How Will Companies Deal with Recovery of Global Supply Chains?


How Will Companies Deal with Recovery of Global Supply Chains?

With signs of recovery is sight, what will we learn from dealing with unprecedented shifts in the global supply chain?

The COVID-19 crisis has intensified the competition for valuable supply sources. In certain industrial sectors, including electric vehicle production, the bargaining power has shifted from OEMs to suppliers.

While it is normal for companies to renegotiate, current extraordinary circumstances are leading to major agreements in the new context.

For example, Tesla and CATL recently announced a strategic partnership for CATL to supply EV batteries to Tesla’s Model-3 production in China, moving away from sole dependency on Panasonic.

Toyota and Panasonic also announced an agreement of a joint venture to produce EV batteries. Similarly, BMW signed a major agreement to purchase EV batteries from CATL worth of 7.3 billion euros.

Managing long-term disruption

Corporate executives traditionally consider costs, quality and delivery as key metrics when developing supply chain strategies.

But as the recent situation has shown, major global events caused by pandemics like COVID-19, along with geopolitical tensions, can create significant disruption to a normally reliable supply of parts or products.

The intricacies of supply value chains are not established overnight. It takes time and effort to qualify potential suppliers in all areas. Factors such as manufacturing quality, capacity, delivery, cost and the ability to respond to engineering or demand changes.

Therefor, supply value chains are designed for long-term needs. Once they’re established, it can be difficult to change them quickly to adapt to unpredictable disruptions. As such, making a hard turn in a short amount of time requires extraordinary agility.

The COVID-19 pandemic has reminded company decision-makers that there is a need to adapt and develop new business strategies in future supply chain designs.

Developing new models

The KPIs to be considered for future supply value chain designs will likely contain a mix of both traditional metrics (cost, quality, delivery etc), and new performance measures using the 3Rs: resilience, responsiveness, and reconfigurability.

To meet the challenge, there will be an increased need for infrastructures and technical means designed to create transparency within global supply chains.

There must be development of predictive models for proactive scheduling which takes into consideration uncertainties and risk factors. Plus a dynamic plan that accommodates the changing pressures of supply and demand for a given situation.

These predictive models will help corporate decision-makers do what-if analysis of various scenarios.

Finally, there must exist opportunities for government collaboration. Considering the continuing emergence of a globalized economy, the world truly is flat.

For the time being for example, the US and Chinese governments could eliminate artificial tariffs so that increased supplies and goods can be flown between the boarders to help mitigate the global COVID-19 pandemic.

The World Economic Forum’s Platform for Advanced Manufacturing and Production is bringing together senior operations, supply chain executives, top leaders from government, academia, and civil society.

The aim is to analyze the economic impact of COVID-19 on value chains and help companies address current liabilities and short-term challenges while keeping long-term sight goals aimed at driving systemic change.

FIFO vs FEFO: Which Method Is Best For Your Business?


FIFO vs FEFO - Which Method Is Best For Your Business?

While both FIFO and FEFO have their respective benefits, one will surely matter more to you depending on the products you sell.

For inventory management best practices, stock rotation is right near the top. At its core, stock rotation is a strategy that helps you to ease the problem of stock loss. It’s about organizing your stock in a way that allows you to avoid loss through expiration or obsolescence.

There are two main stock rotation or inventory maintenance methods that are worth noting: First-In, First-Out (FIFO), and First-Expired, First-Out (FEFO). Let’s look at the core differences:

FIFO Stock Rotation Method

What is First-In, First-Out?

The FIFO method means you aim to sell the products that arrive first in your store. Slightly older products are placed at the front of the shelf, newer products near the back.

You would expect items in front will be the first items out. That’s especially true if customers are in a rush and want to grab the first product off the shelf.

A well displayed shelf goes a long way to persuading your shoppers that all of your products are worth buying.

What are the benefits of FIFO?

For one, it allows you to avoid the problem of dead stock.

By using a FIFO method, you avoid the problem by selling inventory that arrives first. As you arrange it accordingly on your shelf, you shouldn’t need to worry about facing dead stock.

Secondly, it reduces the impact of inflation.

