Inventory reduction and positioning

Trade-offs are a major feature of supply chain and logistics management, as highlighted earlier when outlining factors shaping global logistics.

Trade-offs occur because of the sub-optimisation found in supply chain and logistics operations (Rushton et al. 2017). Most of these trade-offs are measured as cost trade-offs because this can be measured quantitively. Most trade-offs occur within a logistics element, such as inventory, but they can occur between elements such as inventory and transport (this will be explored later).

They also occur within company functions, between company functions and between companies and external organisations they interact with within the supply chain.

Inventory reduction and positioning is one of the major trade-offs found in global logistics and has a big effect on the design of global distribution networks.

Inventory is only held because suppliers manufacture goods constantly for efficiency reasons. They need to keep their facilities busy and maximise their labour and capital equipment resources every day. By contrast, demand for goods can be very erratic and unpredictable for some goods. This requires buffers of inventory, stored after manufacturing and before distribution to consumers.

The most cost-effective supply chains are those where demand is steady and relatively easy to predict. These supply chains also hold minimal stock and inventory. Most supply chain and logistics managers focus on keeping inventory moving because the whole point is to sell goods to consumers, so they can collect cash from them to finance their logistics distribution operations.

Low inventory holdings also improve business performance and improve cash flow. Inventory is basically unsold goods which have been paid for, which accountants must show as short-term and unsecured assets. They need to be sold, which brings cash into the firm. Large stocks and stores of inventory usually reflect poor logistics management or very erratic levels of demand.

Other factors, such as physical characteristics, also influence the levels and locations of inventory. An interesting one is inferior products, which have low value, do not take up much space and can be manufactured cheaply.

Good examples of this are plastic and paper bags, bars of soap, matches or cans of baked beans. Some of these goods are given away with other products because they are so low-value. Often, these goods are manufactured in large quantities for the lowest unit price and then stored. As they physically take up less space, the cost of storage and the value of the goods is low.

Conversely, complex products with high-value physical characteristics need to have a moving inventory, but often these goods have inconsistent demand. A good example is cars. Consumers generally keep their cars for a long period. Selling to markets with a good cost of living means a steady turnover of cars which can sustain a car manufacturer. This means that the geographical location of new car inventory influences inventory costs.

A global brand with several strategically positioned manufacturing plants and inventory locations will be able to balance and trade-off the cost of inventory with the demand of the region’s market. The global distribution designer needs to trade-off the cost of service to customers with the cost of holding inventory.


References

Rushton, A., Croucher, P. and Baker, P. (2017) The Handbook of Logistics and Distribution Management. 6th edn. London: Kogan Page

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This article is from the free online course:

Principles of Global Logistics Management

Coventry University