BUS606: Operations and Supply Chain Management

The problem of inventory optimization is topical for any enterprise, and effective management of replenishment and consumption processes has a decisive influence on the financial position and competitiveness of the company, as well as the quality of customer satisfaction. That is why the newest concepts of inventory management are nascent on the joint financial and production management, logistics and marketing, operations research and mathematical statistics.

The traditional approach to inventory management at domestic enterprises was to increase the volume of inventory and avoid shortages. However, the active use of logistics methods and technologies has changed the economic essence of stocks – from assets to liabilities, as well as management philosophy in terms of the optimal level of client service and acceleration of commodity movement in supply chains. From a Japanese management point of view, the stock should be associated with the cost, and it should be considered as a buffer that smooths supply irregularities, which restock, and consumption, use of stock characteristics. Improvement of information support, differentiation of supply sources and methods of transportation create preconditions for a significant reduction of the stock level without loss of quality of customer service, which helps to decrease total expenses of the enterprise.

It is determined in the work that effective inventory management allows the enterprise to meet or exceed consumer expectations, creating such reserves of each product, which maximize net profit. This means that it is necessary to determine the optimal inventory size, which is necessary to meet the needs of consumers and would provide the maximum return of funds invested in the goods. These two components do not contradict but complement each other. In other words, in terms of effective inventory management, it is necessary to determine such an optimal inventory level, which minimizes the cost of the inventory control system, and, accordingly, maximizes profit. The total cost criterion is based, on the one hand, on the value of operating costs for the creation and holding of stocks, and on the other – potential losses due to the shortage of goods because of reduce sales, degradation of the quality of consumer service or increased operating costs for urgent delivery of goods.

It should be noted that in the scientific literature, there are different approaches to building inventory management strategies. On the one hand, the widespread technology JIT, which binds inventory with the planned volume of consumption, helps to spread the strategy of stock minimization, sometimes to zero levels. On the other hand, the variability of the environment and uncertainty of consumption conditions determine the need to create safety stock, and then we can say about the strategy of stocks optimization.

Exactly the second approach actualizes the need to develop mathematical instruments to determine economically defined inventory levels in terms of minimizing the total costs associated with the creation and support of stocks. The quality of the construction of the corresponding system affects, on the one hand, the level of customer satisfaction with the level of service, and on the other hand – the level of costs of the entire logistics chain. Therefore, it is necessary to constantly seek a compromise between enough inventory level in points of sale, level of allowable shortage and absence of inventory excess in the supply chain. This requires the creation of such an inventory management system, which would be able to most accurately and quickly react to changes in the external environment with the unchanging maintenance of quality parameters and customer service speed.