In the supply chain management process executives need to make effective decisions to create most efficient and responsive process. Some of the important components of inventory decisions are given as:
The average amount of raw material or inventory kept in for the purpose of responding the demand between receipts of suppliers’ shipments is generally known as cycle inventory. The size of the inventory in the cycle inventory is a result of purchase of material in big lots, production and transportation.
Firms try to purchase or produce in big lots to develop economies of scale in the process of purchasing, production and transportation. Increase in lots also result in the increase of carrying costs. Taking the example of an online retailer, average sales of any retailer is nearly ten (10) truck loads per month. The decisions retailer makes in the cycle inventory are how frequently to put these orders and how greatly to order for replenishment. The e-retailer has two options whether to order one truck load every 3 days or order 10 truck loads just once in a month. The challenge supply chain executive face is the cost of ordering inventory frequently against cost of holding big lots of inventory.
Inventory held when demand go beyond expectation is known as safety inventory. Organization held safety inventory to fulfill the demand in uncertain situations. In uncertain demand when inventory could exceed expectation, firms usually seize safety inventory to encounter the unpredictably greater demand. In the safety inventory, supply chain manager faces a challenge of how much inventory to hold as safety.
To fulfill the expected variability in the demand, seasonal inventory is carried. Seasonal inventory should be carried for the time of greater demand and is build up in the time of low demand when firms could not produce all that is demanded. Supply chain managers face challenges in determining whether to store up seasonal inventory, if yes then how much to carried. If a firm quickly changes the rate of its production method at lower cost, then the company may build seasonal inventory, because its production method can easily manage to the time of greater demand without incurring huge costs. Nevertheless, if altering the rate of manufacturing is costly, then it will be better for a firm to build up a smooth manufacturing rate and also build up inventory during time of low demand. The managers face challenges in deciding how much inventory should the firm carries. There always remains a challenge of cost of having more elastic manufacturing rate against the cost of carrying the extra seasonal inventory.
Levels of Product Availability
Levels of goods accessibility is the part of demand that is fulfilled in the time product remains in the inventory. A greater level of goods availability gives a greater level of responsiveness but it results in extra cost, because higher inventory is stocked but is used infrequently. On the other side, lower product availability decreases inventory holding cost however it increases the number of consumers who are not responded on time. The basic challenge faced in this type of inventory decision is the loss from not responding consumers on time and cost of inventory to product availability.