Scm as a Method of Inventory Control
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Inventory is a critical part of any company. Have too much of inventory and it is sitting around, which can cost your company money. Too little of inventory and you might have to shut down production, which will most definitely cost your company money. One way of controlling inventory is using supply chain management. The focus of this paper is to explain what supply chain management is, what is inventory, how supply chain management can be used as a method of inventory control, how ratios can be used to help managers understand their business better, how ratios can be used for inventory control, and how having a good inventory system can help me in my workplace.
Supply Chain Management (SCM) is a type of logistics network. This network will keep track of products as it travels through the different aspects of your business. “The Supply Chain Management Program integrates topics form manufacturing operations, purchasing, transportation, and physical disruption into a unified program” (Zigiaria, 2000, p. 2). There are two basic concepts of the SCM. “First is that practically every product that reaches an end user represents the cumulative effort of multiple organizations. These organizations are referred to collectively as the supply chain” (Handfiled, 2011, para 1). Simply put SCM is a way of keeping track of your inventory from the moment you purchase supplies, until the customer receive the product. “The second idea is that while supply have existed for a long time, most organizations have only paid attention to what was happening within their “four walls” (Handfiled, 2011, para 2). Because of SCM, organizations are discovering that they are getting a competitive edge by using SCM. “The best companies around the world are discovering a powerful new source of competitive advantage. Its called supply-chain management and it encompasses all of those integrated activities that bring product to market and create satisfied customer” (Zigiaria, 2000, p. 2). With SCM, organizations are now apple to not just pay attention to what is within the “four walls”, but now able to keep track of their products from supplier, all the way through to the customer.
Inventory can be several different aspects of a product. “Inventory is composed of raw materials to be used in producing, working in process, and finished goods” (Ross, Westerfield, Jaffe, & Jordan, 2011, p. 22). Another words, any goods are services that a company has in stock can be considered inventory. There are three different stages or categories that can be considered inventory. The first is materials and components or raw materials. Raw materials is “material or substance used in the primary production or manufacturing of a good” (Investopedia, 2011, para 1). This usually consists of the essential items that are needed to create or make a finished product, such as gears for a bicycle, microchips for a computer, or screens and tubes for a television set.
The second type of inventory is called work in progress inventory (WIP). “WIP is material that have entered the production process but is not yet a finished product” (Investopedia, 2011, para 1). These are items that are partially completed, but are not an entire finished product. The work in progress inventories are on their way to becoming whole items but are not quite there yet.
Finally the final stage or category of inventory is the finished goods. Finished goods are the completed products that are ready for sale to the customer (Investorwords.com, n.d.). These are the final products that are ready to be purchased by customers and consumers.
A good inventory management program is an important part of any company. Inventory management, can bring down costs and increase the revenue of a firm. This in turn can raise the revenue and make the stockholders very happy. One way to control inventory is using supply chain management. With SCM, organizations are able to better keep track of with inventory from raw material to items that have been shipped to the customer. Often SCM can be used to track the flow between facilities, from the suppliers, while the products being made, to the distribution centers, and finally to the customer. The supply chain management (SCM) program is geared towards optimizing each component of what used to be called production and operations management (production, warehousing, inventory, transportation and distribution etc.) and the inter-links between these components synergistically (Russel & Taylor, 1998). Back in the 1960s inventory control became an issue for many companies. In the 70s and the 80s, various models for production and operations control and management were developed, such as Just-In-Time (JIT) Inventory management model, Vendor Managed Inventory (VMI) model, Zero Inventory (ZI) model, Total Quality Management (TQM) etc. (Beech, 1998). Many of these operations would focus on the various components of the supply chain, which lead to better inventory control. It is not uncommon that a vast majority of manufacturing and distribution companies suffer from excessive inventories that are necessary. Inventory control problems are usually the result of using poor processes, and practices. The likely result of this approach to inventory control is lots of material shortages, excessive inventories, high costs and poor customer service. Take for example, if a customer orders a product that requires a manufacturer to assemble 30 different parts. If only 29 of the 30 part numbers are available, you cannot complete the order. Production will be at a standstill while you have to order the part needed, wait on the ordered part to be shipped to you, and get the part placed in the correct part of production. All this has to happen before you can ship that particular item to the customer. By having a good inventory control program, you can cut down on the issues that can arise from not having good inventory control. Using supply chain management can be the vital tool you need to help you keep track of your products from start to finish.
Besides having a good inventory control program, you can look at different balance sheets, income statements, and other statements. These statements can help us understand how our business is doing. Along with balance sheets, we can also look at financial ratios. “Financial ratios “are ways of comparing and investigating the relationships between different pieces of financial information” (Ross, Westerfield, Jaffe, & Jordan, 2011, p. 48). In chapter 3 of our book “Corporate Finance Core Principles & Applications” written by Stephen Ross, Randolph Westerfield, Jeffrey Jaffe, and Bradford Jordan, we see several different ratios that can help managers understand how their