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Inventory Management

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DOI: 10.5772/intechopen.113282

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Chapter

Inventory Management
Ahmed Esmail Mohamed

Abstract

Inventory management is pivotal for business performance and profitability.

Efficiently handling inventory levels enhances operational efficiency and financial
strategies. Poor management can result in financial losses, stock imbalances, delayed
order fulfillment, and dissatisfied customers. This chapter discusses inventory man-
agement frameworks, focusing on objectives, techniques, and best practices. The
primary goal is to balance overstocking and understocking, ensuring adequate working
capital while optimizing costs. The chapter delves into various inventory management
techniques, aiming to effectively control and manage inventory. It particularly sheds
light on two pivotal techniques: Vendor-Managed Inventory (VMI) and Just-in-Time
(JIT). VMI reduces inventory levels and improves fill rates, enhancing supply chain
performance. On the other hand, JIT minimizes excess inventory and improves
material flow. Both techniques present challenges and benefits. Accurate forecasting
is highlighted as a best practice, aligning production with demand, reducing carry-
ing costs, enhancing cash flow, and streamlining the supply chain. The literature is
reviewed, emphasizing inventory management’s role in the broader context of supply
chain management.

Keywords: supply chain management, inventory management, cost efficiency, demand

forecasting, Vendor-Managed Inventory, safety stock, Economic Order Quantity

1. Introduction

Modern business management no longer competes as independent entities but

rather as supply chains. Mentzer [1] defines a supply chain as “a set of three or
more entities (organizations or individuals) directly involved in the upstream and
downstream flows of products, services, finances, and/or information from a source
to a customer.” The supply chain is not only a chain of businesses with one-to-one,
business-to-business relationships but also a network of multiple businesses and
relationships [2].
Supply chain management (SCM) encompasses the flow of both materials and
information within the supply chain, with the latter directly influencing internal
activities such as production scheduling, inventory control, and delivery plans [3].
Effective supply chain management decisions can result in cost reductions for orga-
nizations, including transportation, sourcing, stockouts, storage, and disposal costs.
To achieve these benefits, supply chain members must recognize their role within a
complex network and understand the interdependencies between chain participants.

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Operations Management - Recent Advances and New Perspectives

The overall objectives of SCM are to improve the company’s profitability and perfor-
mance, to reduce the costs mainly by reducing the inventory level, and to maximize
the overall value generated to the customer [4].
In the context of supply chain management, the integration of inventory manage-
ment is essential. Efficient inventory management ensures that the right products
are available at the right time, preventing stockouts and overstocking [3]. This
synchronization enables organizations to respond promptly to changes in demand
while minimizing excess inventory costs. Inventory management presents numerous
challenges for many supply chains as they are becoming more complex and composed
of multiple stages.
The goal of inventory management is to increase customer service, enhance
product variety and availability, and minimize costs [5]. Achieving efficient supply
chain operations relies on well-defined inventory management policies that facilitate
reduced excess inventory levels throughout the entire chain [6].

2. Literature review

This section will offer an overview of inventory management aspects that have
been identified in prior literature. Research on inventory management is crucial and
has consistently held a central role in various academic literatures. Scholars from
diverse fields have published articles that contribute to the advancement of inventory
management theory.
Inventory is commonly understood as being synonymous with stock. Stock refers
to tangible goods that are subject to processes such as mining, conversion, creation,
transportation, and sale [7]. Inventories include raw materials, work-in-process
goods, and fully finished products, comprising a business’s assets that are either
prepared for immediate sale or intended for future availability [7]. Selecting an
appropriate inventory model is regarded as a significant challenge for industries.
The earliest scientific research on inventory management dates back to the second
decade of the previous century, yet the continued interest in this scientific field
remains substantial [8]. Inventory management is defined as an ongoing procedure
involving the planning, organization, and control of inventory [9]. Its objective
is to reduce investment in inventory while ensuring equilibrium between supply
and demand. The objective of this process is to decrease procurement and carrying
costs, all the while upholding an optimal product inventory level to satisfy customer
demand.
Inventory management tracks stock trends, ensuring timely ordering and
customer order fulfillment while preventing shortages. Inventory transforms into
revenue upon sale, but while unsold, it ties up cash, and excessive stock diminishes
cash flow [5]. Effective inventory management entails weighing inventory costs
against its benefits. Inventory management’s primary advantages include enabling
order fulfillment and increasing profits [10]. Inventory offers numerous advantages.
It enhances customer service through reduced lead times, fosters organizational
flexibility, cushions variances between input and output rates—accomplished by
bulk ordering or manufacturing and selling in smaller quantities—and evens out
manufacturing burdens for organizations dealing with demand fluctuations [7].
Additionally, it serves as a repository for potential capacity that might otherwise go
to waste. Inventory also has disadvantages. It ties up working capital and space. It can

