"Logistics and Supply Chain Management"
Logistics and Supply Chain Management Inventory Management in Marketing Channels 1 Inventory Management Inventory Holding Costs Reducing Inventory JIT Inventory – Demand Uncertainty Real Inventory Reduction Pseudo Inventory Reduction 2 Inventory Management Third, distance between the point of production and the point of consumption means that transportation takes time. Reasons for Holding Inventory. Customers keep inventories (pipeline First, demand surges outstrip production stock) to hold them over until a shipment capacity. To smooth production, factories arrives and can be unpacked and put out anticipate the surge, producing to forecast. to use. The demand surge may be natural (e.g., ice Fourth, both supply and demand are cream demand rises in summer), or it may be uncertain. Buyers are uncertain how due to marketers' actions. long it will take for them to be re- supplied (lead time) - if they can get the Second, economies of scale are to be had in stock at all. Thus, they acquire safety production or in transportation. Inventory is a stock (the excess of inventory over the result of batch-processing orders to make a best estimate of what is needed during an long production run, or stock-piling goods to order cycle) as a hedge against fill containers, trucks, ships, and planes. uncertainty. That uncertainty is often in the form of ignorance as to what will sell (demand uncertainty). 3 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). 4 Reducing Inventory How can inventory be reduced? Some A powerful way to cut inventory is to obvious methods are to avoid items that simplify, that is, to cut variety. Of turn slowly ("sit in inventory"), lengthen course, this can be a powerful way to cut sales as well! The key is to find the life of the goods (e.g., fill foods with those offerings no one will really preservatives), find a vendor who re- miss. These can be items - or merely supplies faster, locate a cheaper ware- things to track house (perhaps a more modern one), and so forth. One method of reducing variety is Some less obvious methods are to to design value offers to be modular, develop better ways to forecast and then design manufacturing demand, or to alter factory processes to processes to fit the principle of attain scale economies at lower levels of postponing as late as possible the production. Advances in manufacturing point of differentiating a product for practice have done a great deal to achieve a customer or customer base. this latter goal. 5 Inventory – Demand Uncertainty One of the biggest reasons inventory Each party must forecast end-user accumulates is demand uncertainty. demand, then take production, And one of the major causes of shipping, and stocking delays into demand uncertainty is poor account to plan (1) how much to order to serve its own level of communication between members demand (the retailer, hence the of marketing channels. wholesaler); and (2) how much to Even a simple product, such as beer, brew, and therefore what ingredients can serve as a good example of the to order (the brewer). Because each bullwhip effect. Imagine a supply player sees only its link in the supply chain ending with a beer drinker, chain, there is demand uncertainty, going back through the retailer who obliging each party to guess. The result is that inventories of beer and sells the beer, the wholesaler who ingredients oscillate, going up and supplies the retailer, and the brewer down in dramatic surges, then who makes the beer. plunges. 6 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. 7 Real Inventory Reduction Historically, most value offers have been produced to fit a demand forecast. In the 1980s, many organisations discovered that certain Japanese By necessity, factories have produced organisations, notably Toyota, on speculation that demand would operated their factories with a very appear. Similarly, marketing channels different philosophy. have ordered and stocked on speculation that demand would These push systems (such as MRP, appear. The idea here is produce to material requirements planning) forecast or stock to forecast. Players are based on anticipation that a try to make their forecasts come out workstation would need a component by pushing their value offers into the eventually. Toyota reversed the system, These push systems (based on process. Rather than pushing forecasted demand) have dominated components onto the factory floor in for many years and are the basis of anticipation of demand farther down much of manufacturing theory and the assembly line, Toyota practiced a practice. pull system. 8 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. 9