Most probably everyone already knows the famous S&OP acronym … Or its latest variant labeled IBP...
Inventory management as building blocks of supply chain
For many among us in early years (and much later as well most probably …) LEGO® bricks embody a gateway to imagination and creativity. Buildings and structures, ships and vessels, landscapes and cities, individuals and societies, worlds and even universes … those blocks are finite yet make all seem possible, almost endlessly varied in color, shape and size.
Hence the test was maybe less letting free reign to inventing than being faced with straightforward yet compelling challenges … Are the pieces available ? Are they the right ones ? Should they be allocated differently ? Should some tradeoff be exercised ? Is time sufficient to put them into use ? Do some remain idle ? Could they be obsolete ?
Blocks used -say- within a tower building or a rocket ship enable to complete the project as designed. Though the bigger it is, the more burden is applied on available stock and conceivably depleting it. Consecutively it would make it more difficult other and possibly better allocation.
Quite some problem solving skills put to the test, and akin to self teaching inventory management to simultaneously adjust service to customer, cost to operate and cash holding.
Service to customer
- Stock availability – Ensuring products are readily available for customers. Maintaining appropriate stock levels minimizes the risk of stockouts.
- Customer satisfaction –Having the right inventory on hand contributes to high customer satisfaction and triggers return for future purchases.
- Fulfillment pace – Enabling quicker order fulfillment through stock availability.
Cost to operate
- Carrying costs – Expenses associated with warehousing, insurance, depreciation and obsolescence.
- Ordering and handling costs – Ordering patterns accordingly lead to operational costs the sweet spot of order size and order frequency can reduce them.
- Storage space – Inventory holdings require space which add to cost of operations, whereas efficient space utilization and inventory turnover can help minimize them.
- Working capital –Inventory can tie up significant amount of working capital, so the longer it sits on the shelves, the more cash is tied up.
- Opportunity cost – Constraining the use of capital from allocating it to other purposes represents an opportunity cost.
- Cash flow – Improving cash flow by reducing excessive safety stock or carrying obsolete items.
Inventory management may not have all the glamour of other supply chain areas. It is an overlooked and decisive activity where our whimsical LEGO® tower building or rocket ship has the required size, content, shape and color. It carries out risk assessment, identifies exposure and initiate optimization, to ensure customer service, while lowering cost and cash holding.