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Inventory Management, Strategy, Supply Chain Management

and the Theory of Constraints

In every business, there are certain guides that will help the management achieve their goals.  One of these is the Theory of Constraints. Every system has at least one constraint limiting it from getting more of what it strives for.  If this is not true, then the system would produce endless output.  Companies can be measured and controlled by inventory, the output and operational expenses. These are all what makes inventory management, strategies and supply chain management important in every business.

 

Inventory management is one of the lifeline of a business.  An inventory often incurs the biggest expense so it needs to be carefully studied and controlled. Having the wrong inventory or too much of it can decrease resources so by managing it efficiently, the business will be aware of what stock to replenish and what needs to be changed.  If studied carefully, the business will reduce costs and increase sales. This can be done if they will track and maintain inventory so that it will meet customer demands.

Strategies are plans which are made by the managers for proper use of resources and sales of their products.  For a business to succeed, you have to first formulate them carefully. They should require a flawless planning so objectives are met.  There should also be a post-planning to confirm that supervision and division of labor have been assigned in such a way that maximum use of resources take place efficiently.  Every process must also step by step be assessed without missing any important part and to avoid errors in management.

Also essential is supply chain management which aims to improve the way a business sources its raw materials and delivers it to end users.  For any product or service offered by any business, there are usually a number of different business entities involved in the various stages of the supply chain, including manufacturers, wholesalers, distributors and retailers, the last group in a supply chain is consumers. In these stages, when one slows down or commits an error, the whole process suffers. SCM is important for modern businesses because it coordinates and synchronizes activities of partner businesses, giving higher efficiency. The principles of supply chain management are derived from planning, sourcing, manufacturing, delivering and returning.  All of these, if not properly done, constraints will again affect the flow of the business.

You have to study carefully the inventory, strategize effectively, spend wisely and see to it that there is proper sourcing of raw materials up to the delivery of the product so as to minimize or do away with the weakest part which can damage or at least affect the outcome of production.  Any system is very limited in achieving its goals by a very small number of constraints. To achieve it, you must identify, decide to use, align the system, elevate and move the constraint.  With this theory of constraints, for system improvement, the ideal way is to maximize the money coming in, reduce both the money tied up as inventory and the money going out as expense.

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What is inventory management all about?

Inventory management is very important in a business firm. It is all about material requirements planning (MRP) which is a production planning and inventory control system used to manage manufacturing processes. The system is software-based, while it is possible to conduct MRP manually.  An MRP system is intended to meet three objectives: to ensure materials are available for production and products are available for delivery to customers, to maintain the lowest possible material and product levels in store and to plan manufacturing activities, delivery schedules and purchasing activities. The basic function of MRP system includes inventory control, bill of material processing and elementary scheduling. It helps organizations to maintain low inventory levels and is used to plan manufacturing, purchasing and delivering activities.

Manufacturing organizations, whatever products they are, face the same daily practical problem – that clients want products to be available in a shorter time than it takes to make them. Some level of planning is required here. Companies need to control the types and quantities of materials they buy, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at a minimal cost. Making a bad decision in any of these areas will make the company lose money.

MRP can be applied both to items that are bought from external suppliers and to sub-assemblies, produced internally, that are components of more complex items. Some data must be considered like the end item being created which is sometimes called the bill of materials, costing, when the quantities are required to meet demand, shelf life of materials, the inventory status records and planning data.  There are two outputs which are the recommended production schedule and purchasing schedule.

We should also note that the MRP calculation method can be unreliable at times when the demand fluctuates, demand is inconsistent or lumpy or there is no demand for the period; may actually be lower than the normal customer daily deliver quantity. We must not always depend on MRP because it can sometimes mislead us. JIT or just in time can help MRP to be productive because it is more effective when the materials department will reduce costs.

MRP is a system that is designed to compute the material need of the plant internally and externally meaning it can help your inventory in many ways. One good way of increasing the accuracy of data is by controlling parameters in the system. Planning parameters is the result of a poor output of the MRP system so we must take full notice of it. There is that major problem in MRP which is the integrity of the data.  If there are errors in the inventory data, then the output data will also be incorrect.  Another problem is the requirement that the user specify how long it will take for a factory to make a product from its component parts.  There are solutions: to physically verify the bill of material, determine a cycle count, scrap reporting, implement the system of advanced shipping notice, affixing the labels to the containers, and using bar code scanning.

