Question

1.

a. Discuss the critical role of inventory for a company and its supply chain.

b. Identify the key metrics organizations use to assess how well their inventories are being managed.

c. Use the ABC classification method to categorize the various items at a local supermarket store. For example, in which category would fresh fruit and vegetables be listed? Why?

d. Briefly explain the bullwhip effect. What steps can organizations take to minimize the bullwhip effect?

Answer 1

a. Inventory is the storing of finished goods or raw materials that an organization keeps in order to meet the demand of the final product or the production process. From the end customer point of view, inventory plays key role in companies as it prevents opportunity loss through stock out or backlog of final product. In case of production process, inventory plays a major role in preventing disruption in production process as it keeps the ingredients/raw materials ready in the storage. This way inventory makes sure that the entire supply chain process is not disrupted. However, larger inventory on the other hand, results in inventory holding cost so the company needs to balance inventory at such a level that the cost of inventory does not overtake the cost of stock out/opportunity loss.

b. The key metrics used to identify performance of inventory management are:

• Inventory turnover
• Order fill rate
• Cost of carrying inventory
• Days to sell
• Cycle time of the inventory

c. ABC classification is a method of categorizing inventory. In this process the category A represents products that are not used in large volume but are critical and generate the best possible profit margins. Such products in a supermarket may be household items such as small electronics, utensils, kitchenware, baby toys, dry food items, etc. They provide high profit margins and small volume of sale. However their overall contribution is nearly 70-80% of the total profit. The next category B represents the medium range items between A and C. These contribute nearly 15-20% of the overall profit. They are sold more in volume. For example, items such as grains, meat, etc. can be put in this category. The final category is category C and these are usually fast moving items. However, they provide very small margin per item and their overall contribution ranges from 5-10% of the overall profit. These could be vegetables, fruits, etc.

d. Bullwhip effect is a phenomenon where a change in customer demand sends a ripple effect in reverse across the entire supply chain process and affects the inventory. For example, when companies predict customer demand, they are seldom accurate. As a result companies tend to hold safety stock. However, if the customer demand suddenly increase that means the retailers would need to increase safety stock. This would cause the distributors to increase more safety stock by a higher degree and the warehouses too. This results in the manufacture increasing their safety stock by several fold. This ripple effect of customer impact is felt through the entire supply chain and is called the bullwhip effect.

Companies often try various methods to reduce bullwhip effect. Not all of them can be suitable for all industries and situations. They vary depending on several factors. In most cases the techniques used are

• Just in time inventory management
• Vendor managed inventory
• Strategic partnership
• Demand driven MRP