Inventory maintenance lies with tangible, intangible costs
Domino effect of supply chain highlights importance of flexibility
The domino effect in the beverage supply chain prompts attention to strategy and philosophy challenging producers and distributors regarding product inventories and out-of-stocks.
The effect is broad and sales evaluations reveal that supply chain distribution situations do occur. The driving factor is finished goods inventory levels that should be maintained throughout.
From an operations perspective, the options are clear. Produce to forecast because volumes are predicated on sales; however, physical facilities must be sufficient to maintain inventories that ensure desired products are on the shelf for the consumer. Logistics rarely show production direct-to-consumer; therefore, inventories must avoid supply chain gaps at all costs.
Inventory maintenance is a financial matter because tangible and intangible expenses — also known as “inventory carrying costs” — are incurred and become an investment on the books.
Tangible costs: Inventories based on forecasts or experience are the first factor because space [storage, labor, handling] is a variable cost that is determined by how much is consumed by inventory.
Timing is important because beverage seasonality poses the question: how much inventory will there be, and at what time? This factor affects facility space utilization and configuration.
In addition, brand makeup can be significant because most inventory decisions typically consider how fast or slow moving products will affect space use and is reflected in carrying cost.
Other tangibles include taxes, insurance, and possibly depreciation and/or shrinkage. These often are overlooked in the cost calculation; nevertheless, these factors make up the real-time carrying cost of inventory investing.
Intangible costs: Aside from tangible factors, there are intangible costs that should be considered when calculating inventory investment, including cost of money used to generate the inventory, deterioration, obsolescence and, depending on operating conditions, there could be more (at least on this side of the coin).
Aside from the inventory generation and related cost is the other side of the coin: insufficient products to sell — or the age-old “out of stock” label. Never be out of stock.
From an engineering viewpoint, producers should plan to establish the capacity and capability in their own facility, or utilize contract packers or other sources that can provide sufficient product volume for short- and long-term forecasts in defined marketing areas. The plan also should ensure the correct processing technology is in place, and production machinery and equipment can adapt to packaging variables and volumes without delay or loss of production. This might appear somewhat basic or academic, but observations and experience have revealed that lack of such planning can contribute to out-of-stock situations.
The inability to maintain inventories that meet marketing demands also incurs some tangible, but mostly intangible, expenses. Determining lost cost due to out of stock is a challenge because many of the causes are not quantifiable in real terms. Lost sales is one factor that could be tangible; however, projections can be reasonably accurate on what could have been sold. Nevertheless, intangibles — switching brands, stores, or losing brand customers — are all cost-intensive.
The important strategy in the domino effect of the supply chain is to ensure flexible inventory levels are created with variable cost. Inventory level versus out of stock — it will never go away — because consumers must have product.