4 Balanced Inventory

The finished goods inventory can be used as a means of improving customer service
levels by reducing the likelihood of a stock out due to unanticipated demand or
variability in lead time. A balanced Inventory is one that contains items in proportion
to expected Individual demand.

If the inventory is balanced, increased inventory investment will enable the

manufacturer to offer higher levels of product availability and less chance of a stock
out.
5 Bull Whip Effect

The Bullwhip Effect (or Whiplash Effect) is an observed phenomenon in forecast-

driven distribution channels. It is also known as the Forrester Effect.

Since the oscillating demand magnification upstream a supply chain reminds

someone of a cracking whip it became famous as the Bullwhip Effect Because
customer demand is rarely perfectly stable, businesses must forecast demand to
properly position inventory and other resources. Forecasts are based on statistics,
and they are rarely perfectly accurate. Because forecast errors are a given,
companies often carry an inventory buffer called "safety stock".

Moving up the supply chain from end-consumer to raw materials supplier, each
supply chain participant has greater observed variation in demand and thus greater
need for safety stock. In periods of rising demand, down-stream participants increase
orders. In periods of falling demand, orders fall or stop to reduce inventory. The effect
is that variations are amplified as one move upstream in the supply chain (further
from the customer).

In addition to greater safety stocks, the described effect can lead to either inefficient
production or excessive inventory as the producer needs to fulfill the demand of its
predecessor in the supply chain. This also leads to a low utilization of the distribution
channel. In spite of having safety stocks there is still the hazard of stock-outs which
result in poor customer service. Furthermore, the Bullwhip effect leads to a row of
financial costs.

Theoretically the Bullwhip effect does not occur if all orders exactly meet the demand
of each period. This is consistent with findings of supply chain experts who have
recognized that the Bullwhip Effect is a problem in forecast-driven supply chains, and
careful management of the effect is an important goal for Supply Chain Managers.
Therefore it is necessary to extend the visibility of customer demand as far as
possible.

One way to achieve this is to establish a demand-driven supply chain which reacts to
actual customer orders. In manufacturing, this concept is called KANBAN. The result
is near-perfect visibility of customer demand and inventory movement throughout the
supply chain. Better information leads to better inventory positioning and lower costs
throughout the supply chain.

Barriers to the implementation of a demand-driven supply chain include the

necessary investment in information technology and the creation of a corporate
culture of flexibility and focus on customer demand. Another prerequisite is that all
members of a supply chain recognize that they can gain more if they act as a whole
which requires trustful collaboration and information sharing.

6 Customer Relationship Management (CRM)

 CRM is a broadly recognized, widely-implemented strategy for managing and
nurturing a company’s interactions with customers, clients and sales prospects. It
involves using technology to organize, automate and synchronize business
processes principally sales activities, but also those for marketing, customer service,
and technical support.

The overall goals are to find, attract, and win new clients, nurture and retain those the
company already has, entice former clients back into the fold, and reduce the costs of
marketing and client service. Customer relationship management denotes a
company-wide business strategy embracing all client-facing departments and even
beyond. When an implementation is effective, people, processes, and technology
work in synergy to increase profitability and reduce operational costs.

Benefits
 Streamlined sales and marketing processes
 Higher sales productivity
 Added cross-selling and up-selling
 Improved service, loyalty, and retention
 Increased call center efficiency
 Higher close rates
 Better profiling and targeting
 Reduced expenses
 Increased market share
 Higher overall profitability
 Marginal costing

7 Cross-Docking.

In a Cross-docking concept warehouses serve primarily as “distribution mixing

centers.” Product arrives in bulk and is immediately broken down and mixed in the
proper range and quantity of products for customer shipment. In essence, the product
never enters the warehouse.

Cross-docking is becoming popular among retailers, who can order TL, then remix
and immediately ship to individual store locations. Products usually come boxed for
individual stores from the supplier’s location.

 Cross-docking should be considered as an option by firms meeting following

criteria:
 Inventory destination is known when received.
 The Customer is ready to receive inventory immediately
 The Shipment are for fewer locations
 The Large quantities of individual items can be received by firm.
 Inventory arrives at firm’s docks pre-labeled.
 Some inventory is time sensitive.
 Firm’s distribution center is near capacity
 Some of the inventory is pre-priced.

