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Week 13.1 Inventory Management in SCM

Inventory management is an important part of supply chain management. Maintaining efficient inventory levels is a key objective, as inventory is considered a liability. Companies aim to keep inventory levels as low as possible to reduce costs associated with purchasing, holding, and managing inventory. Inventory plays an important role in balancing demand and supply and managing flows within the supply chain. Optimization models are used to codify supply chain issues into mathematical problems to find the best solution subject to constraints, using approaches like mixed integer linear programming, stochastic modeling, and uncertainty modeling.

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93 views4 pages

Week 13.1 Inventory Management in SCM

Inventory management is an important part of supply chain management. Maintaining efficient inventory levels is a key objective, as inventory is considered a liability. Companies aim to keep inventory levels as low as possible to reduce costs associated with purchasing, holding, and managing inventory. Inventory plays an important role in balancing demand and supply and managing flows within the supply chain. Optimization models are used to codify supply chain issues into mathematical problems to find the best solution subject to constraints, using approaches like mixed integer linear programming, stochastic modeling, and uncertainty modeling.

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Supply Chain Management – Inventory Management

As seen under the major objectives of supply


chain, one of the basic objectives of SCM is to
make sure that all the activities and
functions within as well as across the
company are managed efficiently.

There are instances where efficiency in supply


chain can be ensured by efficiencies in inventory, to be more precise, by
maintaining efficiency in inventory reductions. Though inventory is
considered a liability to efficient supply chain management, supply chain
managers acknowledge the need of inventory. However, the unwritten rule is
to keep inventory at a bare minimum.

Many strategies are developed with the objective of streamlining inventories


beyond the supply chain and holding the inventory investment as low as
possible. The supply chain managers tend to maintain the inventories as low
as possible because of inventory investment. The cost or investment related
with owning inventories can be high. These costs comprise the cash outlay
that is necessary for purchasing the inventory, the costs of acquiring the
inventories (the cost of having invested in inventories rather than investing
in something else) and the costs related with managing the inventory.

Role of Inventory

Before understanding the role of inventory in supply chain, we need to


understand the cordial relationship between the manufacturer and the
client. Handling clients, coping up with their demands and creating
relationships with manufacturer is a critical section of managing supply
chains.

There are many instances where we see the concept of collaborative


relationship being marked as the essence of supply chain management.
However, a deeper analysis of supply chain relationships, especially those
including product flows, exposes that at the heart of these relationships is
inventory movement and storage.
More than half of it relies on the purchase, transfer or management of
inventory. As we know, inventory plays a very important role in supply
chains, being a salient feature.

The most fundamental functions that inventory has in supply chains are as
follows:
 To supply and support the balance of demand and supply.
 To effectively cope with the forward and reverse flows in the supply
chain.
Companies need to manage the upstream supplier exchanges and
downstream customer demands. In this situation, the company enters a
state where it has to maintain a balance between fulfilling the demands of
customers, which is mostly very difficult to predict with precision or
accuracy, and maintaining adequate supply of materials and goods. This
balance can be obtained through inventory.

Optimization Models

Optimization models of supply chain are those models that codify the
practical or real life issues into mathematical model. The main objective to
construct this mathematical model is to maximize or minimize an objective
function. In addition to this, some constraints are added to these issues for
defining the feasible region. We try to generate an efficient algorithm that
will examine all possible solutions and return the best solution in the end.
Various supply chain optimization models are as follows:

Mixed Integer Linear Programming

The Mixed integer linear programming (MILP) is a mathematical modeling


approach used to get the best outcome of a system with some restrictions.
This model is broadly used in many optimization areas such as production
planning, transportation, network design, etc.

MILP comprises a linear objective function along with some limitation


constraints constructed by continuous and integer variables. The main
objective of this model is to get an optimal solution of the objective function.
This may be the maximum or minimum value but it should be achieved
without violating any of the constraints imposed.

We can say that MILP is a special case of linear programming that uses
binary variables. When compared with normal linear programming models,
they are slightly tough to solve. Basically the MILP models are solved by
commercial and noncommercial solvers, for example: Fico Xpress or SCIP.

Stochastic Modeling

Stochastic modeling is a mathematical approach of representing data or


predicting outcomes in situations where there is randomness or
unpredictability to some extent.

For example, in a production unit, the manufacturing process generally has


some unknown parameters like quality of the input materials, reliability of
the machines and competence within the employees. These parameters have
an impact on the outcome of the manufacturing process but it is impossible
to measure them with absolute values.

In these types of cases, where we need to find absolute value for unknown
parameters, which cannot be measured exactly, we use Stochastic modeling
approach. This modeling strategy helps in predicting the result of this
process with some defined error rate by considering the unpredictability of
these factors.

Uncertainty Modeling

While using a realistic modeling approach, the system has to take


uncertainties into account. The uncertainty is evaluated to a level where the
uncertain characteristics of the system are modeled with probabilistic
nature.

We use uncertainty modeling for characterizing the uncertain parameters


with probability distributions. It takes dependencies into account easily as
input just like Markov chain or may use the queuing theory for modeling the
systems where waiting has an essential role. These are common ways of
modeling uncertainty.

Bi-level Optimization

A bi-level issue arises in real life situations whenever a decentralized or


hierarchical decision needs to be made. In these types of situations, multiple
parties make decisions one after the other, which influences their respective
profit.

Till now, the only solution to solve bi-level problems is through heuristic
methods for realistic sizes. However, attempts are being made for improving
these optimal methods to compute an optimal solution for real problems as
well.

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