What is inventory?

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The term inventory, or in other words stock,is understood as merchandise or goods stored for a use in [Cox and Blackstone 2005]:

  • production – raw materials, in-process products, work in progress,
  • activities supporting MRO (Maintenance Repair and Operating supplies) – spare parts for machines, consumables and maintenance materials,
  • satisfying customer needs (products and final goods).

The purpose of stockpiling is to ensure the continued availability of raw materials, in-process products, products and final goods in variable demand conditions. Inventory management is therefore understood as actions aimed at effective collection of goods and merchandise and processing of related information in order to minimize costs and maximize customer satisfaction [Ciesielski 2006].

Decisions related to inventory management are usually of a tradeoff type. Maximizing the level of customer service is most often connected with increasing the level of inventories and, consequently, increasing costs. Maximizing vehicle filling is associated with lower transport costs, but results in higher inventory levels. Similarly, the purchase of a large quantity of goods enables a lower price to be obtained, but results in an increase in the level of inventories. Therefore, inventory management seeks to make decisions which will result in holding stock levels constituting a compromise between solutions that are optimal for each of the above criteria.

The factors that influence the necessity to warehouse goods are [Sarjusz-Wolski and Skowronek 2003]:

  • the necessity of access to a given item at a given moment in time and in a given quantity,
  • random variation in demand,
  • the need to level different intensity of flow streams (related to logistical minima, minimum economically justifiable production and transport batches, etc.),
  •  the inability to transport a large amount of goods from factories to shops in a short period of time during the growth in demand,
  • lack of manufacturing capacity needed to produce large quantities of goods in the short term at
    a time when demand is increasing.

Few companies are aware that most organizational units have an impact on inventory levels in the warehouse.

This relation is shown schematically in Figure 1.

The Production Department has an extremely important influence on the level of inventory in the warehouse. The most common goal of the management of this department is to maximize the efficiency of production measured by the OEE (Overall Equipment Effectiveness) index. This indicator is calculated according to the formula [Prussak 2003]:

OEE= Availability × Use × Quality,

where:

  • Availability is the ratio of the actual time the machine was ready for operation to the planned production time,
  • Use is the ratio of the actual working time of the machine to the time when the machine is ready for operation,
  • Quality is the ratio of the number of manufactured high-quality products to the total number of manufactured products.

The formula therefore shows that maximizing production efficiency is linked to maximizing availability, use and quality. Production management will therefore strive for the lowest possible number of machine changeovers and the production of the longest possible production batches. As a consequence, products that are manufactured those which have not been ordered by customers and therefore constitute a surplus stock. Furthermore, another consequence of maximizing production efficiency is that machines are changed in
a sequence which will make the changeover times between the production of subsequent products as short as possible. The result, however, is the production of products that are not needed at a given moment and are translated into new overstock.

The aim of the Purchasing Department in a manufacturing enterprise is to ensure the availability of necessary raw materials, semi-finished products, packaging and other components at the lowest possible costs. In order to minimize the costs of acquisition of these resources, the Purchasing Department employees try to obtain price discounts from suppliers related to the execution of purchases in large batches. Since these purchases are usually not linked to a real production need but are due to the size of the batch at which the discount is obtained, they are never used for production and are scrapped.

Very often, in order to reduce the price of raw materials necessary for production, intermediate products, packaging and other components, their purchases are made in the Far East. Apart from the reduction of the purchase price, the consequence of such an action is a significant increase in the time of order processing of the goods. In order to ensure their availability for production, it is therefore necessary to increase the level of their stocks.

The direct responsibility for the level of inventories usually lies with the Logistics Department, which is in charge of inventory management in the company.
The employees of this department are therefore responsible for deciding „what product, in what quantity and when to order”. Their knowledge and skills therefore have a direct impact on the level of stocks of individual products. The work of the logistics team is usually assessed using two criteria. The first one is the maximization of the customer service level. The second, opposing criterion, however, is the minimization of the level of inventory in the warehouse.

Taking into account the relations between the individual departments of the company, the efforts of logistics specialists aimed at minimizing the level of stocks are most often in opposition to the objectives set for the Sales Department and the Marketing Department. The task of these teams is to maximize the sales of products, which is the easiest to achieve when the product desired by the customer is available in the warehouse in the required quantity. This requirement is usually met for mass-marketing products that are relatively easy to forecast.

However, it is more difficult to maintain the desired level of inventories for products sold incidentally in unpredictable quantities. Opposing goals of the Logistics Department and Sales and Marketing Departments usually lead to constant conflicts within the company.  These conflicts are often fueled by a lack of awareness on the part of merchants whose actions have a direct impact on stock levels. The order lead times agreed with customers, minimum order quantity and the agreed level of customer service are the key parameters of inventory management models.[1] On the one hand, the setting of these parameters in favor of the customer provides a competitive advantage which enables the company to win the contract.

On the other hand, determining these parameters without consulting the Logistics Department can make it unprofitable to handle customer orders. The lack of communication is also a frequent cause of internal conflicts between the departments mentioned above. For example, there are situations in which the Sales Department does not inform the Logistics Department about planned promotions or marketing actions. Therefore, people responsible for ensuring the availability of products in the warehouse are not able to build up adequate stocks on time, which leads to the failure of campaigns and the need for the company to incur contractual penalties.

The Research and Development Department also has an impact on the level of inventories in the warehouse. The aim of the employees of this department is to build a competitive advantage of the company by creating and attributing products with the features and properties desired by customers. The result of these efforts is the constant creation of new varieties and product options. From the logistics point of view, each of these varieties is a different product, for which additional stock must be held.

When analyzing the above relationships between divisions and their impact on inventory levels, particular attention should be paid to the integration of enterprise processes and their treatment as an indivisible whole. Optimization of sub-processes within individual departments does not ensure optimal functioning of the company. Therefore, it is necessary to integrate these subsystems and search for the most advantageous solution from the point of view of the entire company. This issue becomes particularly important in companies with a complex network structure consisting of several factories supplying products to customers via a central warehouse or several warehouses [Chen 1998; Axsater 1997; Masters 1993; Chaharsooghi and Heydari 2010; Chen and Zheng 1994].

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