8 Containerisation

Containerisation is a system of intermodal freight transport using standard inter-

modal containers as prescribed by the International Organization for Standardization
(ISO). These can be loaded and sealed intact onto container ships, railroad cars,
planes and trucks.

Unit Load Devices as containers are being transported through ships in recent times,
contributing to a sizeable volume of sea freight. By using containers, shipping
 companies save substantially on packaging cost and take advantage of safe, secure
and speedy transit of cargoes. Containerisation has led to inter-model transportation
systems wherein cargo is transported from the point of origin to the point destination
(door to door) on the basis of a single contracts and a through freight rate. This has
led to the establishment of dry ports, which are essentially inland inter modal clearing
Houses.

A Container is a metal box of standard dimensions (20’x8’x8 or 40’x8’x8).There are

various types of containers - closed, open refrigerated, etc. Containers are also made
of various materials, such as steel, stainless steel, aluminum etc. In bigger types of
container ships are handled by shore-based equipment like harbor cranes.

The introduction of containers resulted in vast improvements in port handling

efficiency, thus lowering costs and helping lower freight charges and, in turn, boosting
trade flows. Most goods can be shipped by container

Advantages

 Faster arid more reliable

 Greater protection of fragile and easily contaminated goods
 Assurance of original quality
 Minimisation of chances of pilferage
 Containers are available in a variety of sizes, many of which are standardized
for inter-modal use.
 Possibility of physical separation of contaminated / ‘dirty’ goods
 Containers are able to serve as temporary storage facilities at ports and
terminals with limited warehousing space.
 Simplification of documentation and hence of procedures
 Reduction in cargo handling costs and detention at ports

Disadvantages

 Non-availability of container facilities in certain parts of the world.

 Large capital expenditures are required to initiate a container-based
transportation network.
 Significant capital outlays for port and terminal facilities, materials handling
equipment, specialized transport equipment and the containers them selves
are necessary before a firm can utilize containerization.

9 Cold Chain Logistics

A cold chain is a temperature-controlled supply chain. An unbroken cold chain is an

uninterrupted series of storage and distribution activities which maintain a given
temperature range. It is used to help extend and ensure the shelf life of products such
as fresh agricultural produce, frozen food, photographic film, chemicals and
pharmaceutical drugs.

The cold chain distribution process is an extension of the good manufacturing

practice (GMP) environment that all drugs and biological products are required to
adhere to, enforced by the various health regulatory bodies. As such, the distribution
process must be validated to ensure that there is no negative impact to the safety,
efficacy or quality of the drug substance. The GMP environment requires that all
processes that might impact the safety, efficacy or quality of the drug substance must
be evaluated, including storage and distribution of the drug substance.

10 Decoupling of Inventory

The decoupling function of Inventory provides maximum operating efficiency within a

single manufacturing facility by stock piling work in process between production
 operations. The Decoupling process permits each product to be manufactured &
distributed in economic al lot sizes that are greater than market demand .In terms of
marketing, Decoupling permits products manufactured over time to be sold as
assortment. Thus decoupling tends to Buffers the operations from uncertainty
element.

11 Economic Order Quantity (EOQ)

This is the quantity at which the total of Inventory Carrying Cost & Ordering Cost is
minimum. In other words At this Quantity Level Inventory carrying cost will be equal to
ordering cost

Total Cost On Materials = Inventory Carrying Cost + Ordering Cost

Inventory Carrying Cost Elements

 Interest on Capital blocked in the Inventory (Opportunity Cost)

 Cost Of Storage, Labour, Maintenance, Repairs, Handling charges etc.
 Insurance Cost
 Cost of obsolescence & Deterioration

Inventory Carrying Cost = Average Inventory holding (Q/2) x unit price of the
input (U) x cost on carrying inventories (ICC in %)

Ordering Cost Elements

Additional cost incurred in terms of space, Manpower, Communication, Negotiations,

follow up, Receipts, inspection, testing & Transportation etc for placing new orders

Ordering Cost = total annual consumption in terms of units (A) / quantity per
order(Q) x cost of placing each order (P)

THEREFORE RIGHT QUANTITY OR OPTIMUM ORDER QUANTITY OR /

ECONOMIC ORDER QUANTITY (Q) = V 2 A x P / U x ICC (%)

Limitations Of EOQ

 Orders are to be placed in rounding–up Quantities

 Standard Pack Quantities
 Standard Transport Requirements
 Quantity Discounts Offered
 Storage Availability
 Market /Production Capabilities
 Buyer’s Production Capabilities
 Supplier’s Capacity /Capability
 Financial Ability Of Buyer
 Shelf Life Of The Product (Perishable Items: Less EOQ)

12 Extended Enterprises

An Extended Enterprise is a loosely coupled, self-organizing network of firms that

combine their economic output to provide products and services offerings to the
market. Firms in the extended enterprise may operate independently, for example,
through market mechanisms, or cooperatively through agreements and contracts.