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suffer from obsolescence, deterioration, and shrinkage. It can lead to administrative

complexity and can mask inefficiencies.
Inventory management is widely regarded as one of the most critical challenges
in organizational management. Typically, there is no one-size-fits-all solution; the
circumstances vary for each company or firm, encompassing distinct features and
limitations [8]. In the present day, numerous inventory management techniques are
employed by companies with the intention of gaining control over their inventories.
However, not all these techniques are universally applicable to every industry. As a
result, despite the multitude of approaches available for inventory control, selecting an
appropriate one that aligns with a specific company remains a formidable challenge.
Within this chapter, we will delve into several of these techniques and elucidate the
significance of each.

3. Inventory management

Inventory management is a specialized branch of business management that

involves the strategic planning and control of inventories, aiming to uphold the ideal
stock quantities for certain products or items [11].
The challenges of inventory management revolve around the balance between
excessive stock and insufficient inventory. Effective inventory management is crucial
due to its direct impact on operational efficiency, customer satisfaction, and the
financial objectives of an organization. As the number of stages in the supply chain
increases, the complexity of managing inventory also rises. Handling inventory
within a multi-echelon supply chain is notably more challenging than overseeing it
within a single-echelon structure [12].

3.1 Objectives of inventory management

In businesses, especially those involved in manufacturing and production, a sub-

stantial number of financial resources are typically directed toward inventory. This
allocation of funds can sometimes exceed what is dedicated to other assets within
the organization. Consequently, inventory management emerges as a central player
within the realm of supply chain management activities. As previously noted, the
fundamental objective of inventory management encompasses ensuring an uninter-
rupted supply of materials to sustain production during customer demand while
avoiding both overstocking and understocking. This approach aims to maintain the
necessary working capital for operational and sales activities; optimize various costs
such as carrying, ordering, and storage costs; eliminate duplication in stock orders;
provide a continuous flow of required materials; and contribute to price stability. In
essence, effective inventory management serves the critical purposes of supporting
consistent production, cost efficiency, and overall financial stability. In this section,
the focus will be on the main, common points that are mentioned in the previous
literature and are related to the objectives of inventory management.

3.1.1 Cost efficiency

Inventory management is associated with costs that exert a direct influence on the
value of inventory [13].

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3.1.1.1 Carrying costs

Among the challenges of inventory management, carrying costs stand out. These
costs arise from the storage of products in warehouses, distribution centers, or stores.
They encompass expenses such as storage fees, labor, transportation, handling, taxes,
insurance, and depreciation. In essence, carrying costs constitute the total expendi-
ture invested in stocking and storing products and items prior to their sale.

3.1.1.2 Ordering costs

Ordering costs pertain to the expenses linked with placing orders for new inven-
tory. This includes transportation, shipping charges, inspections, and other expendi-
tures related to the order process.

3.1.1.3 Stockout costs

Stockout costs encompass both direct and indirect expenses that a business incurs
when it faces a shortage of stock. Recognizing the substantial impact of these costs on
a company’s margins, revenue, and overall profitability is crucial.

3.1.2 Optimal inventory levels

Balancing on-hand stock is a central challenge faced by most businesses.

Achieving optimal stock levels necessitates alignment with actual customer
demand, ensuring that quantities are consistently available to meet that demand.
Simultaneously, maintaining excessive stock levels can lead to a host of adverse
consequences that negatively impact cash flow and profit margins.

3.1.3 Demand forecasting

Another main challenge for inventory management is demand forecasting, which

involves anticipating inventory needs. Supply chain forecasting goes beyond the
operational task of estimating demand requirements at each level of the supply chain
network. It involves complex issues such as supply chain coordination and sharing
end-customer demand information among members. Consequently, numerous
forecasting techniques have been investigated to assess their impact on inventory
management in the supply chain. Researchers have extensively examined methods
such as moving averages, exponential smoothing, and minimum mean squared error.
Demand forecasting plays an important role in balancing inventory levels and conse-
quently affects inventory management.

