- Define Square Law in safety inventory of supply chain management.
From an inventory perspective, the ideal situation would be a response-based supply chain. The practicality of implementing a fully response-based supply chain was discussed in terms of the total costs and timeliness of customer support. [ While a zero-inventory supply chain is typically not attainable, it is important to remember that each dollar invested in inventory is a trade-off to an
alternative use of assets.
Inventory is a current asset that should provide return on the capital invested. The return on inventory investments is the marginal profit on sales that would not occur without inventory. Accounting experts have long recognized that measuring the true cost and benefits of inventory on the corporate profit-and-loss is difficult. Lack of measurement sophistication makes it difficult to evaluate the trade-offs between service levels, operating efficiencies, and inventory levels. While aggregate inventory levels throughout sectors of the economy have decreased, many enterprises still carry more inventory than needed to support actual business requirements. The forces driving this generalization are understood better through a review of the four prime functions of inventory. Table 7.1 summarizes Inventory Functionality.
These four functions, geographical specialization, decoupling, balancing supply and demand, and buffering uncertainty, require inventory investment to achieve operating objectives. While logistics has made significant progress in reducing overall supply chain inventory, inventory properly deployed creates value and reduces total cost. Given a specific manufacturing/marketing strategy, inventories planned and committed to operations can only be reduced to a level consistent with performing the four inventory functions. All inventory exceeding the minimum level represents excess commitments.
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