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Inventory is kept in many different forms and in many different locations:

  • Inventory of materials at the supplier
  • Inventory of materials at the factory
  • Inventory of work-in-progress at the factory
  • Inventory of finished goods at the factory
  • Inventory of finished goods at the central warehouse
  • Inventory of finished goods at the depots

The amount of stock at each of those points is determined by 2 key factors:

  1. How often do you order (every day a daily quantity, once a month a monthly quantity, whenever stock is low, etcetera)
  2. How much safety stock do you keep to protect against fluctuations of demand and supply

Inventory optimization can be achieved if you align as much as you can the ordering frequencies per stock location, so either order your materials and deploy your finished goods both daily, both weekly or both monthly. This creates a drumbeat whereby goods flow rhythmically through the supply chain.

The other obvious area to achieve benefits is to align the safety stock calculations. Often there is high safety stock in all stock locations to protect against fluctuations in demand and supply, but the demand will only fluctuate at the final stock point in your network, and supply will fluctuate between stock points. So understanding the realistic fluctuations per stock point is key to eliminate the bullwhip effect that is created within your supply chain.

See also: ⇒ Expertise: Inventory Planning

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