Alternatively referred to as a "supply chain" or a "value chain", the extended

enterprise describes the community of participants involved with provisioning a set of
service offerings. Extended Enterprise is a more descriptive term than supply chain,
 in that it permits the notion of different types and degrees and permanence of
connectivity. Connections may be by contract, as in partnerships or alliances or trade
agreements, or by open market exchange or participation in public tariffs.

How the Extended Enterprise is organized and structured and its policies and
mechanisms for the exchange of information, goods, services and money is
described by the Enterprise Architecture.

The notion of the Extended Enterprise has taken on more importance as firms have
become more specialized and inter-connected, trade has become more global,
processes have become more standardized and information has become accessible..
The standardization of business processes has permitted companies to purchase as
services many of the activities that previously had been provided directly by the firm.
By outsourcing certain business functions that had been previously self-provided,
such as transportation, warehousing, procurement, information technology, firms
have been able to concentrate their resources on those investments and activities
that provide them the greatest rate of return. The remaining "core competencies"
determine the firm's unique value proposition.

expensive computer systems in areas which will not use their full capacity

13 Fair Share Allocation Model OF Inventory

Fair share Allocation is a simplified inventory management planning method that

provides each distribution facility with equitable or “ Fair Share” of available inventory
from the common source such as a plant warehouse.

Inventory planner determines the amount of inventory that can be allocated to each
distribution center on the basis of their capability to generate sales at the market
place.

14 DISTRIBN
15 CENTRE Plant Warehouse
Inventory Units 600

Distribution Center 1 Distribution Center 2 Distribution Center 3

16 1 Inventory 50 units Inventory 100 units Inventory 75 units
Daily 50
17 Inventory use 10 units
units Daily use 50 units Daily use 15 units
18 Daily use 10 units

23 Fill Rate

Increased sales are often possible if high levels of inventory lead to better in-stock
availability and more consistent service levels. Fill rate is a common measure of the
customer service performance of inventory.

The Fill rate is often presented as the percentage of units available when requested
by the customer. A 96 percent fill rate means that 4 percent of requested units were
unavailable when ordered by the customer. Low inventory levels can reduce fill rates,
hurting customer service and creating lost sales.
24 Inventory Ranking Methods And Quadrant Technique

The products & services purchased by a company are not all the same. Some
products are more important & require greater procurement attention. Applying the
same procurement strategies, tactics & resources to all the items irrespective of their
criticalness will be fatal for a company from the point of view of their survival &
profitability.
The Quadrant technique enables the supply chain manager to assess the importance
of each product or service being purchased. It utilizes a two by two matrix to
determine a procured item’s relative importance on the basis of value and risk. The
criteria used to determine the importance are value / profit potential and risk or
uniqueness.

Distinctive Critical
High Risk, High value
High Risk, Low value Unique Items
Engineered Items Items Critical for Final Products
R

I Generics Commodities

S Low risk, Low value Low Risk, High value

Office supplies Basic production items,
MRO Items Basic packaging
Logistics services

Value Or Profit Potential

The value criterion examines product or service features that enhance profits for
the final product and the firm’s ability to maintain a competitive advantage in the
market place. The Risk reflects the chance of failure, non-acceptance at the
market place, delivery failure and source non-availability.

Distinctive are high risk, low value items & services such as engineered items /
parts that are available from only a limited number of suppliers or items that have
long lead time. The stock out of these items result in stopping or disturbance in
production line

Critical are high risk, high value items that give the final product competitive
advantage in the market place. These items help company to differentiate their
products from their competitors. These items increase the products value to
customers and the risk of non-availability results in customer’s dissatisfaction &
reduced sales.

Generics are low risk, low value items that typically do not enter in to the final
product. Items such as office supplies and maintenance, repair & operating items
(MRO).The administrative & processing cost often exceed the price paid for the
items.

