Do you know how much your inventory is costing you?
In my last blog, I referred to how much your inventory is costing you and that both direct costs and overhead costs will have an influence on your stocking quantity.
This week, when returning from the shops I unpacked my groceries and repacked them into my fridge and pantry. Since all my purchases have an expiry date, I made sure that I placed the new ingredients with the latest expiry date way at the back and those items which expire sooner right in front. If you think this is a tad OCD, you haven’t met my parents! My dad diligently wrote the date with a marking pen on all the groceries he bought to ensure that he followed a FIFO (First In First Out) consumption pattern. Perhaps he is the reason why I am passionate about food and supply chain!
Your inventory levels also rely on your specific industry or the reason why you have inventory of that particular product in the first place. At the moment I am experimenting with LCHF (Low Carb High Fat) cooking and this translates into a far higher consumption of eggs than usual. The rise in demand for eggs will cause my inventory to rise not only to cater for the increase in demand but also to buffer against demand variability.
Another consideration effecting inventory costs is uncertainty. I don’t know weeks in advance what I would like to eat on a specific day, I usually return home from work and then decide what should be prepared for dinner. This higher flexibility leads to higher uncertainty which leads to higher costs:
Inventory only exists because there is a timing difference between the rate of supply and the rate of demand. However, there are other reasons for an imbalance between the rates of supply and demand at different points in any operation lead and these result in different types of inventory:
Buffer inventory
Also referred to as safety inventory. The purpose of this inventory is to compensate for unexpected fluctuations in supply and demand.
Cycle inventory
This occurs because one or more stages in the process cannot supply all the items it produces simultaneously. This type of inventory only results from the need to produce products in batches and the amount it depends on volume decisions.
De-coupling inventory
Inventory that is used to allow work centres or processes to operate relatively independently.
Pipeline inventory
Pipeline inventory exists because material cannot be transported instantaneously between the point of supply and the point of demand.
Although inventory plays an important role in any operation (even in my kitchen), there are some disadvantages associated with holding stock. For example, it ties up money and influences my available budget, it incurs overhead costs (such as storage costs), it can be damaged or deteriorate, it takes up space that could have been used more productively and it incurs administration and handling costs (in the case of having to repack to ensure that the most perishable ingredients are in the front).
