Pipeline or Movement Inventories
Pipeline and movement inventories are important for companies that depend on the timely delivery of raw materials, finished goods or components. A major problem in this industry is identifying where to draw the line between delivering too many of a certain good and running up against the limitation of available inventory. This is why it is so important to ensure proper inventory fundamentals such as cost per item (COP), average lead time (LTE), average lead time to fill order (LTCO) and a positive cash flow.
The two concepts, which play an integral role in defining inventory, are cost-per-unit and time-to-order. When assessing the cost of the product or goods produced, it is necessary to first identify how much of the total cost is allocated to production and how much is allocated to labor and profit. It is important to determine what the customer demand for the goods will be and to anticipate customer demand sufficiently in advance of establishing a production schedule. Once the customer demand for the goods is established, a company can then establish a proper inventory mix by considering the trend of the prices of the raw materials relative to the prices of the finished goods sold. Once these inventory fundamentals have been established, a company can then establish a balanced-percentage-of-production (BPO) inventory ratio.
Proper inventory management is a critical tool in controlling the costs associated with production and achieving profitable results. Proper inventory management also helps to maintain a strong balance in financial performance between inventory availability and demand, which allows a company to respond quickly to fluctuating market conditions and meet customer demands promptly. Proper inventory management is therefore a process that involves developing an accurate forecast of short and long-term demand and a determination of the right time to dispatch supplies to meet these demands. Moreover, the management process should include efficient work-in-process procedures and adequate levels of inventory control monitoring.
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