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Logistics and Supply Chain Management

Inventory Management in Marketing Channels

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Inventory Management

Inventory Holding Costs

Reducing Inventory

Inventory – Demand

Uncertainty

Pseudo Inventory Reduction

Real Inventory Reduction

JIT

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Inventory Management

Reasons for Holding Inventory.First, demand surges outstrip production capacity. To smooth production, factories anticipate the surge, producing to forecast.

The demand surge may be natural (e.g., ice cream demand rises in summer), or it may be due to marketers' actions.

Second, economies of scale are to be had in production or in transportation. Inventory is a result of batch-processing orders to make a long production run, or stock-piling goods to fill containers, trucks, ships, and planes.

Third, distance between the point of production and the point of consumption means that transportation takes time. Customers keep inventories (pipeline stock) to hold them over until a shipment arrives and can be unpacked and put out to use.

Fourth, both supply and demand are uncertain. Buyers are uncertain how long it will take for them to be re-supplied (lead time) - if they can get the stock at all. Thus, they acquire safety stock (the excess of inventory over the best estimate of what is needed during an order cycle) as a hedge against uncertainty. That uncertainty is often in the form of ignorance as to what will sell (demand uncertainty).

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Inventory Holding Costs

Holding inventory, then, saves money, but also creates costs in:

Capital: the internal cost of funds multiplied by the value of inventory.

Storage: climate control, security, insurance, and the like.

Obsolescence: loss of value due to the product's decay. This can be due to changes in tastes (think of fashion).

Quality: or rather, the deterioration of quality (think of food).

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Reducing Inventory

How can inventory be reduced? Some obvious methods are to avoid items that turn slowly ("sit in inventory"), lengthen the life of the goods (e.g., fill foods with preservatives), find a vendor who re-supplies faster, locate a cheaper ware-house (perhaps a more modern one), and so forth.

Some less obvious methods are to develop better ways to forecast demand, or to alter factory processes to attain scale economies at lower levels of production. Advances in manufacturing practice have done a great deal to achieve this latter goal.

A powerful way to cut inventory is to simplify, that is, to cut variety. Of course, this can be a powerful way to cut sales as well! The key is to find those offerings no one will really miss. These can be items - or merely things to track

One method of reducing variety is to design value offers to be modular, and then design manufacturing processes to fit the principle of postponing as late as possible the point of differentiating a product for a customer or customer base.

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Inventory – Demand Uncertainty

One of the biggest reasons inventory accumulates is demand uncertainty. And one of the major causes of demand uncertainty is poor communication between members of marketing channels.

Even a simple product, such as beer, can serve as a good example of the bullwhip effect. Imagine a supply chain ending with a beer drinker, going back through the retailer who sells the beer, the wholesaler who supplies the retailer, and the brewer who makes the beer.

Each party must forecast end-user demand, then take production, shipping, and stocking delays into account to plan (1) how much to order to serve its own level of demand (the retailer, hence the wholesaler); and (2) how much to brew, and therefore what ingredients to order (the brewer). Because each player sees only its link in the supply chain, there is demand uncertainty, obliging each party to guess. The result is that inventories of beer and ingredients oscillate, going up and down in dramatic surges, then plunges.

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Pseudo Inventory Reduction

Inventory in and of itself is not a negative, contrary to much current thinking. An unfortunate side effect of the movement

to minimize inventory is that many costs have simply been shifted elsewhere. Different incentives get in the way of good

logistics, and this is one of the greatest obstacles to streamlining supply chains.

The drive to minimize inventory can have two pernicious effects. The first, is that managers simply shift the costs elsewhere. The second is that managers can eliminate

opportunities by eliminating inventory.

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Real Inventory Reduction Historically, most value offers have been produced to fit a demand forecast.

By necessity, factories have produced on speculation that demand would appear. Similarly, marketing channels have ordered and stocked on speculation that demand would appear. The idea here is produce to forecast or stock to forecast. Players try to make their forecasts come out by pushing their value offers into the system, These push systems (based on forecasted demand) have dominated for many years and are the basis of much of manufacturing theory and practice.

In the 1980s, many organisations discovered that certain Japanese organisations, notably Toyota, operated their factories with a very different philosophy. These push systems (such as MRP, material requirements planning) are based on anticipation that a workstation would need a component eventually. Toyota reversed the process. Rather than pushing components onto the factory floor in anticipation of demand farther down the assembly line, Toyota practiced a pull system.

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JIT

JIT is a philosophy supported by a variety of techniques (such as kanban and quality circles) and management motivational methods. It gave rise to new interest in pull methods, whereby actual (not anticipated) demand triggers

supply in a synchronized manner. This interest has revolutionized manufacturing.

What does this have to do with marketing channels? It matters because the idea of pull systems (make to order) has achieved great credibility. The

objection that only push systems (make to forecast) are "practical" has been discredited. This has been the inspiration of prominent Supply Chain

Management initiatives, such as Efficient Consumer Response (ECR) and quick response (QR). These will be covered in a later section.