3.1.4 Lead time management

Lead time represents the time difference between when a customer places an order
and when the product or service is delivered. It serves as a crucial factor for calculat-
ing demand during the lead time, also known as safety stock [3]. In short, lead time is
the duration it takes for an order to be fulfilled. Lead time can significantly impact the
decision-making process when purchasing products, as longer lead times can cause
companies to become apprehensive and order excessive amounts, ultimately leading
to an accumulation of excessive stock.
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3.2 Inventory management techniques

Inventory management is an immensely significant function for any business; if

not done well, it can cause serious problems. Poorly managed inventories can lead to
production delays, unhappy customers, and less available money for the business.
Inefficient inventory management can result in production delays, customer dissatis-
faction, or even a reduction in working capital [14].
Many researchers have looked into different ways to manage inventory effectively.
In this chapter, we’ll concentrate on the techniques most frequently discussed in the
literature.

3.2.1 ABC inventory classification technique

The ABC inventory classification technique is widely utilized by large firms to

efficiently manage a significant volume of inventory items. This method involves the
categorization of inventories into three primary groups: A, B, and C. Items desig-
nated as “A” hold the highest level of importance, whereas “C” items are deemed to
be of lesser significance. The classification of items follows a hierarchy where “Class
A” items represent the most crucial, followed by Class B items, and finally, Class C
items, which are the least critical. This classification system plays a pivotal role in
prioritizing inventory items based on their stock levels and reordering requirements.
Moreover, it simplifies the arrangement of inventory items based on their respective
values, demand, costs, and risk data [15].

3.2.2 Just-in-Time (JIT) inventory management technique

The concept of JIT originated from the Toyota Motor Company in Japan. JIT rep-
resents an innovative approach to inventory management, fostering a supply–demand
system that promotes streamlined production and aims to precisely align demand with
supply [8]. JIT systems are designed to rapidly respond to demand fluctuations, elimi-
nating the need for excessive inventory. These systems replenish inventory and trigger
reorders for future resources once a predetermined minimum threshold is reached,
signaled by an indicator that denotes the necessity for additional stock to fulfill current
demand. The core principle revolves around delivering goods precisely as promised
when an order is placed by the customer. In manufacturing, the JIT philosophy extends
to a Japanese management approach that revolves around ensuring the right items of
optimal quality and quantity are available in the right location and at the right time [16].
JIT inventory management is an approach whose goal is to eliminate inventories rather
than simply improve inventory quality. Raw materials and work in progress are reduced
to equal the quantity required for a day’s production. This is achieved by reducing plan-
ning time and lead time, allowing for smaller packaging. Suppliers may be required to
deliver multiple items per day or near the utility facility to support this process [10].

3.2.3 Economic Order Quantity (EOQ )

The order quantity that minimizes overall costs is referred to as the Economic
Order Quantity (EOQ ). This quantity strikes the most efficient balance between
ordering and holding costs, making it a crucial parameter in inventory management.
The concept of Economic Order Quantity (EOQ ) revolves around determining the
optimal order quantity that strikes a balance between inventory holding costs and
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reorder costs [17]. This model has proven to be invaluable in resource optimization,
leading to significant cost reductions. The EOQ model involves a careful consider-
ation of the trade-off between ordering costs and storage costs when deciding on the
replenishment quantity for item inventories.
When opting for a larger order quantity, the frequency of ordering is reduced,
subsequently lowering ordering costs. However, this approach necessitates main-
taining a higher average inventory, consequently elevating storage (holding) costs.
Conversely, choosing a smaller order quantity reduces average inventory levels but
results in more frequent orders, leading to higher monthly ordering costs.

3.2.4 Safety stock

Safety stock refers to the average amount of inventory held on hand to account for
short-term uncertainties in both demand and supply variability [18]. In simpler terms,
safety stock represents the inventory maintained to prevent instances of stockouts and
backorders. Its purpose is to safeguard against various deviations, including discrepan-
cies in delivery dates (when replenishment lead times vary), variations in requirements
(arising from inaccurate forecasts), differences in delivery quantities (stemming from
insufficient vendor supply or subpar material quality), and discrepancies in inventory
levels (when disparities arise between planned and actual inventory) [19].

3.2.5 Vendor-Managed Inventory (VMI)

Vendor-Managed Inventory (VMI), also referred to as continuous replenishment

or supplier-managed inventory, stands out as a pivotal partnering initiative that
promotes collaboration and information sharing among trading partners, exploring
the various benefits it offers [20]. The VMI technique gained prominence in the late
1980s through adoption by industry leaders such as Walmart, Procter & Gamble,
Nestle, and Electrolux Italia.
Vendor-Managed Inventory (VMI) represents a strategic supply chain approach
where the vendor assumes responsibility for determining optimal inventory levels for
each product and establishes suitable inventory policies to ensure seamless inventory
management. This approach proves advantageous to retailers by furnishing them with
a competitive edge. It translates into heightened product availability and service levels
while concurrently reducing the need for extensive inventory monitoring and mini-
mizing costs associated with the ordering process.

