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Logistics and Supply Chain Management: Inventory Management in Marketing Channels
Logistics and Supply Chain Management: Inventory Management in Marketing Channels
Reducing Inventory JIT Inventory Demand Uncertainty Real Inventory Reduction Pseudo Inventory Reduction
Inventory Management
Reasons for Holding Inventory.
First, demand surges outstrip production capacity. To smooth production, factories anticipate the surge, producing to forecast. The demand surge may be natural (e.g., ice cream demand rises in summer), or it may be due to marketers' actions. Second, economies of scale are to be had in production or in transportation. Inventory is a result of batch-processing orders to make a long production run, or stock-piling goods to fill containers, trucks, ships, and planes.
Third, distance between the point of production and the point of consumption means that transportation takes time. Customers keep inventories (pipeline stock) to hold them over until a shipment arrives and can be unpacked and put out to use. Fourth, both supply and demand are uncertain. Buyers are uncertain how long it will take for them to be resupplied (lead time) - if they can get the stock at all. Thus, they acquire safety stock (the excess of inventory over the best estimate of what is needed during an order cycle) as a hedge against uncertainty. That uncertainty is often in the form of ignorance as to what will sell (demand uncertainty). 3
Reducing Inventory
How can inventory be reduced? Some obvious methods are to avoid items that turn slowly ("sit in inventory"), lengthen the life of the goods (e.g., fill foods with preservatives), find a vendor who resupplies faster, locate a cheaper warehouse (perhaps a more modern one), and so forth. Some less obvious methods are to develop better ways to forecast demand, or to alter factory processes to attain scale economies at lower levels of production. Advances in manufacturing practice have done a great deal to achieve this latter goal.
A powerful way to cut inventory is to simplify, that is, to cut variety. Of course, this can be a powerful way to cut sales as well! The key is to find those offerings no one will really miss. These can be items - or merely things to track One method of reducing variety is to design value offers to be modular, and then design manufacturing processes to fit the principle of postponing as late as possible the point of differentiating a product for a customer or customer base.
In the 1980s, many organisations discovered that certain Japanese organisations, notably Toyota, operated their factories with a very different philosophy. These push systems (such as MRP, material requirements planning) are based on anticipation that a workstation would need a component eventually. Toyota reversed the process. Rather than pushing components onto the factory floor in anticipation of demand farther down the assembly line, Toyota practiced a pull system.
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JIT
JIT is a philosophy supported by a variety of techniques (such as kanban and quality circles) and management motivational methods. It gave rise to new interest in pull methods, whereby actual (not anticipated) demand triggers supply in a synchronized manner. This interest has revolutionized manufacturing. What does this have to do with marketing channels? It matters because the idea of pull systems (make to order) has achieved great credibility. The objection that only push systems (make to forecast) are "practical" has been discredited. This has been the inspiration of prominent Supply Chain Management initiatives, such as Efficient Consumer Response (ECR) and quick response (QR). These will be covered in a later section.