Paper Example on Managing Inventory in the Supply Chain

Introduction

In the supply chain, the management of inventory is represented as one of the most integral aspects (Fiala 419). As such, much inefficiency has been associated with the managing of supply chains. For instance, certain actions may necessarily be taken to coordinate the whole supply chain thus, benefiting the overall outcome. This paper will address the need for inventory management in the supply chain. As mentioned above, it will also discuss the importance of coordinating these inefficiencies by providing relevant examples and approaches. Inventory often consists of various orders ranging from cash, finished goods to raw materials, among other related factors. Effective inventory management is significant in the supply chain for various reasons. For example, it can relinquish cash flow or minimize the outcome of an inventory shortage. One of its most important functions is to achieve the strategic goal of a company.

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The Decline of Inventory Costs and Levels

In most cases, it is essential for companies to reestablish their supply chain networks to improve service levels and logistics cost (Fiala 419; Meng 72). For the most part, however, due to the many complex issues involved in logistics, it may be difficult to interpret large systems entirely. On the contrary, firms in practice have to be aware of the challenges involved in the decision-making process. Hence, it is necessary for them to reduce the effect resulting from uncertainty in a cost-efficient way, thus obtaining lead-time and demand.

Double Marginalization Problem

Double marginalization is presented as one of the most significant causes of inefficiency in the supply chain management. As such, a problem may be encountered when there is division in the supply chain's profits among two or more firms. In each firm, the profit margin is represented as an integral aspect in comparison to the supply chain's margin. As a result, one of the firms can often tend to influence the demand. One solution to double marginalization problem is marginal cost pricing. However, in this regard, the supplier can acquire zero profits in return. On the contrary, a profit-sharing contract can be viable for both the supplier and retailer as each of them receive equal earnings. Thus, optimal profit can be attained by each firm through the supply chain due to the irrelevancy of the wholesale price for each firm's profits.

Economic Order Quantity

A product may be produced depending on the predictability and stability of the demand. In some instances, the classic Economic Order Quantity (EOQ) model can be applicable in demonstrating the importance of distinguishing ordering and holding costs in trade-offs. With regards to the supply chain, this model encompasses a type of environment for which demand is stable. However, the main problem associated with this type of model is as a result of the order quantity. For instance, a producer cannot be able to fully optimize the supply chain as a whole because of the irregularity of the order quantity. Hence, it is essential to focus on coordinating the order quantity to facilitate the overall process for members of the supply chain.

Risk Pooling

In supply chain management, risk pooling serves an important purpose in regulating a product's variable demand. Regarding this context, connections can be made between suppliers and retailers in relation to both centralized and decentralized distribution system. Moreover, the variability of demand is minimized by demand aggregation. Thus, the higher demand is for a particular retailer, the lower it becomes from another. Nevertheless, both safety stock, as well as average inventory, can often be reduced due to variability reduction. However, in a decentralized distribution system, the reallocation of inventory may not be possible since different retailers are equipped with different warehouses. In addition, increase in benefit from risk pooling can be obtained by different retailers through higher co-efficiency as well as the more negative correlation of demand.

Inventory Carrying Costs and Ordering Costs

Inventory carrying cost consists of inventory storage and management. It can either be applied to in-house facilities or external warehouses (Meng 72). These components are often directed and controlled by third party vendors. In some instances, both inventory storage and management may involve the use of extensive building materials as well as handling equipment. Furthermore, they may also manage and operate staff resources through the use of IT software applications and hardware equipment. In ordering cost, two factors are dependent and varied in relation to the cost of procurement and inbound logistics cost. These factors are often determined by the cost of excess and less ordering. Hence, on the one hand, ordering excess quantity will constitute to the carrying cost of inventory while on the other hand, the outcome for ordering less quantity is the increase of replenishment costs and ordering costs.

Goods in transit are defined as any merchandise or other types of inventory which have been removed from the shipping dock of the seller, without reaching the receiving dock of the buyer. In this concept, the possession is indicated by the buyer and seller of goods. As such, this may determine who is responsible for the transportation cost. This process is often consistent upon the shipping terms regulated with the goods. These are freight on board (FOB) shipping point and freight on board (FOB) destination. On the other hand, finished goods inventory refer to goods which have been completed through the manufacturing process. Moreover, it may also involve the purchase of goods in a completed (merchandise) form which has not yet been accessed by customers. In most cases, it is termed as a short-term asset due to the high demand rate. In this regard, the total amount of finished goods inventory is typically assembled with the cost of raw materials as well as work in process with regards to the end of a reporting period. Also, it can be reported on the balance sheet by a single "inventory" line item.