3.3 Best practices for effective inventory management

Most retailers aim to achieve goals such as reducing inventory levels and achieving
high inventory turnover through their practical operations. The outcomes of decisions
and steps taken during inventory management can lead to issues like low liquidity due
to a high inventory backlog or poor customer experiences resulting from inventory
shortages [21]. In this section, we will delve into the key points that contribute to the
best practices for effective inventory management.

3.3.1 Accurate forecasting

Accurate demand forecasting is a critical success factor in effective inventory

management. It encompasses predicting, projecting, or estimating the expected
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demand for products over a specified future timeframe [22]. Demand forecasting
plays a pivotal role in inventory management by enhancing an organization’s competi-
tiveness and facilitating informed decision-making. This, in turn, forms the basis for
replenishment, distribution plans, and efficient supply chain management. Demand
forecasting poses significant challenges across various industries. Two main problems
make it hard. First, real customer demands can be irregular. Second, it’s often unpre-
dictable when that demand will happen. Consequently, demand forecasting becomes
imperative for informed decisions regarding inventory management and production
planning. By aligning inventory levels with projected demand, accurate forecast-
ing can reduce inventory costs and ensure enhanced customer satisfaction through
consistent and timely fulfillment of customer demands.

3.3.2 Supplier collaboration

Manufacturing and production companies commonly encounter a range of chal-

lenges when it comes to supplier collaboration. These challenges can be categorized into
several key areas. One notable challenge is data sharing, as many companies struggle
to effectively share real-time information that is crucial for informed decision-making
processes. Another significant hurdle is the lack of trust between companies and their
suppliers, particularly concerning sensitive information and intellectual property.
Another critical aspect is Supplier Performance Monitoring, which involves the ongoing
evaluation of suppliers to ensure both quality and efficiency. Nonetheless, this task can
be intricate due to the varying performance metrics involved, and its implementation
can be particularly challenging without the appropriate tools and resources.
To tackle these challenges, strategic planning, the adoption of advanced technolo-
gies, and the establishment of robust and open lines of communication are essen-
tial. Overcoming these obstacles often demands a substantial investment of time,
resources, and commitment from all parties involved.

3.3.3 Cross-functional collaboration

Cross-functional collaboration takes place when individuals from various teams or

departments collaborate on a designated project or objective. This approach har-
nesses the diverse skills and specialized knowledge of each team member to generate
innovative ideas, tackle challenging issues, and attain superior outcomes within an
organization. An illustrative example of this is evident in supply chain inventory
management within many organizations. This indicates that each functional area,
including sales, marketing, finance, and operations, collaborates within its specific
domain of the inventory management process to align strategies and goals effectively.
Cross-functional collaboration in inventory management is not solely the responsibil-
ity of one department; it involves interconnected processes that impact different parts
of the business. As a result, involving different perspectives and expertise tends to
improve overall inventory accuracy and align with the organization’s strategic goals
and objectives. This holistic approach aims to break down silos, enhance communica-
tion, and create a more cohesive inventory management strategy.

3.3.4 Regular audits

Inventory audits are a crucial process for maintaining precise stock records,
identifying reasons for shrinkage, and ensuring the availability of accurate stock
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on hand. Such audits involve cross-referencing a company’s financial and inventory

records to ensure alignment with the physical inventory count, thereby ensuring
inventory accuracy and addressing inconsistencies. These audits serve several critical
purposes, including identifying discrepancies between actual stock quantities and
accounting records, revealing overstocking or understocking scenarios to aid in asset
management and inventory forecasting, and evaluating the efficiency of logistics
and warehouse workflows. Ultimately, audits play an indispensable role in maintain-
ing precise and up-to-date inventory information, contributing significantly to the
overall integrity of the inventory management process.

