7.5 The Role of Inventory in the Supply Chain

Inventory management is a critical activity within the supply chain, ensuring that materials and goods are available in the right quantities, at the right locations, and at the right time. Without proper inventory management, producing high-quality goods and meeting customer commitments is impossible.

Reasons for Holding Inventories

There are several reasons why organizations maintain inventory stocks:

1. Seasonal Demand: Manufacturers often build up inventories throughout the year to meet seasonal demand fluctuations. For example, a chocolate manufacturer may begin stockpiling inventory in late spring to fulfill the high demand during the Christmas season.
2. Supply Chain Risks: Companies may carry larger inventories to mitigate risks associated with their supply base, such as shortages, work stoppages, poor quality, or late deliveries from suppliers.
3. Cost Optimization: Organizations may be incentivized to purchase larger order quantities to take advantage of discounts or minimize transportation costs. Additionally, concerns about future price increases can prompt companies to build up their inventories.
4. Customer Service: Retailers carry inventory to ensure they can meet customer demand without running out of stock. Distributors and retailers strive to balance the cost of maintaining large inventories with providing excellent customer service and minimizing disappointed customers.
5. Supply Chain Synchronization: Aligning the incoming flow of materials and goods with production schedules and customer shipments can be challenging. As a result, inventory may be stored at various locations along the supply chain, leading to additional costs and inefficiencies.

Effective inventory management is crucial for supply chain optimization. It involves balancing between maintaining sufficient stock levels to meet customer demand and minimizing the costs associated with carrying excess inventory. Advanced techniques, such as demand forecasting, inventory optimization, and supply chain visibility, can help organizations achieve this delicate balance and enhance overall supply chain performance.

“4 Supply Chain” from Introduction to Operations Management Copyright © by Hamid Faramarzi and Mary Drane is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 4.0 International License, except where otherwise noted.—Modifications: used section The Role of Inventory in the Supply Chain, some paragraphs rewritten; added additional explanations.