Procurement and inventory management: inventory
Concepts of inventory management: Procurement and inventory management
There are four primary components that are applied to procurement and inventory management. The first one is supply chain or procurement management, which is what has been discussed. The other three include:
Inventory Control
The bulk of inventory management involves inventory control. It involves all of the coordinating and supervision of the inventory. All of the items in the inventory need to be maintained until it is time for their usage, so it also includes the storage and record keeping of the stock. So if a product requires being kept at a certain temperature in order to maintain its quality, any actions to ensure that that happens would be a part of inventory control in the management process. It may also include purging old inventory, such as items that are damaged or simply no longer needed. All actions in inventory control, however, need to be accounted for just like the inventory itself.
Demand Forecasting
Demand forecasting basically is estimating the state of the market as it relates to inventory and procurement based on current information. This is something that procurement teams already use as a resource for negotiating, as supply-and-demand can dictate prices for anything in the economy. A higher demand often means that prices are lower (usually) and businesses will often wait until that happens before purchasing frequently used items. Inventory management identifies exactly what those items are and the frequency in which they are used–therefore how often supplies need to be replenish. When used correctly, demand forecasting can help prevent such supplies from running out by setting up a purchasing cycle that coincides with those points of high demand.
Procurement and inventory management: Reverse Logistics
The final component is reverse logistics, which is the flow of unwanted goods or surplus items back into the supply chain for reuse elsewhere. You usually can’t return parts of an order back to the supplier and most businesses do not have much use for excess inventory, unless it’s a regularly used item. Rather than eating the cost of the excess inventory or wasting it, the procurement team can resell it back to other businesses and services that typically have use for reverse logistics inventory. This could be recycling centers, resale or refurbish businesses, and fulfillment services. It could also include other departments in the business, depending on what those items are.
Procurement and Inventory management :inventory management strategies
There are strategies that can be put in place to improve inventory management practices in general. They are applicable to any existing procurement strategies that are already in operation. A few of the more commonly used inventory management strategies include:
Conventional Manufacturing Strategy
Conventional manufacturing strategy is the tried and true method that has been used with assembly lines and factories for decades. It primarily involves the usage of inventory, with each area working with its own specific inventory and their own segment of the work. Nothing is left to idle–meaning production is continuous–and inventory levels are mostly synchronized throughout the line. The strategy does have a major flaw, as any hiccups in the production line can potentially through the entire system off. Bottlenecks and low inventory levels can quickly bring the entire system to a screeching halt, causing significant delays for the business.
Warehouse Management Systems (WMS)
As the name suggests, WMS is of best use with warehouse inventories. These are digital systems that automate the entire procurement and inventory management process. It simply requires staff to complete tasks and enter data. A WMS can be incredibly beneficial for those with large inventories, as they help to reduce inaccuracies that are common with high product quantities. This can in turn reduce waste, operation costs, and extend the procurement cycle rate. There are multiple companies that create WMS software, so there’s quite a few options on the market for businesses and procurement teams to choose from.
Just-in-Time (JIT) Method
The JIT method takes conventional practices and tweaks them a bit to create a better consistency. JIT method keep inventory levels up to meet customer demands. Production rates don’t always match up with customer demand. This is how instances of surplus develop with the final product a business produces. The JIT method balances things out a bit, reducing waste, storage and maintenance costs, and profit lost. Using this method requires paying very close attention to the inventory levels of production materials. The method also requires to check market for the product, and resource availability from suppliers. The entire line can then stall due to inaccurate information and the inability to keep up with demand.
Economic Order Quantity (EOQ)
EOQ tries to make customer demand constant and synchronizes inventory depletion to it. As the demand drops, so does the inventory; they both reach zero at the same time, leaving no excess or unhappy customers in the process. Just as with the JIT method, EOQ requires careful monitoring of factors. These ensures that levels are accurate for the sake of the strategy’s success. Problems like delays or mistakes can be very detrimental. Therefore, there’s a lot of pressure put on the timing of things
Material Requirements Planning (MRP) Method
MRP heavily relies on the usage of software and applications to accurately manage inventory levels. There’s an intensely detail and constant analysis of information related to the inventory and procurement. Particularly, inventory that generates plans designed to perpetuate production. The software and maintenance, not to mention the installation, of MRP software can be very expensive. The value that they have over time in accurately allocating procurement and inventory, and production timing ,justify the cost should it ultimately be a viable option.
Push or Pull Models
Push and Pull models address procurement and inventory management based on two different approaches to demand. A pull model depends on customer demands and is largely another name for the JIT method of inventory management. The push version excludes the current demands of the customer for products. Instead, it uses past data to predict what the demand will be in the near future. It’s highly dependent on successful demand forecasting and the accuracy of records and data. There’s also a significant amount of risk attached to the push model. That is, miscalculations can lead to expensive write-offs and waste.