Inventory management is the third major component of physical distribution task. It will be obvious that without effective management of finished product inventory, it is impossible to run any business efficiently and profitably.
Inventory is Inescapable:
Carrying inventories is inescapable in most business. This is because the producing and consuming activities take place at different times, in different locations and at different rates.
Inventories are made up of several elements: Operational stocks kept at the point of sale/retail outlets for meeting ready demand is the first elements; stocks in transit at any given point of time the second; then there will be stocks awaiting shipment and finally there will be buffer stocks for meeting merging sales requirement.
Elements of Inventory Costs:
Interest on capital tied up in the inventory is a significant element of the total inventory carrying costs. This is particularly true in businesses in which the turnaround of inventories is rather slow.
In recent years, increased competition has resulted in accumulation of stocks in a number of businesses. And the slowdown in the economy, wherever it has occurred, has added to the burden in this regard. Warehouse rents have also been going up. Naturally, inventory carrying costs have been going up. Besides warehousing rents and inventory costs, handling costs, which include costs of clearance, lading, unloading and stacking too have been going up.
Issues in managing Inventory and Inventory Cost:
The following are the main issues involved in the management of finished product inventory.
1. Identifying the purpose served by the inventory.
2. Establishing correct relationship between inventory purpose and inventory level, and deciding the ‘optimum inventory level’.
3. Ensuring that the inventory is maintained at the optimum level.
The crux is: How to decide the optimum inventory? In simple terms, optimum inventory is the level that is sufficient to realize the projected sales, but too high to erode projected profits. The controller of physical distribution has to determine at what inventory level, he can by and large avoid lost sales due to stock out. Lost sales are a key concept in inventory management.
Inventory Control a Balancing Act:
It is quite easy a physical distribution controller to completely avoid stock out situations and consequent lost sales if he is allowed to maintain a very high level of inventory. But, no firm will allow excessive inventory levels, it is not sound business. It involves a heavy cost. Sound business will call for optimization of inventory level/inventory costs, ensuring at the same time that the forecasted sales are realized. Obviously one must assess the probability of run out quantify the resultant loss of sales/profit and offset it against the cost of holding additional stocks and realizing the sale. Inventory management thus, is essentially a balancing act.
Optimum Inventory a compromise between Cost and Service:
Inventory is primarily a function of customer services level fixed by the firm. Here, customer service level primarily means the ability to meet demand at the retail level as and when it arises from available stocks, without having to generate a back order. It is in view of this close interrelation between inventory level and customer service level that inventory control essentially becomes a compromise between cost and service.
Improving Warehousing Effectiveness:
Warehousing effectiveness can be improved by adopting scientific methods and by taking the support of IT. In the larger context, however, warehousing effectiveness depends squarely on right policies of physical distribution.
Scientific warehouse layout in itself facilitates warehousing effectiveness. The layout/design must be suitable for the product (s) concerned and the nature of storage and in-out operation.
Warehousing effectiveness also improves when the handling and movement of items within the warehouse is minimized. This applies especially to large warehouses and product involving extensive, receiving and issues operations. Every time an item is moved within the warehouse, it means an opportunity for damage to the item; and lifting of the item fatigues the packages.
Systematic stocking of items is another act. If the items of high demand with high frequency of in out operation, are kept in the front and the relatively slower moving items in the rear, it will facilitate smooth operations and also help reduce the overall cists of warehousing. It is such matters of detail that make the real difference between poor and good warehousing.
In many cases, warehousing as a whole becomes inefficient on account of unreliable sales forecasts. Even actual sales show great divergence from the forecast, any warehousing naturally goes haywire and its effectiveness suffers a setback.