ32AKRGWCB5VQBKE0YOISW?id=SMR187