4. Discussion

Inventory management may not be the most glamorous facet of business opera-
tions, but its importance cannot be overstated. It is a critical element in a company’s
profitability and growth potential. Without an effective inventory management
system in place, businesses can unwittingly waste financial resources on unsellable
products. Furthermore, they run the risk of experiencing stock shortages, leading to
delays in order fulfillment and dissatisfied customers. These challenges can swiftly
erode profit margins, presenting significant obstacles for the business.
Moreover, the consequences of inadequate inventory management go beyond
financial losses and may involve the potential loss of valuable inventory items,
directly impacting a company’s bottom line. However, by implementing an efficient
inventory management process, businesses can avoid these problems and unlock
various benefits.
Expanding to the broader context of supply chain management, inventory man-
agement emerges as a pivotal component. It involves the meticulous tracking of stock
levels and the movement of goods, whether for supplying raw materials to manufac-
turers or fulfilling orders for finished products. Inventory management is, in essence,
the cornerstone of a business’s longevity, offering opportunities to reduce costs,
improve cash flow, and enhance profitability.
When inventory is systematically organized, it serves as the linchpin that ensures
the smooth operation of the entire supply chain. Without it, a range of potential
errors looms, including mis-shipments, shortages, out-of-stocks, spoilage (particu-
larly for perishable stock items), overstocks, mis-picks, and more.
Inventory management plays a vital role in a business’s overall success, profoundly
influencing financial health and operational efficiency. It is a pivot upon which
profitability and growth depend, demanding strategic attention and a commitment to
efficiency.
In this section, our primary focus will be on two inventory management tech-
niques that have been extensively discussed in previous literature and have dem-
onstrated a tangible impact on effective inventory management. Additionally, our
discussion will encompass the most highly regarded best practice activity that has
been identified in prior research pertaining to inventory management.

4.1 Vendor-Managed Inventory

Supply chain management comprises a collection of interconnected activities aimed

at achieving seamless coordination and communication within these operations, ulti-
mately striving to enhance overall efficiency throughout the process [4, 23]. Effective
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supply chain strategy hinges on the sharing of product and production information
among its members. It is widely acknowledged that when information sharing takes
place at the retailer level, it brings about substantial benefits for the supply chain. This
includes the reduction of the bullwhip effect and overall supply chain costs [3, 24].
Nevertheless, despite these compelling advantages, retailers often exhibit a reluc-
tance to engage in information-sharing initiatives. This hesitation largely arises from
the realization that the primary beneficiaries of information sharing are typically
manufacturers rather than retailers themselves [3].
Numerous analytical and simulation studies have conducted extensive examina-
tions of the factors influencing the advantages stemming from information sharing.
The majority of these research investigations indicates that information sharing
leads to noteworthy enhancements in supply chain performance. Furthermore, the
improvements observed in the performance of supply chain enterprises through
information sharing have been substantiated by a multitude of empirical studies.
As previously mentioned, Vendor-Managed Inventory (VMI), also known as con-
tinuous replenishment or supplier-managed inventory, is a highly debated partnering
strategy that plays a prominent role in promoting collaboration and the exchange of
information among trading partners [20]. VMI is a collaborative commerce initiative
in which suppliers are granted authority to oversee the inventory of stock-keeping
units on behalf of the buyer. This initiative integrates operations between suppliers
and buyers through the exchange of information and the reengineering of business
processes. To use VMI, buyers and suppliers need to work closely together. This means
they share information and make sure their processes fit together smoothly. Typically,
buyers share details about what they need and what they have in stock (information
sharing). Then, suppliers take on the responsibility of managing inventory and mak-
ing purchases for the buyers (process integration) [25].
Evidence has demonstrated that VMI can enhance supply chain performance by
reducing inventory levels and increasing fill rates. As a result, the adoption of VMI in
various industries has steadily increased over time.
By utilizing information technologies such as Electronic Data Interchange (EDI)
or Internet-based XML protocols, buyers can share real-time sales and inventory data
with their suppliers. Suppliers, in turn, can use this information to plan production
schedules, coordinate deliveries, and efficiently manage order volumes and inventory
levels at the buyer’s stock-keeping facilities.

4.1.1 Challenges associated with implementing VMI

Vendor-Managed Inventory (VMI) offers mutual benefits to both suppliers

and buyers. However, it presents significant challenges, including issues with data
integrity, transparency, traceability, and the risk of a single point of failure due to its
centralized architecture [26].
In the early stages of VMI implementation, the vendor team encounters numerous
challenges, primarily centered around data collection and information gathering.
Additionally, ensuring transparency and data sharing can pose significant difficulties,
especially when buyers have restrictions in place [26].
Clear and well-identified communication is crucial, especially when introducing
new products or discontinuing old ones. Incorporating new items into the scope can
be challenging due to the absence of historical data for vendors to forecast demand.
Therefore, maintaining an open line of communication between vendors and buyers
is essential to ensure accurate orders, prevent stockouts, and avoid excess inventory.
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Operations Management - Recent Advances and New Perspectives

Sharing data with a third party is not easily approved. Therefore, selecting a VMI
partner is a challenging task, and it’s advisable to consider a confidentiality agreement
before implementing any collaboration.
Selecting the right VMI partner is crucial, as dissatisfaction with their services
can significantly impact the supply chain. It’s important to consider the possibility of
ending the partnership from the beginning and have mitigation plans in place.

