The importance of inventory management

Can you imagine if, upon arriving at a bar, you asked the waiter for a beer and he informed you that it would be necessary to wait a few months, since this is the total time necessary to obtain all its ingredients and produce it? I suppose you would believe he's crazy and leave the bar in frustration. The waiter would not be wrong in his answer, but nowadays no customer accepts waiting that long to have access to this type of product. So that scenes like this do not occur and the customer leaves the establishment satisfied, maintaining a stock is essential.

If it were possible to meet customer demand immediately, that is, at the exact time and quantity that the customer wants, there would be no need, a priori, for stocks to exist. Quite objectively, the mismatch between customer demand and the ability to meet it is one of the main reasons that lead companies to build up inventories.

Inventory maintenance brings several advantages to companies, including:

• Increase the availability of products and services: the formation of a finished product inventory guarantees the immediate purchase of a product by the customer, mainly in times of peak demand when the company does not have production capacity. In addition, keeping stocks of raw materials and spare parts prevents the stoppage of a production line due to lack of inputs or a breakdown of a machine, for example.
• Maximize the use of transportation assets: the formation of stocks allows the consolidation of loads and better occupation of vehicles, reducing the number of trips and, consequently, the cost of transport
• Purchase products at lower prices: it is common to build up stocks to purchase products with unit discounts in case of buying in larger quantities or anticipating an already foreseen increase in prices
• Protect against events that cause shortages: strikes, natural disasters and delays in receipts, despite being difficult to predict, are common occurrences. In cases like this, the lack of stock impedes customer service. In a previous post, I brought an example of another type of situation that impacts supply: it is the Spring Festival, event that marks the change of the year in China and demands the formation of a previous stock by companies that work with Chinese suppliers

Image 1: Types of stocks
Source: ILOS

But, if inventory is so important, why do companies always try to minimize it? Inventory can have a high cost for the company and, among its main disadvantages, we can mention:

• Fixed capital that could be used in something more profitable: in general, in order to build up stock, it is necessary to anticipate a monetary investment that will only be remunerated in the future, when the product is sold, or that may not even bring a return, in case the item goes aground in the warehouse. In these cases, the capital could be used in something more advantageous for the organization, such as financial investments, the purchase of more productive equipment or the improvement of the transport fleet.
• Higher storage costs: to store a stock, you need a suitable place, such as a distribution center, and a team to handle this material. All this generates expenses and, the greater the stock, the greater they will be.
• Losses due to obsolescence and perishability: Carrying stocks can mean loss of money for the company when it misses its sales forecast and the product has a short shelf life, as is the case in the food industry, or tends to quickly become obsolete, a fact that is very common. in technology industries where new products are released quickly and constantly
• mask problems: inventory brings a security that can often hide problems that are occurring in the operation (in general, associated with quality), making the manager take time to perceive and correct them

Considering these advantages and disadvantages, it is the mission of managers to manage inventory levels in a careful and economically sensible way. The objective of inventory management should be to guarantee the level of service that the organization wants to offer without incurring excessive costs associated with maintaining inventories. In certain situations, it is even advisable not to build stock and to produce against orders., and this should always be evaluated by managers.

At a time when the Selic rate is at 13,75%, inventory management becomes even more important. As previously discussed by Gabriel Cruz, high interest rates have a big impact on companies' cash, as they considerably increase the opportunity costs of assets, especially the costs related to maintaining inventories. Thus, an even greater effort is required from managers to minimize product coverage.

To learn more, the importance of the stock, as well as the correct way to size it and the ideal indicators for monitoring your health are seen in detail in the Live Online Course on Inventory Management in the Supply Chain.