FIFO reduces the impact because you’re selling your oldest items first. If you assume that inflation is constant, the purchase price of older inventory is lower than that of the stock you bring in later.

Who should use the FIFO method?

When choosing this method, one of the deciding factors is the type of products you sell. It works well if you stock seasonally items, fresh food or have a policy of displaying and selling older stock first.

It also works best if you stock products that have short demand cycles, such as clothes where styles can quickly become outdated.

FEFO Stock Rotation Method

What is First-Expired, First-Out?

While First-in, First-Out is the most common used stock rotation method, a second accepted method is First-Expired, First-Out (FEFO).

FEFO is an approach to dealing with perishable products or those with expiry dates that begin at your warehouse and ends at the store. It’s the expiry or sell-by date that triggers this process.

Instead of immediately putting products at the back of the shelf, you first check the expiry dates. Then place those items with the shortest shelf-life near to the front, if not directly at the front, so customers will tend to buy them first.

Assigning expiry dates to batches allows everyone in the supply chain know what’s happening right up to when your product reaches the shelf. With a robust inventory management system that tracks the information in place, you’ll know exactly when to push stock from your warehouse to the store effectively.

What are the benefits of the FEFO method?

One benefit of following FEFO is that it allows you to guarantee product quality, which leads to customer satisfaction and a boost in reputation.

For example, let’s say you sell Dairy products. Using the FEFO method will ensure that you sell these products either by their sell-by date or before. Your customers will know when they buy your products, they will receive products of high quality.

Similar to FIFO, following the FEFO method allows you to avoid dead stock. While FIFO refers to dead stock at store level, FEFO helps avoid obsolete inventory at a warehouse level.

A third benefit is cost reduction. By following it, you can reduce the cost of stock expiring on your shelf, plus the cost of collateral damage to the brand name.

Who should follow the FEFO method?

The ‘E’ in FEFO – Expired – gives its main purpose away. Therefor it’s best to use the FEFO method if you sell perishable goods, food and beverage industry, or a pharmacy where offering a product past its expiry date can have serious consequences.

What Is Milk Run In Logistics?


What Is Milk Run In Logistics?

The term milk run may bring cows, farms and sentimental thoughts to mind, but there’s a reason the updated concept is beneficial to your business.

Why Is It Called a Milk Run?

Don’t let the old-school name put you off. The milk run method might solve your delivery and efficiency woes. The Milk run got its moniker from the milk industry practice wherein a single tanker goes to different dairy producers every day to collect milk and then deliver it to the milk processing firm.

This ensures that there’s a regular supply of fresh milk and that overstocking is prevented. It also ensures just-in-time delivery and reduces the possibility of waste and material damage.

How Does It Apply to Material Handling?

Using the Milk Run method has become quite common for many lean manufacturing facilities. Remember that the lean concept focuses on optimizing every aspect of production including material handling and transportation.

The Milk Run method simply allows more frequent deliveries of materials and supplies to more than one area that needs to be re-stocked. Often this helps reduce the levels of overstocking or having to manual call for more materials.

It also keeps production processes flowing across a shop floor which drastically reduces downtime. This is why it is regularly applied to optimize a supply chain.

Deliveries are most commonly made to areas that are in constant need of being re-supplied. These delivery routes are normally timed out during the shift to operating at peak efficiency, to ensure that the assemblers can continuously assemble according to production schedules.

The operator will pick up their materials at a central warehouse or “supermarket” and then follow the route delivering or dropping off the material to the assemblers at different points.

What is milk run system?

These deliveries are most effective and efficient when completed by a system.

In a larger set-up, there will be more material handlers back at the storage area preparing the next milk run route so the driver can easily begin his next delivery route. Whereas in smaller operations this is completed by the same material handler/driver.

Thus, the method used in preparing the next delivery route usually depends on the size and practices in a factory or warehouse.

Generally, the steps within a milk-run route can be reduced down to:

  • Loading
  • Handling of Materials at the drop stations
  • Traveling

The biggest challenge when initially setting up Milk Run routes is the design and creation of the routes and the timing of the intervals. This is because it’s the determining efficiency factor when establishing the method.