4.1.2 Potential benefits from VMI

Effective supply chain management is typically achieved by striking the right bal-
ance between inventory costs and customer service levels. The most desirable projects
are those that yield improvements in both of these dimensions, and VMI is a prime
example of such an approach [27].
Numerous studies have examined the factors that impact the advantages of
VMI and other collaborative supply chain initiatives, as well as how these benefits
are divided between the downstream member (buyer) and the upstream member
(supplier).
Vendor-Managed Inventory (VMI) provides a competitive advantage for retail-
ers by increasing product availability and service levels while reducing inventory
monitoring and ordering costs [28]. The main advantage of VMI is its ability to
generate cost savings across the entire supply chain. It streamlines inventory planning
for retailers by shifting the responsibility to the vendor. This leads to a reduction in
unnecessary orders and the requirement for extra storage space. With less inventory
idling, carrying costs are significantly reduced.
The constant flow of data between retailer and vendor allows for more consis-
tent and timely stock updates and orders. Unlike other supply chain management
systems that rely on rough predictions, VMI uses current sales as a guide for more
strategic inventory ordering. This could help in protection against the bullwhip
effect. The bullwhip effect occurs when there’s a misjudgment of demand for a
specific product, causing disruptions in the supply chain [24]. It typically starts
with retailers overestimating their demand forecasts and ordering more inventory
than necessary, thereby putting pressure on suppliers to produce more of those
products than actual demand warrants. Hence, VMI through information sharing
can show a potential positive impact on demand and assist in the mitigation of the
bullwhip effect.
Conversely, suppliers reaped numerous benefits from the adoption of Vendor-
Managed Inventory (VMI). These advantages encompassed a decrease in stockouts,
which not only safeguarded customer satisfaction but also resulted in increased sales.
Furthermore, suppliers gained valuable insights into customer demand patterns,
leading to more effective inventory planning. The capability to enhance inventory
management and streamline delivery planning emerged as a noteworthy advantage
for upstream members who embraced VMI [29].

4.2 Just-in-Time inventory

Over the past few decades, management has placed a stronger focus on machinery
and workforce utilization while paying less attention to material flow. As a result,
inventories at various stages of manufacturing were allowed to accumulate and grow
without recognizing the negative impacts of this trend. Subsequently, the challenges
shifted toward improving the material flow process, aiming for greater efficiency,
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reduced setup times, enhanced quality, and proactive maintenance. Additionally,

closer coordination among different production resources, departments, and external
stakeholders has become imperative.
In recent years, the term ‘Just-in-Time’ (JIT) and many of its synonyms, such as
Zero Inventory, Stockless Production, World Class Manufacturing, and so on, have
become widely recognized in repetitive manufacturing organizations worldwide [30].
It has garnered significant attention in trade and professional journals, with numer-
ous books dedicated to exploring its various elements. Henry Ford once stated, “We
have found that in buying materials, it is not worthwhile to purchase for anything
other than immediate needs… If transportation were perfect and an even flow of
materials could be assured, it would not be necessary to carry any stock whatsoever
[31].” From this perspective, the concept of JIT began to shine.
Just-in-Time (JIT) inventory management is a strategic approach employed by
businesses to receive the exact amount of inventory precisely when needed, with
the primary objective of minimizing or eliminating excess inventory at any given
moment. It also encompasses the goal of producing items precisely when required,
in the smallest feasible quantities, and with minimal waste of human and natural
resources [30]. In simpler terms, Material Requirement Planning (MRP) systems aim
to achieve JIT, making it a fundamental goal for every production manager.
This approach effectively addresses the prevalent issue in commerce where exces-
sive spending occurs on materials that are not immediately required. Its success hinges
on maintaining continuous communication between the commerce company and its
manufacturers, necessitating the use of specialized, streamlined software for seam-
less implementation.
Just-in-Time (JIT) requires a company to rely on a select few reliable suppliers.
It is believed to enhance productivity and establish a leaner manufacturing system,
leading to minimized inventories. This, in turn, reduces risk and helps lower the
cost of manufacturing [32]. The implementation of JIT can, on average, result in
reduced inventory costs, shorter lead times, and improved productivity for buying
organizations.

