Module V
Inventory Management, Supply Chain
Management & Logistics Management
The purpose of supply chains is to provide customers with goods/
services at proper time. Inventory management plays a central and
vital role in every supply chain’s need to satisfy its customers.
Inventory involves costs, working capital, space, and must be manged
in and out.
OBJECTIVES OF INVENTORY
INVENTORY DECISIONS
Inventory decisions correspond to quantity and placing time of the orders.
INVENTORY COSTS
Elements of Inventory Costs
Inventory-carrying costs are usually made up of the following
elements:
i. Interest charged on the financial investment into inventory
ii. Cost of insurance-covering inventory
iii. Rental or ownership-related costs of the store housing
inventory
iv. Cost of personnel and machinery engaged in handling
inventory
v. Obsolescence, particularly in the case of high-tech goods
vi. Pilferage, wastage, or deterioration of stock that is hard to
avoid when keeping stock for long periods of time.
BALANCING INVENTORY CARRYING COSTS AGAINST
ORDERING COSTS
The amount of inventory and degree of control greatly depends on
the type of product or service
Advantages of Inventory Management and Control
Sequential Process of Inventory Management and Control
INVENTORY MODELS
Fixed Order-Quantity Models
EOQ Systems
Basic EOQ
ABC Classification to control inventory
Lead time
• A lead time is the delay between the initiation and
completion of a process.
• In supply chains, whenever goods are purchased, transformed
or serviced, lead times usually measured in days are involved.
• From a planning point of view, lead times matter because
they imply that most routine decisions must be made ahead
of time in order to deliver the intended effect, such as
maintaining the quality of service.
• The need for demand forecasting also typically emerges from
the existence of lead times, as the adequacy of a decision -
such as an inventory replenishment - depends on unknown
future events that will impact the supply chain for the
duration of the lead time.
Causes and consequences of lead times
• Lead times largely shape how the supply chain operates, and
most of its financial elements, such as required working capital
and return on capital employed (ROCE). Indeed, longer lead
times imply that it takes longer to complete an inventory cycle
where materials or products are purchased, possibly
transformed, and sold again.
• Longer lead times mechanically entail higher
stock commitments, even when stocks on hand may seemingly
remain low. For example, if a company in Europe orders goods
from Asia to be delivered through containers, from the date
where the purchase order is passed the company is committed
to sell or consume the goods. Yet, in this situation, it will
typically take over 6 weeks for the stock levels in Europe to
reflect this commitment.
• Also, longer lead times increase the dependency on
forecasting. When revisiting the example above, the company
cannot afford to merely pass a purchase order based on its
present needs; by the time the order is delivered, the situation
will have evolved. Present stock levels will have been lowered
further due to ongoing consumption, and demand will most
likely have changed, if only due to seasonality.
• Lead times represent a lower bound of the maximal agility
that a company can achieve. As a rule of thumb, if the market
conditions brutally change then the company remains
committed to its past decisions for roughly the duration of
the lead times. There are various ways to mitigate these
effects, starting with contractual terms with suppliers.
However, the underlying risks can rarely be eliminated and are
merely displaced within the supply chain.
• Considering all the negative impact of longer lead times, one may
wonder why companies are frequently opting for what appears to
be (subjectively) long lead times. It turns out that there are multiple
economic factors that tilt the scales in favor of longer lead times.
• Specialization is driving longer lead times: some countries have fairly
unique industries (1) that are difficult or costly to replicate locally.
Such concentrated industries historically emerged primarily due to
high-value materials, which were easy to transport. However, even if
aircrafts can reach any point of the globe in less than 24 hours,
customs and processes tend to substantially increase the actual lead
times when considering overseas suppliers.
(1) As of 2020, there are only three countries that produce RAM
(Random Access Memory), a fundamental hardware component
of modern computers. There are also three countries that
account for nearly 90% of the worldwide reserve and production
of lithium, an essential element of modern batteries.
Diversity of lead times
Wholesaler distributing goods from overseas suppliers may face:
• An ordering lead time, caused by the weekly purchase process
of the wholesaler itself.
• An opportunity lead time, caused by the MOQs imposed by the
suppliers.
• A manufacturing lead time, required by the suppliers to fulfill
the purchase order.
• A transport lead time, required by the freight company.
• An administrative lead time, to go through customs.
• A reception lead time, for inventorying and quality control by
the wholesaler.
• An expedition lead time, required by the distribution center to
fulfil client orders.
• A last-mile delivery lead time, required by a transporter to
make the client delivery.
Safety Stock
• Safety stock is the inventory ordered or carried in stock in excess of
what the expected demand will be. Its purpose is to absorb any
internal or external supply and demand shocks to the supply chain. It
can also help mask or cover other problems present in the supply
chain temporarily such as excessive downtime and maintenance
issues.
• Safety stock can be determined in many ways. Some businesses or
operations determine safety stock levels by past history of events, a
certain number of days of demand, as a percentage of periodic order
sizes, or through a probabilistic model.
• If operations or the supply chain is fairly reliable or not as complex,
historical safety stock levels or a certain number of days as buffer
stock is as reliable measure to establish the required safety stock. If
demand is unstable and the supply chain is complex and relies on
several third party providers then it could be beneficial to use a
probabilistic model in determining the required safety stock.
