Importance of Inventory Logistics

¶ … inventory to logistics. A company's inventory consists of its raw materials as well as finished and unfinished goods that have yet to be sold. As inventory components progress through various phases, a company uses logistics to manage the flow of materials and goods from suppliers, through the organization, and to the customers. This flow must be maintained with priority on efficiency and cost effectiveness, which requires inventory optimization, thus the relationship between inventory and logistics.

One of the key determinants of inventory levels is the need for a company to provide customer service. In considering the quality of their customer service efforts, companies recognize that customer service is a key competitive differentiation point as they attempt to create value for their end consumers. Given this competitive environment, firms must hold inventory at sufficient levels to meet customer demand. On the other hand, they must still manage costs. So, on the one hand, there is the problem of having too much inventory, which can lead to higher costs, versus having too little inventory, which can lead to lost sales. Logistics assists in inventory control so that firms can pursue inventory reduction strategies that optimize inventory levels.

Companies have to strike a balance between carrying enough inventory to be able to respond to customer demand and minimizing their investment in inventory. At the same time, they must also minimize their investment in facilities and equipment, as well as reduce warehousing and storage costs. All of these logistical costs must be taken into account when determining inventory levels.

To avoid shortfalls and stockouts, companies carry extra inventory or safety stock. As they provide higher levels of customer service, their sales increase. But along with the increase in customer service, logistical costs increase disproportionately.

Many companies use supply chain managements software and technology to optimize their inventories and manage their logistics operations. In addition, they find it beneficial to work closely with supply chain partners to find the best balance between inventory levels and customer service. This collaboration involves working together to reduce replenishment speed and efficiency. Collaboration also involves communication with suppliers, both internal and external to the company. It involves working with supply chain partners to help suppliers streamline their operations as well.

One aspect of communication involves measuring how well logistics operates, so a company must use metrics on supplier performance, customer service, and internal assets.

Logistics associated with inventory management means having a well-defined order fulfillment process. This means determining common goals among the stakeholders, including establishing sales and operations planning and forecasting schedules, and also maintaining purchasing levels and adhering to purchasing policies so as to achieve the best inventory optimization results.