Inventory Role in Supply Chain Management

Inventory refers to the raw materials, completely finished and unfinished products which are ready or will be ready for sale. Inventory is the main part of any supply chain and it plays vital role in the supply chain decisions. Efficient management of an inventory is a big challenge for a manager. For example high amount of inventory has high cost of storage, obsolescence and spoilage whereas; low inventory is risky due to loss of potential sales to the customers. Role of the inventory in the supply chain is described below:

To match the supply and demand situation some inventory always exists in the supply chain process. For example, a steel manufacturer intentionally keeps mismatch, because it is economical to produce in greater amount and can be stored for future sales. In a retail store, inventory is intentionally kept for meeting the future demand. Role of inventory in supply chain is to maximize the product demand; it is possible to make product ready and available when it demanded. Other important role of inventory is to minimize the cost by possible ways and also by achieving the economies of scale during the process of production and distribution.

Inventory is a main ingredient of cost in the supply chain process and has enormous impact on responsiveness. Quantity and location of inventory can move from one end of the spectrum to the other in a supply chain process. For example: in the apparel industry, greater inventory exists at the retail level and has a greater responsiveness level because customer may walk into shop and buy anything they like. On the other hand, little inventory may be efficient but it would result in poor customer service. In such case consumers have to wait for few days due to which the possibilities of customers’ switching increases.

In the supply chain process inventory has significant relationship with material flow time. Material time is generally known as a time which starts when raw material enters in supply chain process and ends when the final product is produced. In supply chain process, throughput is the rate where sales are generated. Thus inventory, flow time and throughput can be related by using a law as given below:

I= Inventory
T= Flow time
D= Throughput
I=   DT

For example, if the output is 700 units per hour and flow time is 20 hours, then according to the law, inventory is 700 x 20 = 14,000 units. If inventory is reduced to 7,000 units while holding output constant, then flow time will decrease to 10 hours (7,000/700=10). It must be noted that association between throughput and inventory must have consistent units.

In the supply chain process conceptual conclusion is that flow time and inventory are synonymous and output is often determined by demand. Managers must be able to reduce the levels of inventory needed without reducing responsiveness or increasing cost, because lower flow time could be advantageous in a supply chain process.