Effective Inventory Management

A further strategic consideration is the amount of inventory that should be available in-house. This is a critical issue in effective supply chain management. Operational inventory decisions revolve around optimal levels of stock at each location to ensure customer satisfaction as the market demands fluctuate. A delicate balance exists between too much inventory, which can cost 20 to 40 percent of its value, and not having enough inventory available to meet market demands. Control policies must be considered to determine correct levels of supplies and the EOQ of order at each re-order point. These levels are critical to the day-to-day operation of organisations and to ensure high levels of customer satisfaction.

Effective inventory management

Unfortunately, not all companies record the financial information in detail or in the format that is required by the supply chain definitions. Thus, reporting of the supply chain cost becomes difficult and cumbersome. Reporting then happens rarely, rather than being a regular, continuous improvement enabler.

The five biggest cost drivers affecting the supply chain cost are:

• Warehouse and Distribution Cost;

Includes all cost centres related to warehouse and distribution activity. Ideally, costs can be segmented by location. There are two common benchmark formulas: cost as a percentage of sales, and labour productivity (i.e. picks per labour hour, picks per delivery load, picks per invoice, time per invoice picked).

• Transportation Cost

Includes cost centres for outbound, inbound, and inter-company transportation. Ideally, costs can be segmented by mode, route, customer, supplier, and by plant. There are two common benchmark formulas: cost as a percentage (%) of sales, and cost per kilogram (R/kg).

• Inventory

It excludes planning and sourcing personnel accounted for in cost of goods sold. Ideally, costs are segmented by channel and/or product. The most common benchmark formulas are to calculate by transaction prodcutivity (i.e. items per planner, sale orders per customer service associate, purchase orders per purchasing agent, etc.)

• Cost of Goods

This category is defined by finance using standard protocol and reported on the income statement. It typically includes cost centers for material, direct labor and indirect labor. Depending on accounting method, these can be reported either at “standard cost plus variance” or “actual cost”. Ideally, costs can be segmented by product and/or by plant. The most common benchmark formula is to calculate cost as a percentage to