Supply Chain Activities Which Affect Inventory

Supply chain activities which affect Inventory include:

 Slow moving inventory – While this topic could be the subject of an entire course, it is fairly obvious to say that slow moving products tie up cash.  The problem here is that having the wrong inventory ahs huge implications for the business regarding revenues, costs, and survival of the business.  Good inventory management, starting with the procurement process and ending with the distribution process, will free up cash and better satisfy customers.

Sales Growth (up or down) – See statement in A/R section.

Purchase and transport economies of scale – This relates to additional inventory being purchased that is lower in cost due to production efficiencies and/or lower transportation cost due to using lower truckload rates.  There is a tradeoff between the lower costs and the amount of additional carrying costs which will incur due to storing the additional inventory.  The cost savings due drive up the amount of inventory, which will increase the working capital requirement and lower the efficiency of the C2C.

Manufacturing Efficiency Needs – This is related to purchase economies.  As manufacturers make more units of inventory, they spread fixed costs over more units which lower overall unit costs.  In addition, special orders discount the use of fixed costs altogether which lower unit costs.  Additional units increase inventory carrying costs and working capital requirements, which lowers the C2C.

Forecasting Errors – Pretty obvious here, a bad forecast will result in excess inventory or lack of inventory, which will tie up cash or result in lost sales.  In either case, the C2C is negatively impacted.

Lack of strategy alignment – Not knowing customers and their requirements results in the wrong products or services being rendered, which can result in too much inventory and obsolete inventory, which will negatively impact the C2C.

Long Supply Chains – This results in more inventory in transit and more overall inventory, which affects cash and the C2C.

Seasonality – See statement in A/R section.

Cyclicality – See statement in A/R section.

A firm’s competitive position – See statement in A/R section.

Product Life Cycles – See statement in A/R section.

Valuation Policy (FIFO, LIFO, Weighted Average) – The affect the value of inventory, which impacts the inventory cost calculation.  This can be of get effect during inflationary times.  During FIFO, inventory has less overall value as compared to LIFO when prices rise, and more value as compared to LIFO when prices fall.  Inventory value affect the calculation of inventory turns and affect the C2C calculation.