In my last blog ”Unpacking Dual Challenges: Product Proliferation and Other Operational Realities in the Beverage Industry”, we examined product proliferation in the beverage industry and proposed a few questions that should always be asked when making supply chain-related decisions. In this entry, we will review four inventory categories and the business rationales for holding each type.
Four Categories of Inventory
We consider four inventory categories, Cycle, Safety, Pipeline and Pre-build, that are typically found in the beverage industry. These are organized according to the business requirements they fulfill and are conceptually independent.
Cycle Inventory
Cycle Inventory is the amount of stock carried due to replenishment batch or lot quantities.
If you must produce 5000 cases each time you make Product A, then this is your cycle inventory. If we presume a constant rate of sales, the average cycle inventory is half of the replenishment lot size; the average cycling inventory for 5000 case cycle inventory would be 2500 cases.
For ordered products, the minimum required order quantity determines how long inventory lasts, under the presumption that sales are going to be steady. Due to minimum order quantity requirements, purchasers may be forced to order substantially more than is needed. When ordering finished goods from a contract packer, purchasers might have to order individual products in pallet quantities and must fill a complete truckload per order.
Safety Stock
Safety Stock is inventory carried to protect against unexpected demand or unreliable replenishment. It is a challenge to calculate safety stock because doing so requires a thorough understanding of the statistical reliability of the forecasting and replenishment process over the applicable lead and planning cycle time.
Through empirical studies, we have found that lead-time and planning cycle times necessary to properly set a safety stock level are often underestimated.
Very few promoted products have a normal distribution of sales so we cannot realistically use standard safety stock calculations. For these products, we use a unique approach that is better at predicting the safety stock required to avoid stock outs. Areté’s methodology doesn’t assume normality but instead captures the true distribution of demand.
Pipeline Inventory
Pipeline Inventory is stock that is in-transit; it is sometimes referred to as In-Transit Inventory when looking at it from the point of view of the company selling and shipping the product. Pipeline Inventory is significant when you have distant satellite warehouses that are days apart. In regions where warehouses are spread far apart, at any given time there is a significant amount of inventory “in the pipeline”. This inventory does require warehouse space but it ties up both capital and the transportation resources. At all times, it is important to consider how much inventory is tied up in the pipeline because pipeline inventory will impact the amount of future floor inventory at the destination point.
Pre-Build Inventory
Pre-Build Inventory is inventory that is built and carried for some time when it is anticipated that demand will exceed capacity. A producer may pre-build, producing substantially more than is being sold, when approaching a high season. Producers may also pre-build in anticipation of line maintenance or labor stoppage. Pre-build inventory is also known as Anticipation Inventory. Areté’s Tactical Replenishment Planning (TRP) capability allows companies to strategically pre-build at the right point in time to prevent capacity issues in the future while lowering costs.
Other Considerations
While not typically included in these four categories, WIP (work-in-progress) inventory is a pool of unfinished stock still in production at a manufacturing plant. WIP is a sub-classification of inventory as it is being processed before transitioning into Cycle, Safety Stock or Pre-build stock inventory. It is not a type of Pipeline inventory because it is not en route to a new location.
Note that inventory policies and inventory levels do not have to be described in physical units. Inventory can also be managed in terms of “Days of Supply” which indicates the number of days that current inventory will last given expected demand or requirements. Representing stock levels in Days of Supply terms allows for “variable” levels of inventory in order to cover a period of time; this is often the more suitable and dynamic approach for managing stock level.
Summary
We have reviewed four primary categories of inventory (Cycle, Safety Stock, Pipeline and Pre-Build) as well as the business requirement for each category. In order to optimize stock collectively, an intelligent Supply Planning solution is necessary.
In the next blog of this series, we will outline ways of reducing inventory levels for each of the aforementioned inventory categories. Please subscribe to our blog to be notified as soon as the next in this series is available to you!