Lot of testing, experimenting and time goes into the process before you get it right. The area of the route and the distance from the storage area to the different delivery points all play a big role in the effectiveness and efficiency of such a route.

Also, the amount of demand your delivery points would generate and how often they would need to be re-supplied. This can be difficult to manage and implement because many times a production schedule is unknown and can be fluid. So, the final Milk Run plan must consider these factors and the effect of real-time occurrences.

The aim is efficiency

It might take years of practice and modification until a milk run is operating at peak efficiency. Brimich Logistics is more than happy to work alongside organizations, increase their success, and implement milk run routes into their material handling practice.

Drop Trailer Services: What’s In It For You?


Drop Trailer Services - What's In It For You?

Is it time for you to consider a drop trailer or drop and hook freight service for your business?

Capacity crunch and driver shortage has caused serious issues in many businesses’ supply chains and has increased the demand for drop trailer / drop and hook shipping programs.

What is a drop trailer program?

A drop trailer program is when a carrier brings a tractor to the loading dock and picks up a trailer loaded previously. Drop-and-hook takes the process of trailer shipping one step further. A carrier will arrive with an empty trailer to drop, pick up a loaded trailer, and continue on.

In the US, many shippers are now considering such programs mainly because of the new hours of service rules issued by the Federal Motor Carrier Safety Administration (FMCSA) which are more strictly monitored by the ELD mandate.

Drop trailer services can also have a significant impact on the efficiency of your supply chain. Drop trailer programs help shippers and carriers plan more effectively for deliveries and outbound shipments as it’s important for them to align their schedules.

Without drop trailers, a carrier must arrive within a narrow time window to load or unload the trailer. Depending on how the appointment coordinates with their on-duty schedule, and considering other conditions such as traffic, weather, breakdowns or unexpected events, the driver may be forced to wait for hours, thus missing the appointment altogether.

In these situations, detention fees, late delivery fees, and a negative vendor scorecard are unpleasant results.

Drop Trailer Benefits for Carriers:

  • Better trailer planning. You decide when you pick up and drop off.
  • No more waiting to pick up a load or be live-loaded.
  • Great for time-consuming loads, like floor-loaded freight.
  • Higher delivery percentages that are on time.

Drop Trailer Benefits for Shippers:

  • A smoother supply chain operation. You can load or unload a trailer at your convenience or when staffing levels are adequate; no more paying overtime to load or unload when a truck is early or late.
  • Superior for time-consuming loads.
  • Avoid extra driver or truck detention charges.
  • Higher on-time delivery percentages.
  • Decrease fines from strict retail Must Arrive By Date (MABD) requirements.
  • Better retailer relationships with vendor scorecard performance.

On the downside, there may be an initial cost to implement a program. Every trailer that a carrier takes out of over-the-road service is lost revenue, so to recoup it, there will be a cost for a drop trailer. Of course, this cost will pay for itself because there should never be any detention fees.

Drop trailers should not become warehouses; the maximum time a trailer should sit is a week. In most drop trailer programs, trailers turn two or three times a week.

Final Thoughts

There’s a lot of up-front heavy lifting to implement a drop trailer program. Not all carriers supply a drop trailer service therefor finding one that does can be time-consuming. Trailers make carriers money, if one of your carriers doesn’t want to drop a trailer, simply look at using a different one.

International Food Safety: What Are We Doing to Stay In Step?


International Food Safety

Do the FPC and FSMA have effective plans in place to prevent potential cross-border food hazards?

“The most sweeping reform of U.S. food safety laws in more than 70 years.” implemented on Jan 4, 2011, was the result of a development program launched by the FDA under the Food Safety and Modernization Act (FSMA).

Recognizing the need for information regarding new regulatory requirements, the Food Processors of Canada (FPC) held an information session for its members on the impacts of the Preventive Control Rule. The well attended session of 50 participants represented a wide variety of Canadian food manufacturers.

Dr. David Acheson (former assistant commissioner for Food at the USFDA), and Cameron Prince (former vice-president of the Canadian Food Inspection Agency) of The Acheson Group, were invited by the FPC to provide background on FSMA.

The purpose was to highlight the main impacts of the Preventive Control Rule on Canadian food producers exporting to the U.S.

