Inventory Optimization and Inventory Management

Inventory Optimization and Inventory Management

Abstract

An effective Inventory management method is key to the success of any business. Such a method will help to achieve customers’ satisfaction while at the same time ensuring that the company does not incur unnecessary costs of storage. This paper aims to determine the best method to reduce demand and lifecycle level uncertainties to ensure that the organization does not minimize customer satisfaction by hampering the customer service level. Evaluation of the existing literature shows that different methods of inventory management exist, some of which are specific to certain businesses. Variables such as the lead times, information about uncertainty in demand and supply and the lifecycle service levels for different organizations will be evaluated.

Introduction

Inventory management decisions are among the hardest in an organization. According to Subramanian, Rawlings and Maravelias(2014), determining the time to restock particular items, the quantities to buy or produce, the amount of money to pay for goods and services, the appropriate time to sell the stock and the price of selling can be a difficult task. Wrong choices have the potential to collapse the firm. Inventory management strategies vary across different industries. For example, storing oil in an oil depot for months can yield huge profits in the long run. However, when dealing with perishable goods, whose demand is highly time-sensitive, sitting on the goods is never an option.  Many businesses focus on ordering, forecasting, and storage. Some of the analytical methods used today include the utilization of the IoT and cloud-enabled devices which allows for automatic data entry and analysis (Pelzel, 2017).

Problem statement

Many organizations count losses resulting from unsold and sometimes dead stock sitting on the shelves. For firms with complex supply chains and manufacturing processes balancing of inventory gluts and shortages is a hard thing (Taleizadeh et al. 2015). Even though business organizations have come up with different techniques to manage inventory, achieving customer’s satisfaction has remained to be a challenge. Many businesses are not able to balance between having too much and too little stock.There are unnecessary storage costs incurred or the cycle time of orders is prolonged.

The purpose of the study

Optimizing the inventory and improving its management helps logistics professionals to free-up capital and maintain an optimal level of the inventory since they have to look for a means of preventing stock-outs and improving the response time for demand as well as asset utilization. Lack of optimized inventory methodology and a method of solving a problem creates a higher risk of underperformance and overpayment. This paper aims to provide the best solution for reducing demand uncertainty and reducing the life cycle level to ensure that the organization does not minimize customer satisfaction by hampering the customer service level.

Research questions

To achieve the purpose of the study, this paper will seek to answer the following questions:

  1. What would be the best method reduce the uncertainty inherent in demand without having negative impacts against customers?
  2. What would be the appropriate way of reducing the lifecycle service level of an organization?
  3. How to reduce the supply lead time in logistics without affection services offered to the clients

Objectives

The objectives of the study are as follows:

  1. To provide the best method of minimizing uncertainty innate in the demand.
  2. To provide best method of decreasing the lifecycle service level of an organization.
  3. To provide the best method of reducing the supply lead time in logistics without adversely affecting services offered to clients.

Literature review

Among the leading factors that affect a business are the demand and supply uncertainties(Singh et al. 2018). Demand uncertainties mean that the firm is not able to accurately predict the demand for its products and thus it may end up keeping its stock unproductively for a long time. On the other hand, supply uncertainties refer to the inability to tell whether the supply of the required input material will be available at a given time, say at the time when the demand will be high. It is a big blow to the business if an order is made but the necessary materials to make the production are unavailable. Customers’ satisfaction is also a critical factor to consider. The level of satisfaction depends on both the quality of the product and the supply lead time. According to Sokolinskiy et al. (2018), the lead time is the time that elapses between the time a client orders a product and the time of delivery. The primary cause of long lead times is the stock-outs. Stock-outs result from poor sales-forecasts, where the demand arrives and the business does not have enough stock to service the orders.

There is a variety of inventory management methods. One of the oldest techniques is the First-In-First-Out method. The method assumes that the goods that were the first to be purchased will be the first to be sold (Peavler, 2018). However, the assumption does not always hold. Another traditional method is the Highest-In-First-out method. In this method, the inventory with the highest cost of purchase is the first to be sold or used. Its application is limited to businesses dealing with one type of products.

Other inventory management techniques include the Just-In-Time. This method originated in Japan. It was first developed and implemented by Toyota Motor (Jalali and Nieuwenhuyse, 2015). It focusses on reducing wastage in an organization by avoiding over-production. It encourages keeping only the inventory that is necessary to produce and sell products according to the demand in the market. The costs incurred in storing and insuring excess goods and in their liquidation and disposal are avoided. The con of the JIT technique is that it is not able to handle unpredicted demand spikes. When such a demand occurs, it becomes difficult for the business to mobilize the resources in good time to avail the goods in the market. Consequently, the reputation of the firm will be adversely affected, and customers will opt to go to the competitors (Chauhan, 2015).

Another method commonly utilized in managing the inventory is the Materials Requirement Planning (MRP I). The approach depends on sales-forecast. It requires that the firm keep all the past sales records to enable an informed prediction (Krajnakova,Navikaite, and Navickas,2015). The MRP I incorporates a computer system and a production information system. The latter keeps track of the details relating to the inventory, production schedules and administration of the process inputs. The use of this method is highly dependent on the demand(Singh et al.,2018). Its success in the application depends on whether the production of the final product directly affects the materials demand and whether the materials demand has high fluctuations during the ordinary business operating cycle.

Manufacturing resource planning (MRP II) is yet another tool used by many organizations to keep their inventory. It is a development of MRP I and it focuses more on operational and financial planning. The MRP II software provides a simulation capability to help the user get answers to the “if” questions (Wild, 2017). It is composed of many processes which are combined to make one overall system. It brings together production planning, materials requirement planning, and capacity requirement planning among other processes.

This literature review finds that many scholars have made attempts to look into the pros and the cons of each of the available methods of inventory management. However, none of the studies is aimed at determining the best among them. This gap necessitates this research project.

Methodology

This research will adopt review of literature methodology, since secondary sources will be used to inform the researcher. The information gathered from different authors and reliable databases will be taken into consideration, in order to allow forming the conclusions. Similarly, interpretative research philosophy will be employed in this case. Based on this philosophy, it enables the researcher to have an in-depth consideration of the topic under study, hence reducing the biasness. Moreover; the phenomenological design is considered

as it helps in comparison of concepts in regards to themes.

Results and discussion

The supply lead time vary from one firm to the other. For companies in the same line of business, the difference in the lead time influences the level of consumer satisfaction. The relationship between the lead time and the level of satisfaction will be analysed. The lifecycle service levels of the different departments and organizations will be compared. The analysis will however focus on the organizations that use the same method. The relationship between the lifecycle services levels and customers’ service levels will be determined. The research will also compare the levels of employee’s and customers’ satisfaction when different methods are utilized.

Foreseen limitations

To have a reliable study, there is a need to have data from quite a large number of organizations who operate along different lines of business. It would also be necessary for each of the lines of business to equally have many businesses to be studied for all the .available methods. Covering such a wide scope would be practically impossible for this research.

Research schedule

Implementation Phases Week1 Week2 Week3 Week4 Week5 Week6 Week7 Week8 Week9
Data collection                  
Writing introduction and methodology                  
First Draft                  
Review of literature                  
Presentation and interpretation of findings                  
Second draft                  
Final copy                  

Conclusions and recommendations

The methodology is designed such that maximum information will be acquired by the end of the study. Analysis of the collected data will draw informed conclusions about the objectives of the research.The three week timeframe will also enable the researcher to reach out to a considerably many organizations and also allow a comprehensive analysis ofthe findings. Based on the foreseen limitations however, future studies in this area should consider evaluating a relatively wider scope.

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