Term Paper on "Logistics of Inventory Management a Company's Supply"

Term Paper 11 pages (3259 words) Sources: 10

[EXCERPT] . . . .

Logistics of Inventory Management

A company's supply chain is used to coordinate the acquisition of the materials that are needed for manufacture, but there is far more involved in the inventory management function that simply ordering, storing and using these materials. Identifying and maintaining optimal inventory levels is a complicated and challenging enterprise. Inventory levels that are too high can cause problems, just as inventory levels that become too low can create havoc along the entire production line. Today, though, there are a number of manual and computer-assisted methods available that can help organizations of all types and sizes improve their inventory management function. To gain some fresh insights into these methods and technologies, this paper provides a review of the relevant peer-reviewed and scholarly literature, followed by a summary of the research and important findings in the conclusion.

Review and Analysis

Companies of all types and sizes are faced with many of the same types of problems when it comes to identifying and establishing appropriate inventory levels (Thierauf, 1998). According to the definition provided by Shim and Siegel (2001), inventory management is "maintaining the optimum inventory level through inventory records. This is done to maximize profits by creating a good balance between inventory investment and smooth, continuous production, for a profit oriented firm" (p. 247). There is also a need for not-for-profit organizations to optimize their inventory management practices. In this regard, Shim and Siegel add that, "For a non-profit entity, this means minimizing costs" (2001, p. 247). In fact, these issues have been the source of an increasing amount of attention for almost a century now, with interest in developing more effective inventory management practices and to help establish optimal inventory levels beginning around 1915 (Thierauf, 1998). In the intervening years, these manual analytical processes have been supplemented and even replaced by increasingly sophisticated computer-based applications that are specifically designed for effective inventory management purposes -- and for good reason. According to Thierauf, "The reason for greater attention to inventory is that this asset, for many firms, is the largest one appearing on the balance sheet" (p. 55). Indeed, significant and typically expensive problems can result when inventory levels reach levels that are either too high or too low (Thierauf, 1998).

There are three general types of inventory: (a) raw materials (these are materials that are purchased from a supplier that will be used to manufacture goods; (b) work-in-progress (these are partially completed goods that exist during the end of an accounting cycle; and (c) finish goods (these are completed goods that are waiting to be sold) (Shim & Siegel, 2007). Irrespective of which category of inventory is involved, though, identifying optimal inventory management practices is usually a complicated and challenging enterprise. For instance, Shim and Siegel note that, "Inventory management involves a trade-off between the costs associated with keeping inventory vs. The benefits of holding inventory" (2007, p. 112).

On the one hand, there are some significantly higher costs that are involved in keeping inventory levels high, including storage, insurance, spoilage, and the interest on the funds borrowed to finance inventory acquisitions (Shim & Siegel, 2007). On the other hand, though, higher inventory levels can help prevent lost sales opportunities from stockouts, and well as the chance of disruption of the manufacturing process due to a lack of needed components (Shim & Siegel, 2007). These points are also made by Stout and Bedenis (2007) who add that, "For virtually any manufacturer, proper inventory management ensures the availability of the right items at the right time and in the right place. This, in turn, supports organizational objectives of customer service, productivity, profit, and return on investment" (p. 9). Conversely, Stout and Bedenis also cite that downsides to higher inventory levels: "There are, however, both out-of-pocket and opportunity costs associated with inventory holdings. For example, inventory ties up capital, uses storage space, requires handling, deteriorates, becomes obsolete, incurs property taxes, requires insurance, and sometimes is lost or stolen" (2007, p. 9).

Given the enormous amounts of money that are involved in formulating optimal inventory levels and the significant outcomes that are at stake, it is not surprising that over the past four decades, a growing number of companies of all types and sizes have sought to achieve improvements in their inventory management methods (Allen, 1999). As one practitioner points out, "Improving inventory management can be a fruitful place to look for savings" (Bendix, 2009, p. 25). Likewise, Thierauf (1998) emphasizes that, "Effective inventory management can make a significant contribution to a company's profit" (p. 57).

These trends in inventory management have also been fueled by the internationalization of trade in an increasingly globalized marketplace. There has been a corresponding need for companies to become "leaner and meaner" in their inventory management practices this operating environment in order to remain competitive and achieve a competitive advantage, and a number of approaches have been developed in response to these needs. For example, identifying the most appropriate inventory management approach represents a basic way that companies can facilitate the movement of inventory along the entire supply chain. In this regard, Allen (1999) reports that more efficient inventory management has been achieved by many companies through the use of "just-in-time" management techniques as well as a wide range of emerging technologies.