Some key points that came out of the session:

HACCP+

FSMA focuses on preventing, rather than being reactionary, to issues that can cause food-borne illness. The safety schedules apply to firms that manufacture, process, pack or hold food for humans.

These businesses are required to have written plans that identify hazards, specify the steps they’ve put in place to prevent or minimize or those hazards. In addition, they must clearly identify monitoring procedures and record monitoring results, plus specify actions to be taken to correct problems that arise.

When compared to similar HACCP and GFSI programs, there are differences in the new FSMA Preventive Controls Rule that will require companies to re-evaluate and adjust their programs.

With the Preventive Control approach, hazards related to the process, and to plant operation, are controlled under a prerequisite program that now requires the same level of diligence in:

  • Documentation
  • Monitoring
  • Record keeping
  • Corrective actions as a CCP under HACCP

The Preventive Control approach is portrayed as “HACCP+” in which Prerequisite Programs are identified as Preventive Controls requiring the same level of control as a CCP such as:

  • Cleaning and Sanitation
  • Allergen Control
  • Recall

Products That Are “Ready-to-Eat”

Processors of Ready-to-Eat (RTE) products exporting to the U.S. may are required to implement an environmental pathogen monitoring program.

If the RTE product is open to the environment after processing and before packaging, and a kill step does not follow the packaging step, an environmental pathogen monitoring program is required.

Foreign Suppliers Verification

U.S. importers must also comply with the Foreign Suppliers Verification Rule, which means U.S. importers need to verify that Canadian Suppliers are in compliance with all U.S. Rules for FDA commodities. The verification could include an audit by the U.S. importer or a third party representing the U.S. importer.

Qualified Personnel

A qualified individual is required to develop, implement, and monitor the Preventive Controls Program by the Preventative Control Rule.

This individual is known as a Preventive Controls Qualified Individual (PCQI). Although experienced food safety managers can qualify for this position, it is strongly recommended that companies have a certified PCQI on staff.

In most cases this means a QA manager will be required to take a two-and-a-half day certified training program.

What is the Future of Third Party Logistics in 2020?


The Future of Third Party Logistics in 2020

What Can Your Business Expect from 3PL Providers in the Ever-Evolving Digital Age?

There’s no doubt the third party logistics (3PL) landscape has altered significantly within the last decade. As mobile technologies and ‘smart’ working practices continue to develop, further growth, and potential benefits, are inevitable.

With expected growth in third party logistics markets forecast to be as high as 15 percent, the demand to service in these markets in 2020 is sure to generate fierce competition.

A greater consumer demand for 24/7 services and reduced costs means efficiency and accuracy are going to be a crucial points for successful 3PL providers. Businesses will remain focused on the goal to drive down their own operational and labor costs by outsourcing logistics to 3PL service providers. But success will also depend on their willingness to adopt new technologies.

The following are the most influential changes predicted within the next 7 years. There’s a very good likelihood they will become common among most third party logistics companies.

1. Extended Collaboration Between Shippers and 3PL Companies

Third party logistics companies will rely heavily on technology to collaborate, connect, and interact with customers. Electronic data exchange services are going to be critical, not just for the performance and integrity of the info, but also to accommodate the speed of change.

Vendor managed inventory, where the supply chain vendor monitors the buyers inventory and makes periodic resupply decisions, are going to be commonplace and allow smaller 3PL services to operate via web-based portals and user-friendly access systems.

2. Mobile Application Expansion

Dependency on paper records in warehouses is becoming a continually diminishing memory. Everything will be focused around agility through mobility. As we’re already seeing, mobile devices are becoming more commonplace and will eventually be used by all third party logistics firms.

With the potential for RFID enabled devices to carry data information with them, product and providence for identification and traceability become easier. Customers are going to be ready to order and process freight shipments anytime, anywhere, 24/7.

3. Dedicated Smart Technology from Third Party Logistics

Third party logistics providers will see the advantages of investing in smarter IT and software systems which may deliver a quick and solid ROI.

By decreasing inefficiencies, software like Transportation Management Systems (TMS), will drive down costs and save time. As voice recognition becomes more accurate, voice prompts and commands are going to be standard within the supply chain process, like stock inquiries or freight tracking.

