How Inventory Decisions Affect Other Areas of the Supply Chain

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  • 0:00 Decisions About the…
  • 0:53 Bullwhip Effect
  • 2:10 Inventory Positioning
  • 3:25 Packaging and Materials
  • 4:35 Lesson Summary
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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.

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