Functions of Inventory Management | Safety Stock

Inventory Management:

Inventory management supports businesses identify how much stock to order and when. It manages the movement and use of items from the time of order to the time they are placed in stock.

Hello, I am Rashid and in this blog, I will tell you about the functions of inventory. Also, try to get answers to the questions below.

• Why is inventory important in the supply chain process?

• Why do companies keep innovations in the supply chain process?

We will try to get answers to these questions from the objectives and functions mentioned below.

Valid reasons for holding inventory:

Functions of Supply Chain Inventory

The primary function of inventory is to maintain operations at all times with a supply of inventory. Inventory is viewed as both an asset and a liability. Therefore, businesses want to find the right balance between too much and too little to achieve this function efficiently, but care should also be taken to avoid stock out due to low inventory. Thus, keeping the inventory in balance will improve the company's cash flow, improve competitive advantage, and increase its profits.

S#.	Reason
1.	Safety Stock (S.S) or Fluctuation Inventory.
2.	Anticipation Inventory.
3.	Lot-size Inventory of Cycle stock.
4.	Buffer Inventory.
5.	Hedge Inventory.
6.	Decoupling.

Safety Stock:

Also referred to as fluctuation inventory. The stock planned to be kept in inventory to cover fluctuations in supply and demand is called safety stock. The amount of inventory is kept in the warehouse to avoid stock-out. Now the question arises of how much safety stock should be kept.

Safety Stock

Maintaining adequate safety stock levels keeps the business running as planned. For example, there is a supplier who could not supply his goods on time due to some sudden reason his factory operations closed, so until we find a replacement supplier, at that time, we can make our operation smooth by safety stocks. Safety stocks are essential to meet customer service targets and reduce stock-out costs. Safety stock is required to meet unplanned demand.

How to calculate safety stock:

Safety stock = [maximum daily use x maximum lead time] – [average daily use x average lead time]

Anticipation Inventory:

In addition to the basic stock, the additional inventory that is kept to cover estimated trends in the future that will lead to an increase in sales or a sales promotion that is planned by a marketing team or company may have a vacation planned soon or seasonal variations. In addition, the company needs this inventory to meet its forecasted demand. Fluctuations in demand due to seasonal changes, promotions, or marketing campaigns are also covered by the anticipation inventory.

Anticipation Inventory Example:

Price increase, a seasonal increase in demand for example at charismas.

Lot-size Inventory:

Also referred to as cycle stock. Manufacturing or buying inventory in excess of the quantity needed to receive a quantity discount or full truck discounts. Inventory that is gradually depleted with customer orders and is replenished cyclically.

The longer the cycle, the bigger the lot size (Q). The bigger lot size can help in customer satisfaction, less ordering, transportation, and purchasing cost.

Average Cycle Inventory Calculation

Hedge Inventory:

The purpose of hedging is to manage risk. There is a risk as we know that the price of inventory is going to increase in the future, or that the supply may be threatened in the future. In this method, the supplier gives us a contractual guarantee that he will supply the inventory to us at a set price in any case.

Types of Hedging:

There are two types of hedging.

1.	Hedge Sale
2.	Hedge Purchase

Buffer Inventory:

The inventory on hand is maintained to avoid any kind of inventory shortage, transportation delays, or surge in demand during the production process is called buffer inventory.

Government owned companies maintains a buffer stock of rice and wheat to ensure food security in countries is an example of buffer stock or inventory.

Buffer Inventory

Advantages of Buffer Inventory:

1. Protects against stock-outs.
2. Provides stability.
3. Reduces Costs.

Decoupling:

When product manufacturers exclude extra raw materials or work-in-process materials from the entire or from some stages in a product line in case of stock shortage or low stock situation or breakdown at any one stage, do not slow or stop the whole operations.

Conclusion:

In conclusion, the roles of supply chain inventory show a key role in the total effectiveness and achievement of an industry. The involved interaction between inventory management, procurement, production, and distribution is vital for meeting buyer demands, improving costs, and upholding a competitive edge in the marketplace. By deliberately matching stock levels, lessening holding costs, and leveraging technology for real-time visibility, businesses can improve their responsiveness to market variations and buyer preferences.

Furthermore, a well-managed supply chain inventory system backs to better-quality forecasting accuracy, risk mitigation, and streamlined operations.

Frequently Asked Questions about Functions of Supply Chain Inventories (FAQs):

Q.1. How effective inventory management contributes to overall supply chain performance?

Inventory management plays a crucial role in safeguarding smooth business processes and buyer satisfaction. By upholding ideal inventory levels, corporations can avoid stock outs that lead to lost sales or decreased customer’s satisfaction.

Q.2. What are the main purposes of supply chain inventory in cost optimization for an organization?

• Enhance Customer Experience.
• Improved Relationship.
• Increased Profitability.
• Make Supply chain more resilient.
• Cost Reduction.
• Better Quality.

Q.3. What is the difference between anticipation inventory and safety stock?

Anticipation Inventory vs Safety Stock

The main difference is that safety stock is held for unforeseen or unanticipated happenings, and anticipation inventory (as the name entails) is held since you presume a run on your product at definite periods.

Q.4. What are the possible risks accompanying with poor inventory management in the supply chain?

• Loss of Inventory.
• Stock Shelf Life.
• Damaged Stock.
• Missing Valuable Sales.
• Delayed Delivery of Orders.
• Unsatisfied Customers.
• Waste.