Every supply chain leader should know this relationship by heart:
Ending Inventory = Beginning Inventory + Receipts (in) – Shipments (out)
How Does a Supply Chain Work?
A supply chain is basically product moving from node to node across the enterprise. Then understand that:
- Each node is like a bucket that can hold water.
- There is some amount water coming into the bucket.
- There is some water coming out of the bucket.
- What remains is inventory.
Now pick a set period of time, say one month for example. Then determine:
- The amount of water at the beginning of the month.
- The amount of water that came in.
- The amount of water that came out.
Now you have all you need to calculate the amount of water that remains (or should remain). That’s basically what a supply chain model should do.
Now if your supply chain only had a single node then the equation above would be all you need. Receipts would simply be what you make or buy. And Shipments would be what you sell.
But what if you have multiple nodes? Well, it’s still pretty simple. Refer to the simple supply chain map below:
Start from the Retail Location or the node that makes the sale to the customer. Shipments out would simply be what you sell. Receipts would be the amount it receives from a Distribution Center.
Now what are the Receipts and Shipments Distribution Center? Shipments would be what it delivered to the Retail Location. Or for a given period, simply:
Shipments of the Distribution Center is EQUAL to Receipts of the Retail Location.
You then follow this same process going to the left until you hit the Manufacturing Site’s purchase of raw materials. Its purchase of raw materials serves as the Receipt for the Manufacturing Site.
Some other points. Realize that in this simplified supply chain, there are only two points where inventory comes in and goes out. It’s at the purchase of raw materials and at the point of sale. Can product be lost along the way? Sure, in the forms of shrinkage, yield loss or QA holds. But we’ll disregard that for now.
Back to You
Is this something that seems pretty basic? Or do you find that surprisingly, not all supply chain folks understand this?