4.2.1 Challenges associated with implementing Just-in-Time

The implementation of JIT in the purchasing of materials poses numerous chal-

lenges that can significantly impact the success of this concept. JIT techniques should
be extended to suppliers, and parts and raw materials supplied by external vendors
are often delivered in small batches precisely when needed. It’s essential to consider
that geographical and ownership factors often necessitate special provisions.
In sourcing decisions, price alone is not the sole determinant. Factors such as the
long-term stability of the supplier, their ability to collaborate on problem resolution,
willingness and capability to make frequent deliveries, and the quality of the parts
supplied become crucial considerations [30]. Since evaluating potential suppliers
requires more effort, fewer suppliers are typically used, leading to a greater preva-
lence of single sourcing, with existing suppliers having a competitive edge in securing
additional work. This extended effort in switching suppliers also leads to the develop-
ment of longer-term relationships.
Ideally, proximity to suppliers is preferred, as it facilitates easier coordination of
transportation and shorter lead times. Transportation and shipping play pivotal roles
in the success of JIT concepts. However, it’s not impossible to apply JIT principles with
remote suppliers.
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4.2.2 Benefits of Just-in-Time

As previously mentioned, effective inventory management demands significant

efforts to fine-tune the production system, encompassing various aspects such as
methods, layout, material handling flow, workforce relationships, job content, and
more. In exchange for the dedication required to implement these changes, organiza-
tions can expect to reap several benefits. The existing literature extensively outlines
the advantages of JIT techniques, including but not limited to decreased inventory
levels, reduced floor space requirements, shorter lead times, lower rates of scrap and
rework, enhanced product quality, improved utilization of both labor and equipment,
increased job satisfaction among workers, greater operational flexibility, streamlined
automation, adherence to schedules, and the establishment of an alternative incentive
system. All of these benefits collectively result in cost reductions, higher-quality end
products, and enhanced competitiveness [16, 30, 31].
Conversely, JIT brings several advantages to the supplier. These benefits encom-
pass a level of demand assurance, a more consistent demand pattern, and, potentially,
an advantageous position when it comes to future business prospects. Nonetheless, it’s
important to recognize that this increased reliance on a single customer for orders can
expose the supplier to heightened pressure for price concessions and other compro-
mises [30].

4.3 Best practices under accurate forecasting

Effective inventory management is paramount for success in any business,

whether in manufacturing or service industries. It’s essential to recognize that inven-
tory management approaches should be tailored to the strategies, business processes,
and values of each company. The effectiveness of inventory management is directly
linked to a company’s competitiveness and its ability to thrive in the long-term [33].
Inventory management encompasses various activities, including forecasting,
calculating safety stock, determining production or procurement quantities, ware-
house operations, and more. One crucial aspect of effective inventory management
is the forecasting technique. Forecasting is a method that utilizes past data to create
informed predictions, allowing us to anticipate the direction of future trends. In
supply chain management, forecasts are employed to ensure that the correct product
is available at the appropriate location precisely when it is needed.
Effective forecasting plays a pivotal role in helping manufacturers, distributors,
and retailers manage their inventory efficiently. It leads to reduced excess stock and
prevents unnecessary orders, ultimately contributing to improved profit margins.

4.3.1 Challenges associated with inventory management forecasting

Forecasting and planning for inventory management have garnered substantial

attention from the Operational Research (OR) community over the past 50 years. This
attention stems from the profound implications it holds for decision-making, span-
ning both the strategic and operational levels within an organization [34].
Forecasting can significantly enhance an inventory management system by
improving decision-making, refining production planning, minimizing overstock,
averting stockouts, and optimizing inventory levels [35].
There are numerous types of inventory forecasting methods available. All
forecasting models rely on identifying upward and downward trends in consumer
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demand. Selecting the most accurate forecasting model can be a challenging task, as
it requires matching the model to the specific nature of the industry, the size of the
company, the production volume, and the location of the company.
The literature discusses numerous challenges associated with forecasting in
inventory management, with demand variability and uncertainty being prominent.
Fluctuating customer demand due to seasonal trends, market shifts, economic condi-
tions, or unexpected events poses a significant challenge in accurate forecasting and
can result in detrimental consequences if not managed effectively.
Inaccurate or incomplete historical data can lead to flawed forecasts. Data that are
outdated, unreliable, or insufficient hinder accurate predictions. Therefore, ensuring
data quality and availability is crucial for precise forecasting.
In the context of stockouts and overstocking, accurate forecasting plays a pivotal
role in maintaining a balanced inventory. Overestimating demand can lead to over-
stocking, tying up capital and storage space. Conversely, underestimating demand
can result in stockouts, leading to customer dissatisfaction and lost sales.
Unforeseen events and changes in economic conditions, including fluctuations in
interest rates, inflation, and shifts in customer spending habits, can disrupt demand
patterns and further exacerbate the challenge of accurate forecasting.