Improved speech recognition software also will allow workers to speak directly with their Warehouse Management System (WMS) to enhance stock records, speed up order turnarounds and shorten staff training periods.

4. Leveraging Massive Data and Knowledge Sharing

Cloud-based technologies are going to be employed by the bulk of third party logistics companies as they embrace the new age of ‘Big Data’.

3PLs will recognize the necessity to permit client access to their own systems to enhance efficiency in areas linked to seasonal trends, and therefore accommodate the demands of flexible operations. Shared data will also allow the traceability of an item at any given point within the supply chain.

5. A More Globalized Economy

In 2020, an increasingly globalized economy is going to be more integrated. 3PL providers are going to be expected to figure on a bigger scale with a distinctly international outlook.

Distribution will also expand globally with more opportunities opening up. This will create a more complex supply chain, varied costs, increased integration processes, and thus a rise in expert third party logistics.

The 3PL industry will face many challenges within the future, but by 2020 the world will also have grown dramatically, largely due to the expansion of emerging global markets.

As we’ve seen with the meteoric rise of technology itself, change can happen swiftly. We will see more and more mergers & acquisitions over the approaching 7 years within the third party logistics world.

With such a competitive landscape, we will also see more standardization in the expectations of shippers and supply chain managers. The foundational businesses, those that actually start the wheels turning, will experience the end benefits.

At Brimich Logistics, we strive to stay on the most productive cutting edge of 3PL technologies in order to serve you better.

What Makes a Warehouse Food Grade?


What Makes a Warehouse Food Grade?

If You Value the Quality of the Food Products You Supply, Isn’t Your Warehouse Partner Just as Valuable?

Storage is an integral part of food supply chains between the producer, processor, retailer, and consumer. Warehouses that store food products must meet extensive requirements and undergo continuous evaluation. If a facility doesn’t meet regulatory standards, they must discontinue operation.

There are several types of food-grade warehouses. Dry storage, frozen food storage, and refrigerated storage are the most common types and the most likely options for food warehousing.

Dry storage warehouses are suitable for food products that do not require temperature regulation. These products include canned food, rice, and grain. Frozen food storage warehouses have facilities to maintain a constant freezing temperature to handle perishable food products.

A refrigerated warehouse has all the necessary equipment to store food products below a specific temperature without freezing it.

Health and Sanitation Issues

Health and sanitation are crucial in food storage. If a warehouse doesn’t manage cleanliness carefully, it can result in food contamination by bacterial growth, fungi, rodents, or other pests.

Indications that a warehouse’s sanitation is compromised include:

  • Rodent tracks or burrows in- or around the warehouse
  • Standing water, weeds, or trash in the vicinity of the warehouse
  • Leaks in the warehouse’s roof, foundation, or walls
  • Holes in the warehouse windows
  • Signs of damage to the warehouse building’s exterior

Cross Contamination

In addition to the issues listed above, the odour from other products in the warehouse can result in cross-contamination. Food product packaging can absorb odours from other products in the warehouse. When storing a new food item, the warehouse should consider the other products in the warehouse.

Customers who are selecting their 3PL should also consider the products that a warehouse stores as many facilities don’t pay attention to products that can result in cross-contamination.

Four Principles for Food Grade Storage

Pest Control

Substances for pest control at strategic locations around food grade storage perimeter eliminates the presence of rodents, insects, birds, and other animals. A warehouse should inspect the perimeter at least once every quarter to check for infestations.

Master Sanitation Schedule

The warehouse should schedule and document regular cleaning sessions to ensure that the food-grade facility is sterile from the roof to the floor. Records of cleaning sessions should be readily available. The warehouse should either appoint a skilled cleaning staff or hire an industrial sanitation service provider.

Personal Hygiene and Training Program

All the employees who work in a food-grade warehouse should regularly wash their hands at company-supplied stations with soap and hygienic hand-drying devices. Employees should also undergo training in personal hygiene, food safety, incident and crisis management, and quality awareness. The warehouse must keep a record of all employee training sessions.

