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Supply Chain and Inventory Demand Management

Introduction

When an organization’s operations rely on very crucial components or inventories, its operations hangs on a balance in case the supply chain fails to provide the insurance of inventories availability at all times (Rooney & Bangert, 2001). Like wise, Vacumet coating company (VCC) has since its inception and until to date, been relying on absolutely crucial components to support its operations. As a result, Frank and William must understand that the organization cannot afford inventories stock out at any one time, since this will obviously paralyze the organizations operations. For inventories safety insurance therefore, VCC while coming up with a supply chain must ensure that the latter is securely safeguarded against any stock out of inventories (crucial components) whatsoever.

Irrespective of the accuracy that may exist in inventories demand forecasting and control, a certain degree of uncertainty and risk exists within the supply chain and which might result in unforeseen inventories stock outs that leads to organizational operations stoppage (Kent, 2001). A supply chain management therefore must be keen to fit the SC with feasible safeguards against such a situation especially if the inventories are that crucial to the firm’s operation; a category in which VCC belongs. In this section therefore, we present Frank and William with feasible models and approaches to protect the established supply chain against the stock outs that are presented by the uncertainties of the supply and demand within and without the supply chain environment.

According to Hatesh (2007) the most effective approach to safeguard the organization from stock outs of the crucial inventories is through identification and establishment of strategic relationships and partnerships with suppliers so as to guarantee the organization the availability of such components every time they are needed.

Apart from the achievement of the strategic continued availability of material, organization-supplier relationship works positively in enhancing the quality of raw materials, supports expediting in case a need arose, minimizes the lead time and promotes collaboration between the company and the suppliers to jointly enhance quality in all aspects of the organization for mutual benefits (Jonathan et al., 2007).

Such a relationship would include integration with the suppliers for continuous inventories or components availability. As a result, Frank and William should ensure that the supply chain integrates such crucial relationships to insure continuous flow of inventories for continuous operations. Furthermore, integrations will offer the company strategic material costs advantage and limited fluctuations in materials quality thus offering VCC an unmatched consistency in components and final products quality (Kent, 2001).

Apart from the formation of relationships with suppliers, integration of computer-aided technology and inventories ordering models will provide VCC with accurate reorder points and accurate order quantities that safeguard it from possible stock outs. The reorder point are points of minimum level of inventories that points a time when a new order must be made in an effort to prevent inventories stock out (Kent, Rooney & Bangert, 2001). In determining the reorder point, the supply chain managers should consider the lead-time involved in acquiring new inventories, the accurate rate of inventories use and the cost that would be involved in case of a stock out (Rooney & Bangert, 2001).

For Vacumet coating company, Frank and William must understand that the cost that would amount from inventories stock out will be vehement since the materials are crucial for the company operations. The reorder point that is supported by computer-assisted inventory control models that can approximate the lead time and rate of inventories consumption with the highest degree of accuracy and precision will effectively safeguard VCC from stock outs (Rooney & Bangert, 2001).

Integration of state-of-the-art (computer supported techniques) in the SC to support models such as Economic Order Quantity, Materials Requirement Planning Models, the Fixed Order Interval/ Fixed Order Quantity Models and Just In Time Control Model with an objective of reducing the risk of supply chain uncertainties will protect the organization against inventories stock out (Kent, 2001). Frank and William must however note that computer-based technology is imperative for these models to safeguard against stock outs.

Integration of technology in the supply chain will enable effective Technologically Supported Inventory Management tools such as electronic data interchange (EDI) among the partner in the supply chain, hence forms accurate basis of approximating demand, sales, inventories use rate and determination of precise inventories reorder points that avoids stock outs (Kent; Rooney & Bangert, 2001).

However, use of JIT Inventories Control Models might be risky for the organization since it is related with just enough hence must be used carefully. In JIT models, the firm relies on highly effective and reliable suppliers hence maintain limited on-hand inventories. In case of failure on the part of the suppliers therefore it may result in serious stock outs (Kent, 2001). Since the nature of VCC inventories is that crucial to the firm’s operations, use of a JIT or just enough models would be risky unless the inventories handling cost (storage, insurance etc) are higher than the stock out costs.

Safety stock or buffer stock

Due to the fact that the effectiveness of inventories at VCC has not been fully acquired in the new supply chain, coupled with the inevitable uncertainties of demand and supplies, it is advisable that frank and Williams maintain a certain level of safety stock, also referred to as buffer stock, as a physical effort to safeguard itself against the possible stock out of the essential components.

Safety or buffer stock is the excess of inventories that an organization holds so as to act as a safeguard against the stock outs that may result from the uncertainties of supply chain (supply and demand) (Kent; Rooney & Bangert, 2001). In circumstances where the supply chain is not adequate in its ability to accurately forecast the demand, inventories consumption rates or the inventories lead time coupled with high cost of stock out, it is advisable to maintain extra units of inventories to serve as an insurance against possible stock outs thus avoiding disruption of the production process.

When a company maintains adequate buffer stock on hand, it is able to effectively meet demand beyond what they had forecasted without having to change their production plan. In addition, buffer stock or safety stock will protect the organization from possible disruption of operations due to unforeseen fluctuation in the supply chain leading to material shortages or delays in material deliveries as a result of emergencies which could lead to loss of sales and rise in customer’s turnover (Rooney & Bangert, 2001).

Especially for a new supply chain like VCC, safety stock would be a very strategic approach of avoiding stock out before it acquires absolute inventories forecasting competence or precision. As the level of accuracy in inventories forecasting increases therefore, the level of buffer stock will be reduced to check the increase in cost that is associated with it (mainly handling cost).

In addition, the amount of safety stock that the company keeps will depend on the degree of predictability and consistency of demand. The amount of extra units that the organization keeps will reduce as the predictability and consistency of demand increases (Rooney & Bangert, 2001).

The organization however should be able to balance its buffer stock to avoid keeping to much that will lead to wastage and high cost of inventory handling, especially if the company runs a lean manufacturing strategy, or having too little that poses the risk of stock outs for the company (Kent, 2001). To achieve this, integration of computer based models in the calculation of buffer stock will enable the company to maintain the optimal amount and to reduce it accordingly as the predictability and consistency of demand and supply improves with time.

References

Hatesh Attri (2007) Supply Chain Management: The Supply Chain Visibility and Sustainability: Harvard business school publishing. Web.

Jonathan Wright et al (2007) The Sustainable Supply Chain: Balancing Cost, Customer Service and Sustainability to Achieve High Supply Chain Performance. Web.

Kent N. Gourdin (2001) Global Logistics Management: A Competitive Advantage For New Millennium. Blackwell publishing.

Rooney C and Bangert, C. (2001), Developing the Right Approach to Requirements Planning under ERP. Web.