Safety stock Probability model
Calculating the required safety stock using a simple probability model
can be easily done in Microsoft excel, on a statistics calculator or a
cumulative distribution table. The data needed before performing the
calculation is:
-The average demand per time period.
-The standard deviation of demand per time period
-The assumption that demand is normally distributed
A commonly used approach calculates the safety stock based
on the following factors:
• Demand is the number of items consumed by customers,
usually a succession of independent random variables.
• Lead time is the delay between the time the reorder
point (inventory level which initiates an order) is reached and
renewed availability.
• Service level is the desired probability of meeting demand
during the lead time without a stockout. If the service level is
increased, the required safety stock increases, as well.
• Forecast error is an estimate of how far actual demand may
be from forecast demand.
Fundamental Concepts of JIT
DESIGNING FOCUSED FACTORIES THROUGH JIT
PRODUCTION
DEMAND PULL SYSTEM
PUSH SYSTEM
JIT AND LEAN MANAGEMENT
WASTAGES IN OPERATIONS
JIT IMPLEMENTATION
General Problems and Difficulties Encountered in JIT
Implementation
Basic Concepts of Supply Chain Management
The term “supply chain management” arose in the late 1980s and
came into widespread use in the 1990s. Prior to that time, businesses
used terms such as “logistics” and “operations management” instead.
Some definitions of a supply chain are offered below:
• “A supply chain is the alignment of firms that bring products or
services to market.” —book Fundamentals of Logistics Management
(Douglas M., James R. Stock, and Lisa M. Ellram)
• “A supply chain consists of all stages involved, directly or indirectly, in
fulfilling a customer request. The supply chain not only includes the
manufacturer and suppliers, but also transporters, warehouses,
retailers, and customers themselves.”— from Chopra and Meindl in
their book Supply Chain Management: Strategy, Planning, and
Operations
• “A supply chain is a network of facilities and distribution options
that performs the functions of procurement of materials,
transformation of these materials into intermediate and finished
products, and the distribution of these finished products to
customers.”—from Ganeshan and Harrison
• “The systemic, strategic coordination of the traditional business
functions and the tactics across these business functions within a
particular company and across businesses within the supply chain,
for the purposes of improving the long-term performance of the
individual companies and the supply chain as a whole.”—from
Mentzer, DeWitt, Deebler, Min, Nix, Smith, and Zacharia in their
article Defining Supply Chain Management in the Journal of
Business Logistics
“Supply chain management is the coordination of production,
inventory, location, and transportation among the participants in a
supply chain to achieve the best mix of responsiveness and efficiency
for the market being served.”
The design and structure of supply chain varies from industry to industry
and product to product. Initially, the design is to be framed keeping in
mind the various factors like cost, profit, response and differentiation.
Then, the structure of SCM is erected according to the designing factors.
Application Areas of Supply Chain management:
1. Production: What products does the market want? How much of
which products should be produced and by when? This activity
includes the creation of master production schedules that take into
account plant capacities, workload balancing, quality control, and
equipment maintenance.
2. Inventory—What inventory should be stocked at each stage in a
supply chain? How much inventory should be held as raw materials,
semifinished, or finished goods? The primary purpose of inventory is
to act as a buffer against uncertainty in the supply chain. However,
holding inventory can be expensive, so what are the optimal
inventory levels and reorder points?
3. Location—Where should facilities for production and inventory
storage be located? Where are the most cost efficient locations for
production and for storage of inventory? Should existing facilities be
used or new ones built? Once these decisions are made they
determine the possible paths available for product to flow through
for delivery to the final consumer.
4. Transportation—How should inventory be moved from one supply
chain location to another? Air freight and truck delivery are generally
fast and reliable but they are expensive. Shipping by sea or rail is much
less expensive but usually involves longer transit times and more
uncertainty. This uncertainty must be compensated for by stocking
higher levels of inventory. When is it better to use which mode of
transportation?
5. Information—How much data should be collected and how much
information should be shared? Timely and accurate information holds
the promise of better coordination and better decision making. With
good information, people can make effective decisions about what to
produce and how much, about where to locate inventory and how best
to transport it.
Production
Production refers to the capacity of a supply chain to make and store
products. The facilities of production are factories and warehouses. If
factories and warehouses are built with a lot of excess capacity, they can be
very flexible and respond quickly to wide swings in product demand.
Factories can be built to accommodate one of two approaches to
manufacturing:
1. Product focus—A factory that takes a product focus performs the
range of different operations required to make a given product line
from fabrication of different product parts to assembly of these parts.
2. Functional focus—A functional approach concentrates on performing
just a few operations such as only making a select group of parts or
only doing assembly. These functions can be applied to making many
different kinds of products.
As with factories, warehouses too can be built to accommodate
different approaches. There are three main approaches to use in
warehousing:
1. Stock keeping unit (SKU) storage—In this traditional approach, all of
a given type of product is stored together. This is an efficient and
easy to understand way to store products.
2. Job lot storage—In this approach, all the different products related
to the needs of a certain type of customer or related to the needs of
a particular job are stored together. This allows for an efficient
picking and packing operation but usually requires more storage
space than the traditional SKU storage approach.
3. Crossdocking—An approach that was pioneered by Wal-Mart in its
drive to increase efficiencies in its supply chain. In this approach,
product is not actually warehoused in the facility. Instead the facility
is used to house a process where trucks from suppliers arrive and
unload large quantities of different products.