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The Role of Inventory in Supply Chain Management

Managing customer and vendor relationships is a critical aspect of managing supply chains. In many cases, the collaborative relationship concept has been considered the essence of supply chain management. However, a closer examination of supply chain relationships, particularly those involving product flows, reveals that the heart of these relationships is inventory movement and storage. Much of the activity involved in managing relationships is based on the purchase, transfer, or management of inventory. As such, inventory plays a critical role in supply chains because it is a salient focus of supply chains.

Perhaps the most fundamental role that inventory plays in supply chains is that of facilitating the balancing of demand and supply. To effectively manage the forward and reverse flows in the supply chain, firms have to deal with upstream supplier exchanges and downstream customer demands. This puts an organization in the position of trying to strike a balance between fulfilling the demands of customers, which is often difficult to forecast with precision or accuracy, and maintaining adequate supply of materials and goods. This balance is often achieved through inventory.

For example, a growing trend is the implementation of sales and operations planning (S&OP) processes.4 The fundamental purpose of S&OP is to bring the demand management functions of the firm (for example, sales forecasting, marketing) together with the operations functions of the firm (for example, manufacturing, supply chain, logistics, procurement) and level strategic plans. This often involves extensive discussions about the firm’s on-hand inventory, in-transit inventory, and work-in-process. Such discussions allow the sales and marketing group to adequately plan for the forthcoming time horizon by gaining a realistic picture of the inventory levels available for sale. Additionally, the operations groups are able to get updated and direct sales forecasting information, which can assist in planning for future inventory needs. Such information may very well result in shifts in manufacturing plans or alterations to procurement needs because of the strategic decision to focus on specific units of inventory instead of others in the near future.

Another example of balancing through inventory is the use of point-of-sale5 (POS) data for perpetual inventory management in the retail industry. For many retailers, every “beep” of a cash register upon scanning of an item’s bar code during checkout triggers a series of messages that another unit of inventory has been sold. This information is not only tracked by the retailer but is also shared with upstream vendors. As items are depleted from inventory, in some cases, both the retailer and vendor work collaboratively to determine when reordering is necessary to replenish the depleted inventory, especially at the distribution center level. This is a balancing of supply and demand because demand information is tracked to determine when to best place replenishment orders based on the time required to get the inventory to the store location. In essence, inventory decisions are used to effectively time when supply inflows are needed to handle demand outflows.

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