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