Commodities are items that are low in risk but high on value. Basic production /
packaging materials are examples of commodities that enhance the profitability of
the company but pose low risk. These items are fundamental to the company’s
finished product thus making them high value items. Risk is low because
commodities are not unique items as there are many sources of supply.

In view of the above, the supply chain manager must utilize varying procurement
strategies based on the value & risk of the items. Greater sources & attention
should be directed towards procuring critical than towards generics.
25 Inventory Proportionality

Inventory proportionality is the goal of demand-driven inventory management. The

primary optimal outcome is to have the same number of days' (or hours', etc.) worth
of inventory on hand across all products so that the time of run-out of all products
would be simultaneous. In such a case, there is no "excess inventory," that is,
inventory that would be left over of another product when the first product runs out.
Excess inventory is sub-optimal because the money spent to obtain it could have
been utilized better elsewhere, i.e. to the product that just ran out.

The secondary goal of inventory proportionality is inventory minimization. By

integrating accurate demand forecasting with inventory management, replenishment
inventories can be scheduled to arrive just in time to replenish the product destined to
run out first, while at the same time balancing out the inventory supply of all products
to make their inventories more proportional, and thereby closer to achieving the
primary goal. Accurate demand forecasting also allows the desired inventory
proportions to be dynamic by determining expected sales out into the future; this
allows for inventory to be in proportion to expected short-term sales or consumption
rather than to past averages, a much more accurate and optimal outcome.

Integrating demand forecasting into inventory management in this way also allows for
the prediction of the "can fit" point when inventory storage is limited on a per-product
basis. The technique of inventory proportionality is most appropriate for inventories
that remain unseen by the consumer. As opposed to "keep full" systems where a
retail consumer would like to see full shelves of the product they are buying so as not
to think they are buying something old, unwanted or stale; and differentiated from the
"trigger point" systems where product is reordered when it hits a certain level;
inventory proportionality is used effectively by just-in-time manufacturing processes
and retail applications where the product is hidden from view.

26 Just-in-time (JIT)

Just-in-time is an inventory strategy that strives to improve a business's return on

investment by reducing in-process inventory and associated carrying costs. Just In
Time production method is also called the Toyota Production System. To meet JIT
objectives, the process relies on signals or KANBAN between different points in the
process, which tell production when to make the next part. KANBAN are usually
'tickets' but can be simple visual signals, such as the presence or absence of a part
on a shelf. Implemented correctly, JIT can improve a manufacturing organization's
return on investment, quality, and efficiency.

JIT requires close coordination of demand needs among logistics, carriers, suppliers
and manufacturing. JIT also represents a tremendous opportunity for the logistics
function to contribute to the organization’s success by reducing inventory while
simultaneously maintaining or improving customer service levels. Thus, JIT
represents an important trend in inventory management.

Quick notice that stock depletion requires personnel to order new stock is critical to
the inventory reduction at the center of JIT. This saves warehouse space and costs.
However, the complete mechanism for making this work is often misunderstood.

27 Just In Time II (JIT II)

JIT II is an extension of JIT concept to the purchasing function by having a

representative of the supplier located at the buying organization’s facility. Developed
by Bose Corporation, this approach improves mutual understanding between the
buyer and supplier, reduces waste and redundancy of efforts, improves supplier
responsiveness, and creates a positive working environment.
 28 KANBAN

The term KANBAN describes an embellished wooden or metal sign often

representing a trademark or seal. "KANBAN" uses the rate of demand to control the
rate of production, passing demand from the end customer up through the chain of
customer-store processes.

An important determinant of the success of production scheduling based on "pushing"

the demand is the quality of the demand forecast that can receive such "push."

KANBAN, by contrast, is part of an approach of receiving the "pull" from the demand.
Therefore, the supply or production is determined according to the actual demand of
the customers.

KANBAN is used as a demand signal that immediately propagates through the supply
chain. This can be used to ensure that intermediate stocks held in the supply chain
are better managed, usually smaller.

To be effective KANBAN must follow strict rules of use and that close monitoring of
these rules is a never-ending task to ensure that the KANBAN does what is required.

