Inventory risk

Hertwich EG, Mateles SF, Pease WS, McKone TE (2001) Human toxicity potentials for life cycle assessment and toxics release inventory risk screening. Environ Toxicol Chem 20 928-939... 

Toxic Chemical Release Inventory Risk Screening Guide... 

Economists also consider risk as multidimensional (Dahl etal, 1993). They have coined names for a variety of risks. Some of these, applied mostly to stocks, bonds, and other purely financial instruments, are market risk (related to the CAPM model and the above described parameter beta ), volatility risk (applied to options, primarily), currency risk, credit risk, liquidity risk, residual risk, inventory risk, etc. 

Interestingly, many articles devoted to inventory risk, especially in management science, consider variance as a measure of risk (Gaur and Seshadri, 2004) and proceed consequently. While there are many other intricacies behind the relationship between inventories, risk hedging, and expected profit that engineers have not yet grasped, the use of variance constitutes the first head-on collision between both approaches. 

Gaur V. and Seshadri S. 2004. Hedging Inventory Risk through Market Instruments. Working Paper at the Stem School of Business, New York University. 

Cachon, G. (2004). The allocation of inventory risk in a supply chain Push, pull, and advance-purchase discount contracts. Management Science, 50, 222-238. 

To the best of our knowledge, this chapter represents the first formal model of a drop-shipping supply chain, the practice where the retailer acquires customers while the wholesaler is responsible for fulfillment and takes inventory risk. We compare traditional supply chain structures in which the retailer both takes inventory risk and acquires customers with supply chain structures employing drop-shipping agreements. Our focus is on the supply chains in which both the retailer and the wholesaler are present. We concentrate on two cost... 

Our main interest in this chapter is to get a better understanding of inventory risk allocation issues in drop-shipping supply chains as well as the impact of power distribution between the channel entities. To keep focus and to not diffuse economic insights, we do not explicitly reflect other issues encountered in e-commerce fulfillment, since many are hard to include in a formal model. Among these issues are possible differences in transportation costs and responsiveness, coordination issues arising when multiple wholesalers are needed to fulfill a single order, and the rationing of inventory when a wholesaler serves multiple retailers. These and other issues are treated qualitatively in Randall et al. (2002). 

Drop-shipping requires a certain investment from the wholesaler, since she should be able to handle small shipments directly to the customer. In addition, there are costs associated with taking inventory risk. This would lead the wholesaler to demand an increase in the wholesale price, resulting in, as the last observation shows, capturing more profits, which is beneficial in the long run. 

Supply chain visibility— According to Blackhurst et al. (2005) supply chain visibility refers to the sharing of information in real-time across the supply chain stages and among their partners. The net effect of visibility is to make the supply chain more responsive, increase availability and reduce inventory risk. For example, Dell shares customer demand information with its suppliers so that they can maintain proper inventory of needed parts. Wal-Mart shares points-of-sales (PoS) data with its suppliers so that they can forecast and plan their replenishment strategies. 

Your sales department needs a much shorter forecast range. This reduces the inventory risk for your stocks. 

The "necessary" planning horizon for the projected sales figures which are exponentially tentative is also considerably lowered. The inventory risk is reduced disproportionately (Fig. 24). You process more and more orders in response to specific customer orders. 

Fig. 24 Short throughput times reduce planning and inventory risk...

A few remarks on sales planning and the ensuing costdntensive Inventory risk ... 

We all know how inaccurate these figures are which we use as the basis for complex ERP system to calculate apparently accurately which resources - in particular, material - are to be procured as fast as possible. Purchasing then has to make the purchases with a high inventory risk. 

You can now see the planned, immense inventory risk that is programmed by long delivery and throughput times. Naturally, the forecasts made by sales are seldom accurate, with the following consequences ... 

If you are now able to cut the throughput times in your enterprise by half, you can avoid most of your inventory risk - as clearly shown in Fig. 24. 

You allocate and purchase for specific orders without any inventory risk. 

You cannot rule out that the purchaser in his desire to obtain low purchase prices is not sufficiently aware of the consequences of longer delivery times for your ability to deliver and inventory risk Should he make his purchases as reasonably as possible or realize short delivery times For what does he receive recognition Against what standard is his performance rated ... 

When delivery times and internal throughput times are long, sales is required to predict market demands far into the future, which is not feasible. The inaccuracy of these predictions and thus the inventory risk rise exponentially with the distance from the present (Fig. 23). 

With long delivery and throughput times a high inventory risk ispreprogrammed. 

Once delivery and throughput times have been markedly reduced, sales does not have to state its primary demand until much later. The percentage of customer orders in the planning horizon increases. We plan and order much later (Fig. 23). The inventory risk decreases out of proportion with every day of less throughput time. 

To overcome the mismatch between centralized production and product customization, companies are postponing product customization to the DCs at destinations. Thus the number of inventory items is minimized until the point of customization, minimizing transportation cost, inventory risk and costs, and lead-times. 

In addition to time-to-market and inventory risks, events of recent years have forced companies to adapt to the new supply chain reality of expecting the unexpected. Companies are not only responding to current volatility and geopolitical... 

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