Inventory management is understood to be a cross-sectional function across the entire value chain, to which different functions place very different demands. Within inventory management, various competing target variables are optimized together. The aim is to determine the optimal conditions for a low inventory level with the associated low inventory costs as well as low capital commitment, while at the same time maintaining high delivery reliability and customer satisfaction.
Inventory management as a process
Generally speaking, inventory management is divided into three closely related sub-areas. One considers demand planning, procurement planning and (warehouse) inventory planning.
First in the demand planning the in each case future demand is determined. This is done either according to an existing production program or by updating past data of the demand as a forecast for the future. Thereby both the date for the individual requirement are planned and the requirement quantities starting from it are calculated.
Order date and order quantities as optimized order lot sizes. In the lot-sizing procedure, the requirement quantity of a lot size is optimized together with the resulting lot-sizing costs and inventory costs.
Inventory planning determines the various and necessary and optimal inventories.
Inventory refers to the total stock of items in a given warehouse.
The maximum stock limits the stock of individual items. Limits here are determined by storage bin occupancy and associated costs.
The safety stock is kept as an additional buffer to the actual planned stock in order to be able to absorb unforeseen fluctuations.
When the reorder level is reached, reordering is triggered to replenish the stock so that the withdrawal requirement can always be safely guaranteed from the warehouse.
Inventory management is being given greater importance as a cross-functional logistics function in companies. Inventories tie up parts of their liquidity with the goods stored there. The so-called inventory interest rate is used to indicate what percentage should be added to the capital tied up in the average inventory during the average storage period and thus costs. Inventories are allocated to current asset inventories in the balance sheet, and optimized inventories that lead to a reduction in the “Inventories” item reduce the capital employed and thus also the capital tied up. All other things being equal, this leads to an increased return on equity.
In the target system of inventory optimization, the delivery service is added as a third variable, in addition to the reduction in capital commitment costs and capital commitment. Delivery service is understood as the improvement of delivery capability and readiness, quantities as well as adherence to delivery dates.
Challenges of inventory management
When implementing the goal of minimizing inventory while maintaining a high level of delivery service, companies typically face several challenges.
Lack of inventory traceability
Insufficiently interlocking processes in the logistics chain
Insufficient information about requirements
Creating transparency about inventories, coordinating processes, and documenting demand are therefore important ongoing and accompanying processes in inventory management.