APICS defines inventory as “those stocks or items used to support production (raw materials and work-in-process items), supporting activities (maintenance, repair, and operating supplies) and customer service (finished goods and spare parts) .”1 In this chapter, we discuss the critical role of inventory—why it is necessary, what purposes it serves, and how it is controlled.
As Amazon’s experience suggests, inventory management is still an important function, even in the Internet age. In fact, many managers seem to have a love–hate relationship with inventory. Michael Dell talks about inventory velocity—the speed at which components move through Dell Computer’s operations—as a key measure of his company’s performance.2 In his mind, the less inventory the company has sitting in the warehouse, the better. Victor Fung of the Hong Kong-based trading firm Li & Fung, goes so far as to say, “Inventory is the root of all evil.”3
Yet look what happened to the price of gasoline in the United States during the spring of 2007. It skyrocketed, primarily because refineries were shut down for maintenance and suppliers were caught with inadequate reserves. And if you have ever visited a store only to find that your favorite product is sold out, you might think the lack of inventory is the root of all evil. The fact is, inventory is both a valuable resource and a potential source of waste.
1Definition of Inventory in J. H. Blackstone, ed., APICS Dictionary, 14th ed. (Chicago, IL: APICS, 2013). Reprinted by
2J. Magretta, “The Power of Virtual Integration: An Interview with Dell Computer’s Michael Dell,” Harvard Business
Review 76, no. 2 (March–April 1998): 72–84.
3J. Magretta, “Fast, Global, and Entrepreneurial: Supply Chain Management, Hong Kong Style,” Harvard Business Review
76, no. 5 (September–October 1998): 102–109.
CHAPTER 11 • Managing Inventory throughout the Supply Chain 329
11.1 The Role of Inventory
Consider WolfByte Computers, a fictional manufacturer of laptops, tablets and e-readers. Fig- HYPERLINK \l “page346” ure 11.2 shows the supply chain for WolfByte’s laptop computers. WolfByte assembles the laptops from components purchased from companies throughout the world, three of which are shown in the figure. Supplier 1 provides the displays, Supplier 2 manufactures the hard drives, and Sup-plier 3 produces the keyboards.
Looking downstream, WolfByte sells its products through independent retail stores and through its own Web site. At retail stores, customers can buy a laptop off the shelf, or they can order one to be customized and shipped directly to them. On average, WolfByte takes about two days to ship a computer from its assembly plant to a retail store or a customer. Both WolfByte and the retail stores keep spare parts on hand to handle customers’ warranty claims and other service requirements.
With this background, let’s discuss the basic types of inventory and see how they fit into WolfByte’s supply chain.
Components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by the upstream partner.
Extra inventory that a company holds to protect itself against uncertainties in either demand or replenishment time.
Two of the most common types of inventory are cycle stock and safety stock. Cycle stock refers to components or products that are received in bulk by a downstream partner, gradually used up, and then replenished again in bulk by the upstream partner. For example, suppose Supplier 3 ships 20,000 keyboards at a time to WolfByte. Of course, WolfByte can’t use all those devices at once. More likely, workers pull them out of inventory as needed. Eventually, the inventory runs down, and WolfByte places another order for keyboards. When the new order arrives, the inven-tory level rises and the cycle is repeated. Figure 11.3 shows the classic sawtooth pattern associ-ated with cycle stock inventories.
Cycle stock exists at other points in WolfByte’s supply chain. Almost certainly, Suppliers 1 through 3 have cycle stocks of raw materials that they use to make components. And retailers need to keep cycle stocks of both completed computers and spare parts in order to serve their customers.
Cycle stock is often thought of as active inventory because companies are constantly using it up, and their suppliers constantly replenishing it. Safety stock, on the other hand, is extra in-ventory that companies hold to protect themselves against uncertainties in either demand levels or replenishment time. Companies do not plan on using their safety stock any more than you plan on using the spare tire in the trunk of your car; it is there just in case.
Let’s return to the keyboard example in Figure 11.3. WolfByte has timed its orders so that a new batch of keyboards comes in just as the old batch is used up. But what if Supplier 3 is late in delivering the devices? What if demand is higher than expected? If either or both these condi-tions occur, WolfByte could run out of keyboards before the next order arrives.
Imagine the resulting chaos: Assembly lines would have to shut down, customers’ orders couldn’t be filled, and WolfByte would have to notify customers, retailers, and shippers about the delays.