Independent and Dependent Demand Items

In inventory management, inventory is composed of two forms in relation to the demand pattern. These include independent and dependent demand for inventories. These two forms of inventory play an important role in enhancing the need for inventory. However, there are some major differences associated with these two forms of inventory. For instance, independent demand inventory relates to an item which is not dependent on another item based on their demand. Therefore, when external customers purchase finished goods items or manufactured for stocks and sales, they are termed as independent demand items (Meng 72). Furthermore, they are often consistent ranging from customer orders and forecasts to estimates as well as historical data from the past. For dependent demand items, raw materials and component inventories are reliant upon the demand for finished goods. As such, while finished goods inventories characterize independent demand, dependent demand, on the other hand, is controlled by Material Resources Planning (MRP). This process may involve interpreting and regulating the delivery capacity whereby, the lead item and delivery schedules are combined with the logistical processes as well as transit timelines by all suppliers to transport and store raw materials on the warehouse materials, thus, enhancing the efficiency of the overall production process.

Benefits of Classifying Inventory Using ABC Analysis

End of life management: The concept of ABC analysis often assists inventory planners in determining the demand for products, therefore regulating the stock levels accordingly. In turn, this ensures that there is a reduction in the inventory levels thus avoiding obsolete stock to minimize the carrying costs.

Supplier negotiation: A supplier may generate reasonable profit based on certain negotiation features such as providing post-purchase services, down payment reduction and free shipping among others. As a result, this may enhance the desired quality product and services suitable for a company.

Inventory optimization: In ABC analysis, optimizing inventory is categorized as one of its most important aspects. The reason for this is because it allows inventory planners to strategize high priority items in accordance with the customer's demands, depending on the fluctuation of demand.

Strategic pricing: Through strategic ABC analysis of inventory, products can be arranged based on prices which are more valuable to the company. As such, constant monitoring of these products by the company is essential in increasing the demand rates which are highly desirable to customers.

Resource Allocation: This is termed as a continuous process which encompasses the regular tracking of class A items. Due to their utmost value, these items are essential in aligning the stock level with the demand of customers.

Customer Service Levels: These service levels often range from item cost and the quantity sold to the product's margin. In such cases, an ABC analysis provides inventory planners with the required service set levels to enhance the overall performance of the supply chain in relation to the products classification, thus carrying less safety stock.

CASE STUDY: Baseball Card Emporium

Economic order quantity = square root of [(2 demand ordering costs) carrying costs].

Therefore, the EOQ of BBE in pounds is calculated accordingly as,

EOQ = square root of [(2 6000 $75) 30%] (here, 30% is done on case value)

EOQ = square root of [(26000 $75) 28.8]

EOQ = = 176.8 units = 177 units

Since, 50 pounds = 1 case,

Therefore, 177 * 50 pounds = 8850 pounds

Therefore, the EOQ for BBE is 8850 pounds and 177 in Units.

Total cost Excluding Transportation charges = EOQ - transportation costs.

That is, in this case, the transportation costs are summed as,

Unit weight = 50 lbs per case

Rate of Motor carrier = $1.2 per cwt. (100 lbs) that is, as 1 cwt = 100 lbs

6000 50 = 300000 lbs = 3000 cwt.

The rate of Air carrier = $ 2.5, Therefore, the total transportation cost is,

Rate of Motor carrier (1.2 3000 cwt) + Rate of Air carrier (2.5 3000 cwt) = $11100

Therefore, as required EOQ, excluding the transportation cost sum up to

Total cost Excluding Transportation charges = 177 96 + [6000 177] 75 + 177 4 30% of $96

= 16992 + 2542.5 + 1.54 = $19536.04

= $19536.04 - $11100

= $8436.04

iii. Aggregated Costs for Transportation using Motor Carrier

The total pounds Cost per order Motor carrier rate in- transit inventory carrying a cost, therefore,

The cost for Transportation using Motor Carrier = [8850 pounds ($75 1.2)] 18

= $1770

Total Cost for Transportation using Air Carrier

= The total pounds Cost per order Air carrier rate in- transit inventory carrying a cost,

Therefore,

Cost for Transportation using Air Carrier,

= [8850 pounds ($75 2.5)] 18

= $849.6

From the calculations mentioned above, the Baseball Cards Emporium Company should relegate their daily transactions through Motor Vehicles or carriers. This is because motor carriers are cost-efficient in comparison to air carriers.

Conclusion

Despite being operated by independent units based on individual preferences, supply chain inventory management often consists of much inefficiency. As such, to make a supply chain more effective, it is essential to deploy regulation techniques which may assist in manipulating the behavior of one unit thus gaining an advantage over the other. As mentioned in the case involving the Baseball Cards Emporium Company, transportation of goods can be done through motor carriers as they as cost-effective and efficient in meeting the demand of customers.

Works Cited

Fiala, Petr. "Information sharing in supp...