The just-in-time inventory management system was introduced by Toyota using its now-well-known "Kanban" method in which two Kanban cards were manually placed in buckets by workers to signal their completion of one task and the need for parts for the next (Young & Nie, 1999). According to Young and Nie, "The Toyota system was simple and it worked. It was a variation of a commonly used inventory system called a 'two-bin system,' in which parts are pulled from a front storage bin, and a second bin's parts are pushed to the first bin, signaling the need to reorder" (p. 56).

These straightforward but tried-and-true manual steps facilitated inventory management at Toyota on the line; however, the major innovation that was occurring at this time as a concomitant of the JIT method used by Toyota was the change that was taking place in the relationship between manufacturer and suppliers, with responsiveness and nimbleness being the key to success. In this regard, Young and Nie report that, "The real innovation of the Toyota system was going on at the receiving area of the plant. Toyota arranged for its suppliers to deliver parts shortly before they were actually used, requiring some suppliers to deliver more than once a day and many other suppliers to make daily deliveries" (1999, p. 56). By the time suppliers had managed to become efficient with Toyota's inventory management approach, they had essentially become inextricable parts of Toyota. As Young and Nie point out, "This changed the whole nature of the buyer-supplier relationship. Since the buyer of parts was so dependent on the delivery of parts by the supplier, the traditional adversarial relationship had to be dispensed. Suppliers became part of the firm" (1999, p. 56).

Another important change that took place in inventory management as a result of the experiences with just-in-time approaches was the streamlining of the supply chain to more vertically organize companies to the maximum extent possible in ways that also tend to bind companies together in a make-or-break fashion. For instance, Young and Nie conclude that, "Whether a company decides to go to a JIT system or not, the JIT sourcing philosophies apply to all organizations. The move is on to reduce the supplier base. A philosophical shift has taken place -- the old approach was to have multiple sources for a commodity, the new approach is to seek a primary source" (1999, p. 56).

Just as companies have reduced the number of suppliers they use in their inventory management systems, the goal of the just-in-time inventory management approach is to reduce the amount of inventory needed to an absolute minimum. The technique is typically used by manufacturers so that needed components are available for use only at the time they are needed during production and no sooner in ways that contribute to organizational productivity and profitability (Mckay & Shank, 2008). Likewise, Hughen, Livingstone and Upton (2011) report that, "Inventory reduction is a goal under lean inventory and manufacturing systems, such as just in time" (p. 27).

Effectively managing inventory and factory production levels, though, becomes a major challenge when orders differ, thereby requiring supply chain partners to retain more items in their respective inventories (Haines & Hough, 2010). Fortunately, innovations in radio-frequency identification (RFID) readers and tags, bar codes and computerized inventory management systems that can keep track of inventory levels and automatically issue purchase orders have also improved inventory management practices in companies such as Dell, Cisco, and Pfizer in significant ways in recent years (Jablonsky & Barsky, 2001). Likewise, Rogers (2009) reports that, "The Dairy Queen chain used technology to assess its distribution, transportation, and inventory management for a national rollout of new products. Result: $1.8 million or 29% cost reduction" (p. 240),… READ MORE

How to Reference "Logistics of Inventory Management a Company's Supply" Term Paper in a Bibliography

Related Term Papers:

Inventory Management a in an Importer Industry Case Study

Inventory Management

The raw materials, goods in process, and finished products represent different forms of inventory. Every stage of production of commodity represents money tied up until the inventory finds… read more

Case Study 40 pages (12443 words) Sources: 40 Topic: Management / Organizations

---

Inventory and Supply Chain Management Case Study

Inventory and Supply Chain Management: Coca-Cola's Approach to Collaborative, Planning, Forecasting & Replenishment Strategies

The significant accomplishments of the Coca-Cola Bottling Co. Consolidated in Charlotte, N.C. (CCBCC) clearly illustrates best… read more

Case Study 3 pages (844 words) Sources: 3 Style: APA Topic: Management / Organizations

---

Managing Projects Operations and Information Systems Thesis

Managing Projects, Operations and Information Systems

End of Seminar Project

The time optimization of the storage activity in United Biscuit logistics department [Coordinator's name]

Project management plan

Stakeholder analysis

Project… read more

Thesis 8 pages (2210 words) Sources: 10 Style: APA Topic: Management / Organizations

---

Supply Chain Management Strategies Research Paper

Supply Chain Management Strategies

Supply Chain Management -

There are several reasons that explain Johnson & Johnson's children's medicines recall. However, the primary causes that led to these product recall… read more

Research Paper 5 pages (1956 words) Sources: 10 Topic: Business / Corporations / E-commerce

---

Global Logistics Management Essay

Management

Global Logistics Management

How do you view the challenges and benefits of Information Technology, in regards to Logistics?

It is often taken for granted that products will be available… read more

Essay 4 pages (1625 words) Sources: 5 Topic: Business / Corporations / E-commerce

---

View 100+ more related papers  >>