Inventory Management Concepts

Study Notes

Inventory ensures a smooth supply chain process and minimizes disruptions.
Defined as materials or items owned by a business for production or sale purposes.
Different forms of inventory include raw materials, work in progress, finished goods, and goods in transit.

Acts as safety stock to manage unexpected demand surges or supply shortages.
Understocking occurs when demand exceeds available inventory, leading to lost sales and reduced margins.
Overstocking happens when inventory exceeds demand, resulting in liquidation, obsolescence, and increased holding costs.

Service level refers to the probability of satisfying inventory demands within a specified time frame.
Key metrics include Item Fill Rate (IFR) and Cycle Service Level (CSL).
A higher amount of inventory typically correlates with a higher service level.
Insufficient inventory results in a higher likelihood of stockouts.

Sustainability in inventory focuses on reducing environmental impacts without compromising profitability.
Effective practices include minimizing carbon emissions through various strategies:
- Implementing green energy solutions in warehouses to reduce energy consumption.
- Choosing transportation methods with lower carbon footprints.
- Reducing overall inventory levels to lower emissions from storage and transportation.
- Designing products for reuse to decrease the need for disposal, which can further minimize environmental impact.

Sustainable sourcing is increasingly recognized as critical for procurement processes.
The integration of sustainability affects financial valuation and investor perceptions.

Higher emission intensity correlates with lower company valuations.
Sectors with significant emission intensity and valuation impacts:
- Oils and Gas: -12% valuation difference, 13% median valuation
- Steel: -12% valuation difference, 14% median valuation
- Chemicals, Mining, Energy, Cement: valuation differences range from -10% to -12%.

A shift in investor expectations emphasizes the need for companies to demonstrate social contributions beyond financial performance.
Larry Fink (CEO of BlackRock) notes that sustainable investing may perform at least as well as traditional investments.

SRI encompasses sustainable development principles in financial investments.
Growth of global SRI assets over time demonstrates increasing importance:
- Strong ESG (Environmental, Social, Governance) scores indicate higher investment potential.
- Metrics illustrate growth in SRI assets:
  - SRI scores grew from 18.3 to 30.7 from 2014 to 2018, reflecting a +34% increase in environmental focus and +25% in social aspects.