Inventory resides at several locations in a supply chain, and the goal of inventory management is to reduce or eliminate inventory wherever it exists in the supply chain. This increases the velocity of movement of material through the chain, reducing the time from the point where material enters to the point of final consumption or sale. Slow movement of material leads to higher average inventories throughout the supply chain and results in higher inventory carrying costs. Techniques that can help reduce these costs include the following.
The first technique is to use models such as vendor-managed inventory (VMI) and drop-shipments to reduce the number of locations where inventory is stored. With VMI the buyer of a product provides certain information to a vendor of that product, and the vendor takes full responsibility for maintaining an agreed level of inventory of the material, usually at the location where the buyer uses it.
Second, the same strategy should not be used to manage and control all inventory items regardless of their value. Instead, use ABC analysis (not the same as activity-based costing) to classify inventory into different classes and to maintain appropriately safe stock levels based on the class. ABC analysis makes use of Pareto’s Law and classifies inventory into classes A, B and C. A-class items are high in value and low in number, requiring tight control, while C-class items are low-value, high-number items that can be loosely controlled. Items classed as B include medium-value, medium-number items and typically require a blanket policy for control.
Other inventory management techniques include reducing the amount of transportation/pipeline inventory, and application of lean and just-in-time techniques to reduce or eliminate waste.
Transportation is used to move products from one location in the supply chain to another and is a significant component of the supply chain cost. A responsive transportation system can help to lower supply chain costs by achieving a high level of product availability at a reasonable price. A common technique for making a transportation system responsive is “cross-docking.” Under cross-docking, products from a supplier are aggregated into trucks that arrive at distribution centers. At these centers the process of cross-docking means that products are exchanged between different trucks so that each truck leaving for a given retail location is loaded with products from several suppliers.
Transportation planners can reduce supply chain costs by reducing transportation costs by selecting low-cost modes of transport and using software to plan optimal routes and delivery schedules. The various modes of transport include water, rail, truck, intermodal, and air, and package carriers such as DHL, FedEx, and UPS. Having a low-cost supply chain depends closely on the selection and use of an appropriate mode of transport. Water is typically the least expensive, although slowest, whereas air is the most expensive and fastest. Transportation planners often use the approach of total cost analysis to select the best mode. This requires finding the total cost for each mode of transportation and using the mode that has the lowest total cost. The total cost is made up of, and considers, the trade-off between the cost of transport, cost of inventory at the origin, cost of inventory in the pipeline, and cost of inventory at the destination. Several companies develop and provide software that helps planners to construct transportation routes and schedules. Planners also use satellite-based global positioning systems to lower costs while still maintaining a responsive transport system.