Lot Traceability

The warehouse’s food-grade logistics operation unit traces lot and date codes on the products to ensure that the warehouse rotates them on a first-in, first-out (FIFO) basis.

Conclusion

The four principles above are central to the operations of a food-grade warehouse. Contact Brimich Logistics to learn more about our 3PL warehousing solutions and value-added services.

What is Co-Packing?


What is Co-Packing?

Contract Packaging Just May Be The Ticket To Growing Your Business

When people hear the term co-packing, also known as contract packaging, there are two questions they ask. “What is co-packing, and how does it work?”

This is an arrangement whereby a firm (let’s call them firm A) allows another firm (firm B) to handle the packaging of its products. Let’s look at co-packing agreements in depth.

How does co-packing work?

What is a co-pack agreement? Co-packing is an agreement between a firm A and its co-packer, firm B. It allows firm B to handle all the packaging processes for firm A.

This contract allows firm A to focus on its specialty, which is production, and firm B focuses on the packaging, branding, and logistics. The two companies have to come to a formal co-packing agreement which outlines the nature of their relationship.

Why do firms opt for co-packing?

There are many reasons why your firm might want to consider co-packing as a way of streamlining its business operations, including:

  1. Cost – For most firms that opt to enter into a co-packing agreement, cost is the main driving factor. Instead of firm A establishing a packaging unit, these costs can be saved by outsourcing the services of a co-packer.
  2. Technology – Co-packers invest a lot of resources in technology that helps to make the packing exercise smooth and time efficient. Many companies lack this technology, so it is necessary to seek a partnership with a co-packer.
  3. Spike in demand – A co packer’s services can come in handy if a company is experiencing a spike in demand for its products. This sudden increase may mean the company is unable to meet the packaging requirements at its facility, so they need to enter into an agreement with a co-packer.
  4. Specialization – Specialization is a core principle of economics and running a business. Companies that choose to specialize in one specific task might find the services of a co-packer to be necessary. This may inform their choice to enter into a co-packing agreement.

Which industries can co-packing serve?

Co-packing, as has been established, focuses on the packaging and branding of products given to them with permission from another company. The services of a co-packer can cut across many industries.

With the question of what co-packing is and how it works answered, the following list of industries stand to benefit most from agreements with a co-packer.

  • Cosmetics – The cosmetic industry is one that relies heavily on the right packaging to make a dent in the market. The services of a co-packer can help a firm in this industry to transform into a market leader.
  • Pharmaceuticals – Many times, medicine isn’t packed by its manufacturing firm. Co-packing is a crucial aspect of collaboration in this industry.
  • Beverages – Bottling companies are a must have for the beverage industry. Without them, it would present a challenge for a company to distribute its products.

Is Co-packing Right for You?

The answer to this question will be based on two things; what you produce and in what quantity. This is what determines whether your firm needs a co-packer.

Types of Managed Inventory – Part 2


Types of Managed Inventory – Part 2

Who Do You Trust to Manage Your Products Within The Supply Chain?

Transit Inventory

Transit inventory consists of goods that are still in transit between companies. When a transaction involves the shipping of large quantities, it can take days or even weeks to occur.

Transit inventory can also result in accounting and ownership issues for companies that don’t track shipments between locations.

Large firms use the services of freight consolidators to combine inventories from several locations into one shipping source to establish economies of scale and reduce the input cost per unit. Consolidating shipments increases the size of transit inventory as well as the transit time.

Buffer Inventory

Some firms find themselves in volatile conditions, uncertainty in terms of product quality and delivery times from suppliers, and fluctuating demand.

To protect themselves against these conditions, companies keep buffer or safety inventory, which is stock at hand that exceeds demand.

When a firm runs out of existing inventory, it doesn’t have to backorder items, and as it can source them from buffer inventory.

Customer service is a crucial motivator to hold buffer inventory, as the firm is less likely to run out of stock and make the customer wait for the next order cycle. Buffer stock also mitigates the risk of customers switching to another supplier for their orders.

Anticipation Inventory

Anticipation inventory is stock that firms purchase in addition to their current need when they anticipate an increase in demand.

When there are anticipated events like seasonal increases in demand or labor strikes, firms ramp up their orders or production to be able to meet all orders.

