Thursday, August 5, 2010

Improving Logistics, Inventory Control and Supply Chain Management

For food and agribusiness companies it is now more important than ever to have the proper logistics, inventory control and supply chain management in place. Why? Because it ultimately leads to cost savings, and improved customer service – providing a much needed competitive advantage.

In order to create the appropriate strategy, your company should understand the nature of product demand, inventory management and supply chain capabilities. We recently came across a great article titled, Logistics, Inventory Control, and Supply Chain Management, written by Frank Dooley that covers these items in depth. However, some of the key points in the article were as follows:

Inventory Management
There are three general approaches used to manage inventory.

  1. An inventory control approach which is typically used by retailers.

  2. Production Scheduling and Flow Management used by manufacturers.

  3. And a non-active approach which involves keeping large inventory quantities on hand at all times, commonly seen in agribusiness companies.
Types of Demand
Inventory management is influenced by the nature of demand, including whether demand is derived or independent. Which is more applicable to your business?
  • Derived demand arises from the production of another product.

  • Independent demand arises from the demand for an end-product.
Customer Service and Inventory
The availability of inventory provides customer service. The Item Fill Rate (IFR) measures how often a particular product (often called a stock keeping unit or SKU) is available. A common metric of customer service, IFR is expressed as the percentage of time that a customer can obtain the item they seek.

To avoid shortfalls or stockouts, some companies may carry extra inventory known as safety stock. As more customer service is provided, you can expect sales to increase. However in some cases as you attempt to improve your customer service levels, some logistical costs may increase.

Conclusion
Inventory levels are affected by customer service expectations, demand uncertainty, and the flexibility of the supply chain. For products with relatively certain demand and a long shelf-life, it can be much easier to maintain the desired customer service standards and inventory levels. However for products that have unpredictable demand, a short life cycle, or product proliferation, a more responsive supply chain and larger buffer inventories may be necessary in order to maintain the desired level of customer service.

Consumers are demanding more customer service from companies throughout the supply chain. Those with a higher level are more likely to gain the much needed competitive advantage over those that do not have the supply chain capabilities in place or the ability to manage them. If you can study and gain a good overall understanding of your demand, recognize stock-out costs and carry the right levels of inventory – you’ll be more likely to manage it effectively. As industrialization affects agribusiness and agriculture in general, the importance of customer service and competitiveness becomes more and more important.

To read the entire article, please click here.

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