How Inventory Decisions Affect Other Areas of the Supply Chain

An error occurred trying to load this video.

Try refreshing the page, or contact customer support.

Coming up next: What Is Inventory? - Definition & Example

You're on a roll. Keep up the good work!

Take Quiz Watch Next Lesson
 Replay
Your next lesson will play in 10 seconds
  • 0:00 Decisions About the…
  • 0:53 Bullwhip Effect
  • 2:10 Inventory Positioning
  • 3:25 Packaging and Materials
  • 4:35 Lesson Summary
Save Save Save

Want to watch this again later?

Log in or sign up to add this lesson to a Custom Course.

Log in or Sign up

Timeline
Autoplay
Autoplay
Speed Speed
Lesson Transcript
Instructor: Kevin Newton

Kevin has edited encyclopedias, taught history, and has an MA in Islamic law/finance. He has since founded his own financial advice firm, Newton Analytical.

Inventory decisions can affect the supply chain in more ways than just a simple flow. In this lesson, we examine how three different inventory decisions can wreak havoc on your supply chain.

Decisions About the Supply Chain

You have recently taken over the logistics operations for a widget company that has a very intricate supply chain. However, you are committed to making sure that your organization's logistics are as well managed as possible. You know the value of keeping costs low while maintaining a logistical flow to make sure managers always get the resources they need and that customers always get the goods that they require. However, you do want to know what you can do to make your methodology better.

As a result, you begin to examine your supply chain with respect to how inventory decisions have an effect further down the line. To that end, you'll focus especially on three different areas: the bullwhip effect; inventory positioning along the supply chain; and impact of transportation, packaging, and material handling considerations on the whole organization.

Bullwhip Effect

First off, you're interested in the bullwhip effect, or how small fluctuations can build to much larger ones. Just as the wave of a bullwhip snaps back, so too must the logistics involved of all this planning. Almost as soon as plans are made to deal with the inconsistency, those plans themselves become inconsistent because conditions have returned to normal. Put another way, it could just as easily be called the ripple effect; a mistake or mishandling made at any point of the supply chain has the potential to build into something much greater.

Think of it through this example. Let's say that you were a day late delivering a supply to a factory. Due to the fact that workers have to put off today's work until tomorrow and then do tomorrow's work alongside today's work, it puts their manufacturing behind an additional day. Your transportation team can't move the goods to the distribution center at the time they are complete because it has other priorities to contend with. All the while, your goods are just sitting there. More and more time delays get built into the schedule simply because your first delivery was a day late. Ultimately, that single mistake could put you a full week, or even more, behind on your operations. The further away you move from the incident that created the fluctuation, the greater it becomes.

Inventory Positioning

Now much of that is avoidable if you are careful with your inventory positioning, or where you make sure to have additional goods needed for each step of the supply chain. However, before you start to think that fully stocked warehouses at each step of the supply chain are a good thing, remember that those fully stocked warehouses have to have had their wares paid for already. In short, they are not profitable.

Also, some consideration must be made to just what type of supply chain you've got. In a push supply chain, where you create with the expectation that items will be sold, a modest buildup of inventory may not be such a bad thing. After all, push supply chains work best with companies that can produce goods that everyone will always need. Boxes, most groceries, and construction materials are all push products, and as a result, their supply chains can be bettered through use of inventory positioning.

To unlock this lesson you must be a Study.com Member.
Create your account

Register to view this lesson

Are you a student or a teacher?

Unlock Your Education

See for yourself why 30 million people use Study.com

Become a Study.com member and start learning now.
Become a Member  Back
What teachers are saying about Study.com
Try it risk-free for 30 days

Earning College Credit

Did you know… We have over 200 college courses that prepare you to earn credit by exam that is accepted by over 1,500 colleges and universities. You can test out of the first two years of college and save thousands off your degree. Anyone can earn credit-by-exam regardless of age or education level.

To learn more, visit our Earning Credit Page

Transferring credit to the school of your choice

Not sure what college you want to attend yet? Study.com has thousands of articles about every imaginable degree, area of study and career path that can help you find the school that's right for you.

Create an account to start this course today
Try it risk-free for 30 days!
Create an account
Support