4.3.2 Benefits of accurate inventory forecasting

Accurate forecasting offers numerous benefits to businesses. Understanding these

advantages aids in selecting an appropriate forecasting model that aligns with the
company’s requirements. Precise forecasting plays a pivotal role in determining the
optimal inventory levels, thereby preventing excess stock or stockouts. This optimi-
zation effectively reduces carrying costs and maximizes the efficient utilization of
working capital.
When forecasts appear accurate, they facilitate improved coordination with
suppliers and manufacturers, leading to streamlined production plans and efficient
supply chain operations. This, in turn, can result in cost savings and enhanced agility
in responding to market changes.
Precision in forecasting ensures a closer alignment between production and demand,
which accelerates inventory turnover. Faster turnover rates mean products are sold more
swiftly, leading to improved cash flow and reduced holding expenses [34].

5. Conclusions

Supply chain management (SCM) has become a cornerstone of operational

efficiency and cost-effectiveness, encompassing material and information flows
that influence various facets of production, inventory control, and delivery plan-
ning. Supply chain management’s integral relationship with inventory management
further underscores its importance. Effective supply chain decisions can lead to cost
reductions and improved performance. Integrating inventory management into the
supply chain context ensures the availability of products at the right time, preventing
stockouts and overstocking.
This chapter has explored the critical integration of inventory management within
the broader context of SCM. Inventory management holds a pivotal role in enhancing
business performance and profitability. The efficient management of inventory levels
can significantly boost operational efficiency and optimize financial strategies.
13
Operations Management - Recent Advances and New Perspectives

By maintaining optimal stock levels, organizations can enhance operational effec-

tiveness and achieve cost savings. The objectives of inventory management include
maintaining working capital, optimizing costs, reducing duplication, and ensuring a
steady material flow to support consistent production. The intricate balance of costs,
such as carrying, ordering, and stockout costs, plays a pivotal role in determining cost
efficiency.
Addressing challenges in inventory management, such as demand forecasting and
lead time management, is essential for achieving efficiency. Through an overview of
key objectives and techniques, this chapter has contributed to advancing inventory
management theory. The discussed techniques, such as ABC inventory classification,
Just-In-Time (JIT) management, Economic Order Quantity (EOQ ), safety stock, and
Vendor-Managed Inventory (VMI), offer distinct advantages for different scenarios.
Alongside these techniques, best practices such as accurate forecasting, supplier col-
laboration, cross-functional collaboration, and regular audits are essential for achiev-
ing efficient inventory management.
Moreover, this chapter has highlighted best practices that contribute to effec-
tive inventory management. Accurate demand forecasting, supplier collaboration,
cross-functional teamwork, and regular audits all play critical roles in maintaining
inventory accuracy, enhancing operational efficiency, and aligning strategies with
organizational goals.
In conclusion, integrating inventory management within SCM is vital for organi-
zations seeking to thrive in today’s interconnected business landscape. By employing
appropriate techniques and adopting best practices, businesses can optimize inven-
tory levels, ensure timely customer satisfaction, and achieve long-term financial sta-
bility within their supply chain networks. The success of modern businesses depends
on their ability to navigate these complexities and effectively manage their inventory
to meet customer demands while minimizing costs.

6. Limitations & direction for future work

The chapter presents valuable insights into the realm of inventory management
and its pivotal role within supply chains. However, it does exhibit certain limitations
that warrant consideration for a comprehensive understanding of the topic. First,
while the article provides an overview of various inventory management techniques,
it does not delve deeply into the practical implementation challenges and nuances
associated with each technique. A more thorough exploration of real-world case
studies and examples could elucidate how these techniques perform under diverse
industry contexts and shed light on their potential drawbacks and limitations.
Additionally, the article also lacks an in-depth discussion of the trade-offs inher-
ent in each inventory management technique. For instance, while Just-In-Time (JIT)
inventory management can minimize carrying costs, it might leave businesses vulner-
able to supply disruptions. Addressing these trade-offs and elucidating how industries
and companies make decisions based on their unique circumstances would provide a
more nuanced understanding of inventory management strategies.
To address these limitations and provide a more well-rounded exploration of
inventory management, future research could incorporate practical case studies,
recent industry developments, and insights from experts in the field. This would
contribute to a deeper understanding of the challenges and opportunities presented
by inventory management within modern supply chain contexts.
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Inventory Management
DOI: http://dx.doi.org/10.5772/intechopen.113282

Author details

Ahmed Esmail Mohamed

University of Southern Denmark, Odense M, Denmark

*Address all correspondence to: [email protected]

© 2023 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of
the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0),
which permits unrestricted use, distribution, and reproduction in any medium, provided
the original work is properly cited.
15
Operations Management - Recent Advances and New Perspectives

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