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Global competition continues to pressure manufacturers to operate more efficiently: produce more with less, at a high quality, delivered on time and value priced. One of the keys to successfully competing in today’s global arena is to focus on efficient management and optimization of the supply chain, the design in particular and the manufacturing design. In order to make a company the best to customers and market, one should: analyze markets, competitor and competitive productivity, deploy customer value proposition, articulate corporate culture, implement process improvements, and resource scheduling system and manage and adjust internal resources to reflect market change. Supply chain operations are strongly related to corporate financial performance; supply chain management incorporates the entire flow of services, materials and information; ranging from raw materials to the end customer. Manufacturing design is a critical factor in organizational success because it sets the characteristics, features, and performance of the service or good that consumers demand. The objective of product design is to create a good or service with excellent functional utility and sales appeal at an acceptable cost and within a reasonable time.

The competitive growth process contains elements which require a detail project plan and dedicated resources to implement performance expectations. Being the best requires a strong and structured infrastructure and competitive productivity. This means providing the best product at the lowest price. Once you achieve this performance, you must maintain it by adjusting and changing processes, products, performance and values as you markets, customers and competitors change.

The most commonly used measurements for supply chain efficiency are inventory turnover and cost of goods sold where the formula for measuring supply chain efficiency is as follows: Inventory turnover = cost of goods sold/average aggregate inventory value. Cost of goods sold refers to the annual cost a company incurs to produce the goods or services offered. Average aggregate inventory value refers to a company’s inventory of items at cost. The derived value enables a company to determine the efficiency of its supply chain. Supply chain efficiency enables an organization to carry the right amount of inventory to ensure orders are filled in a timely manner. Keeping inventory can prove costly and too much inventory increases holding costs and too little inventory results in shortage costs.

The manufacturing design and design for assembly are the integration of product design and process planning into one common activity. The goal is to design a product that is easily and economically manufactured. The importance of designing for manufacturing is underlined by the fact that about 70% of manufacturing costs of a product (cost of materials, processing, and assembly) is determined by design decisions, with production decisions responsible for only 20%. The heart of any design for manufacturing system is a group of design principles or guidelines that are structured to help the designer reduce the cost and difficulty of manufacturing an item. In doing this, you have to reduce the total number of parts, develop a modular design, use of standard components, design parts to be multi-functional, design parts for multi-use, design for ease of fabrication, avoid separate fasteners, minimize assembly directions, maximize compliance and minimize handling.

Making your company the best requires understanding the needs and expectations of your customers and markets and then adjusting company resources to best meet those expectations and to meet the global competitiveness of markets. In gathering data and information about your markets, customers and competitors, it allows you to accurately define and measure your performance to customer value drivers which quantify customer and market expectations and armed with accurate customer value drivers, you can define and deploy an effective corporate culture that all employees can understand and follow. Efficient process and resource allows for the efficient scheduling and planning of products and services for customer orders and inventory investment; the standard process used to measure performance and make adjustments as markets, customers and competitor changes. Supply chain design and analysis is a process necessary to ensure a company remains competitive and manages costs effectively. Manufacturing design is important as it is an approach which aims to improve manufacturing productivity bringing major benefits when used in the design of new generations of products. It helps the team focus on clear and common objectives, encourages problem-ownership being shifted from area to area, uses a top-down approach to product design and can lead to a 25-30% reduction in production cost without capital investment in new facilities.

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The inventory, together with the transport, the location of the production spaces and of the storage represent an important factor that influences the performance of the supply chain. Inventory contains the raw materials, the work in process and all the finished products of a supply chain and the changes of the inventory policies can lead to a dramatic alteration of the supply chain’s efficiency and responsiveness. In the management of supply chain processes, inventory management is challenging because it directly impacts both cost and service. Uncertain demand and uncertain supply make it necessary to hold inventory at certain positions in the supply chain to provide adequate service to the customers. With this, increasing supply chain process inventories will increase customer service and revenue, but it comes at higher cost.

 

The supply chain is a system coordinated by organizations, humans, activities, information and resources involved in the movement of a product in a physical manner from the supplier to the client. The activities from the supply chain transform raw materials and components in a product that is delivered to the consumer or to the user.

 

Cost and service goes hand in hand in the business of supply and demand.  Service must be taken into account with a reasonable cost for the company. With the fluctuating and erratic demand of products nowadays, inventory must be held in the right position to be able to give the right service to the customers.

 

Inventory plays a major role in the performance of the supply chain. Though it may be costly, a firm must be able to identify what products have a high demand in the market. Slow moving products must have little or low inventory so as to cut costs.

 

The managers of the firms that build up a supply chain have to identify the main categories of inventory and the way that they can be dimensioned. In every company we can identify cycle inventory, safety inventory and seasonal inventory and we can calculate a series of indicators that can offer an image of the inventory. It focuses on products that are needed for the inventory. It is important to know the demand of the market because it helps the inventory to be updated. Cost and service is important because it helps the firm to manipulate the cause of supply and demand.

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