The relationship between inventory management and transport is a complicated an interesting one. A lot of attention has been given to this relationship. Through logical thinking it can be deduced that there is a direct relationship between transport and inventory management. If inventory is managed better, transport performance can become better.
This paper will discuss the inventory management-transport relationship by looking at the trade-offs between the two, as well as other factors influencing the relationship, like the placement of facilities, the supply chain objectives, technology and outsourcing. Practical applications of the discussed theory will be presented throughout the paper directly following the theory, to illustrate the relationship.
Theoretical Study & Practical Application
As inventory management is entirely concerned with the movement and flow of all materials (be it raw materials, work in process items and all the finished products of a supply chain) it should be clearly defined, across the whole supply chain, what transportation mode will best benefit the end consumer. Inventory is regularly reformed throughout the supply chain and transportation decisions should be made considering the type of material that is being handled, and the trade-offs between inventory management and transportation.
A manufacturing company looking to import materials would be focused on moving raw materials. The inventory is of less value than completed products, and using a cheaper transport alternative could pose benefits. On the other hand, finished products being exported might require more delicate handling at a higher cost, seeing as the product is of higher value. Trade-offs
Trade-offs between inventory management and transportation are plentiful. The main elements discussed are time, cost and customer satisfaction. Time is the most important variable as inventory is directly influenced by transportation times.
High end commercial or third party logistics firms(3PL’s) have better resources and are more expensive to incorporate into the business, but bring the added benefit of reliability, quicker deliveries, and risk aversion. Acquiring high speed commercial carriers or outsourcing can reduce pipeline transit variability and lead time, benefitting the firm as it requires fewer inventories to satisfy demand.
Thus, improving lead time variability through transit should most definitely decrease inventories. On the other scale, using low speed carriers or internal sourcing will require more inventory to avoid stock out costs, but are less expensive than outsourcing. Decreasing inventory would also improve inventory turnover as decreased average inventory results in increased turnover rates (Paul, Murphy, Donald and Wood, 2011:163). “Inventory turnover can be calculated by dividing the cost of goods sold by the average inventory” (Paul et al., 2011:163).
Thus, by increasing inventory turnover, a speculative profit can be realised. This profit, or rather savings, made from reduced inventory levels must be played off against lost profit resulting from stock outs due to reduced stock availability. The trade-off most definitely arises in favour of inventory as the demand or demand variability increases. An organization may also choose to outsource some transportation in times of high variability as to increase order fulfillment rates. Cost of goods reflects transportation costs. Higher valued merchandise is more expensive to transport, to handle, and to store.
Raw materials (low value), for instance coal, is cheap to transport because it doesn’t need special handling requirements and can benefit from economies of scale. Transportation can form a large part of total costs, especially these days as the petrol price is ever increasing. Further emphasis is placed on transportation if the costs involved are greater than managing inventory, or moreover, holding inventory. Stock-out costs in distribution companies are highly valued as customers could possibly be lost in some cases. A distribution company like this would increase the relevancy of the trade-off between carrying and stock out costs.
As said above, to prevent stock outs and to keep transportation cost and inventory cost to a minimum, a good inventory management software system is necessary. This is exactly what Swisslog, a hospital logistics automation provider, did in 2009.
They have released their next generation Inventory Management Software (IMS) to optimise medication inventory, so that they can manage inventory costs better. The company’s IMS would automate reordering of drugs directly with the hospitals pharmaceutical wholesaler. Inventory is then tracked and recorded from the warehouse to the hospital. The IMS also keeps check of the stock at the hospitals, so as soon as the stock levels drops too low, a automated reorder is done. Ben Hinnen, the Business Unit Manager of Swisslog, said that ineffective inventory management often leads to excess stock and high waste due to expiring drugs and, as a result, costs hospital pharmacies millions of dollars each year.
Thus, inventory management, together with adequate transportation, is very important to deliver the medicine on time and when needed (Swisslog Launches Inventory Management Software To Control Hospital Medication Supply Chain, 2009). In inventory management there are different techniques and systems to manage a companies’ inventory, like the just in time approach. In 2009 Gates Corporation, a manufacturer of industrial products, decided to use a Vendor Management Inventory Program. In the article, Gates Corporation stated they identified that Vendor Management Inventory is a key strategy to give more value to their customers. In any business there is trade-offs between the different systems a company uses to manage their inventory (Gates Opt For Datalliance VMI, 2009).
Customer satisfaction is where demand availability comes to mind. The level of satisfaction is, in most cases, determined by fulfilled orders. If customer service was the most sought after element, a systems approach should be implemented. Transport and inventory management must be analysed and traded off against each other in such a way that costs could be minimized. These costs must, at the same time, meet the business’s set of standards according to customer service levels.