4.1 Basic concepts and rationale for inventory holding
Stockpiles of raw material, processed material, semi-finished material, finished material, spare parts, consumables, etc. that appear at various points in a logistics channel are termed inventory. Inventory holding is a basic of business, as it is of life. We see inventory holding all the time. Animals do it as a normal function of their lives. Humans do too. Weekly shopping for food and other household needs is an example. We maintain a stock of goods that we think we will consume in a certain period in the future. The rationale includes standard consumption, abnormal consumption through expected or unexpected visitors, and allow for considered unforeseen events. As uncertainty increases, higher stocks result and can be the strength of an organisation in being able to meet customer needs in such conditions. Benefits from holding inventory are that:
- supply and demand can be smoothed
- abnormal consumption can be accommodated
- irregular supplies can be accommodated
- savings can be made from large purchases
- savings are made when price increases are expected
- stockpiled products might not be produced any longer, but might still be required occasionally in the marketplace
- there is a reduction in transport costs through bulk buying
- there is security at times of emergency.
Inventory is, therefore, integral to the generic cycle of logistics from procurement to consumption:
- Place an order with a supplier.
- Take delivery when it arrives (after lead time, studied in previous chapters).
- Check, sort and store.
- Internal demand draws upon this stock.
- When stock falls to re-order point, another order is placed.
Inventory is a cushion between the distribution and consumption processes. It absorbs the lead time factor as well as any errors that may exist in the forecasting process. Buying in bulk often leads to economies of scale and cheaper quotes. Inventories also act as a balance between supply and demand.
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