Retailers typically stock anticipation inventory before demand increase for, for example, Christmas or the back-to-school season.

Manufacturers also maintain or increase production when demand is low, so they have stock available when demand rises again.

Producing anticipation inventory also eliminates the need to employ additional means of production in reaction to a demand increase.

MRO Goods Inventory

MRO goods are the maintenance, repair, and operating supplies that support production processes. Firms consume MRO goods during production, but they don’t form part of the finished product as raw materials or work-in-process inventory.

Examples of MRO goods include:

  • Fuel, oils, lubricants, and coolants
  • Janitorial supplies, protective clothing, and uniforms
  • Packing materials and storage products
  • Tools, screws, nuts, and bolts

Secondary supplies to support the production infrastructure can also fall under MRO goods, for example, stationery, paper, and toner.

Theoretical Inventory

Theoretical inventory is the average inventory at a given throughput while assuming an ideal situation where is inflow, processing, and outflow rates are equal. In other words, no work-in-process item has to wait for processing.

Firms determine theoretical inventory to calculate the minimum amount of stock that is necessary to maintain the given process throughput.

Theoretical inventory = Throughput x Theoretical Flow Time. Theoretical time includes the sum of all processing times for one unit and doesn’t include wait times.

Work-in-process inventory is equal to theoretical inventory when the actual process flow time is equal to theoretical flow time.

In case you missed it, check out Part 1 of this article here >>

Types of Managed Inventory – Part 1


Types of Managed Inventory – Part 1

What Can Be Measured Can Be Controlled – for Profit!

Most businesses that supply products carry inventory, which is a stock or store of goods. A company manages its inventory and keeps it at hand so it can meet demands or carry out its daily operations.

The types of managed inventory that a business has depends on the industry. For example, retailers have finished products in stock, and manufacturers use raw materials or work-in-process.

An organization must manage its inventory carefully to ensure that it can fulfill its reason for existence, especially in volatile conditions with fluctuating demand.

In this section, we’re looking at the different types of managed inventory.

Raw Materials

Raw materials are a type of managed inventory that manufacturers use in the production of product components, subassemblies, or finished products.

Raw materials typically consist of commodities, extracted products, elements, or objects that the firm extracted or purchased.

Commodities that organizations implement in their production process as raw materials include things like minerals, ore, wood, steel, and chemicals.

Raw materials can also be finished products like nuts, bolts, wheels, and engines if the firm purchased the inventory to produce components.

Work-in-process

Work-in-process is a type of managed inventory that:

  • Is not a raw material,
  • Is a component of a parent,
  • Is processed or about to be processed in the production system

Work-in-process inventory includes materials, components, subassemblies, assemblies released for initial processing.

This inventory can also be fully processed materials that are awaiting inspection before inclusion in finished products.

Finished Goods

Finished goods are completed products that underwent and passed final inspection and that are ready for order by wholesalers, retailers, or final users. This type of inventory does not have a parent in the production process.

However, the end-user may purchase a single unit to use as a component in another product, for example, car engines that are manufactured as finished goods and sold to wholesalers.

Decoupling Inventory

The machines in a production facility typically don’t have the same output rate. One station can take longer to process parts as the one before it in the production process.

Additionally, some machines may be removed from the production line for repairs or maintenance.

When looking at a functioning line, however, it may appear as if all the machines have a corresponding output and that the production process is flowing smoothly.

Production flows because of decoupling inventory or safety stock that ensures an indirect feed between devices and acts as shock absorbers in a production line.

Decoupling inventory prevents inventory from piling up at slow-moving stations in the production process, eliminating bottlenecks that can affect other stages in the process.

Cycle Inventory

Ordering or producing large quantities, the ordering cost per unit decreases. However, ordering large quantities can increase carrying and holding costs.

Economic order quantity is a concept that businesses follow to balance carrying and holding costs with the costs related to orders or production.

When the costs related to holding and carrying costs are equal, the total cost per unit is at its lowest. Cycle inventory is the excess stock that the business order to achieve this minimization point.

Continue to the second part of this series: Types of Managed Inventory Part 2

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