Toyota's Six Rules

1. Do not send defective products to the subsequent processes
[Link] subsequent process comes to withdraw only what is needed
3. Produce only the exact quantity withdrawn by the subsequent process
4. Equalize production
5. KANBAN is a means to fine tuning
6. Stabilize and rationalize the process

29 E-KANBAN Systems
Many manufacturers have implemented electronic KANBAN systems.

Electronic KANBAN systems, or E-KANBAN systems, help to eliminate common

problems such as manual entry errors and lost cards E-KANBAN systems can be
integrated into Enterprise Resource Planning (ERP) systems.

Integrating E-KANBAN systems into ERP systems allows for real-time demand
signaling across the supply chain and improved visibility. Data pulled from E-
KANBAN systems can be used to optimize inventory levels by better tracking supplier
lead and replenishment times.

23 Logistics Information Systems

As a part of an organization’s ability to use logistics as a competitive weapon is based

on its capability to assess and adjust actual logistics performance in real time. This
means that the ability to monitor customer demands and inventory levels as they
occur, to act in a timely manner to prevent stock outs and to communicate potential
problems to customers.

This requires excellent, integrated logistics information systems. These systems

impact all of the logistics activities and must be integrated and take into account
marketing and production activities. Such systems also must be integrated with other
member of the supply chain to provide accurate information throughout the channel
from the earliest supplier through the ultimate customer.
30 Outsourcing

During the 1980s, many organizations began to recognize that they could not effectively
and efficiently “do it all” themselves and still remain competitive. They began to look
 third-party specialists to perform activities that were not a part of their “core
competency.”

This activity is known as outsourcing, in which an organization hires an outside

organization to provide goods or services because this third party is more “expert” in
efficiently providing them at most optimal costs.

Recently, outsourcing has been an area of growing interest and activity. Logistics
outsourcing often involves third-party warehouses and use of public / contract
transportation carriers. Outsourcing offers the opportunity for organizations to use the
best logistics providers available to meet their needs. Outsourcing may involve a
partner’s relationship or be ad-hoc on a transaction to transaction basis.

31 Palletisation

A pallet (sometimes called a Skid) is a flat transport structure that supports goods in a
stable fashion while being lifted by a forklift, pallet jack, front loader or other jacking
device. A pallet is the structural foundation of a unit load which allows handling and
storage efficiencies. Goods or shipping containers are often placed on a pallet
secured with strapping, stretch wrap or shrink wrap and shipped.

While most pallets are wooden, they are also are made of plastic, metal, and paper. Each
material has advantages and disadvantages relative to the others

32 Postponement

In the times when business environments are changing dynamically, customers are
demanding more and more sophisticated products, but they are unwilling to pay
more or wait longer. The concept of postponement has helped companies meet the
variety of customer demands without much increase in their inventory holdings.

In the age of globalization to stay ahead in competition companies are penetrating

into various international markets. Volatility in the global market and increased
complexity in the customer demands forced companies to search for strategies
whereby they produce variety of products to meet diverse needs of global customers
while keeping their inventory levels minimum.

The strategy of postponement has emerged in order to meet uncertainty in

customer’s demand without much escalating the production cost or expanding the
capacity. The Companies which have long production and distribution lead times
have redesigned their business processes in order to meet the customer’s delivery
requirements.

Postponement Strategy

Postponement is an adaptive supply chain strategy which mainly concentrates on

delaying the product differentiation very close to the customer. In this way
companies are reducing their costs incurred in holding finished goods inventory.
Customer service levels are also increased as the products are customized only
once the actual customer demand is known.

This concept has gained importance during the past two decades and has now
become a powerful strategy for the e- commerce channel. In a consumer oriented
market where customers are demanding for high levels of customization, yet
unwilling to pay more or wait for longer time this strategy helps companies in being
more flexible and responsive to meet the changes in demand from different markets.
In the above example when the supply chain operates without postponement
strategy the companies pile up inventory of finished goods of the same product with
different attributes in equal quantity expecting equal demand for all the products.
However when the supply chain operates with postponement strategy activities
relating to aggregate forecast is done before product differentiation. Individual
product forecast is shifted close to the actual time of sale when demand is known
with certainty. This way postponement helps in matching supply with demand.

Postponement Types
Postponement strategies can be broadly classified into two categories
manufacturing postponement and logistics postponement. Manufacturing
postponement mainly deals with form postponement and logistics postponement
covers the aspect of time postponement.

Form Postponement

Form postponement deals with building up a generic product initially and delaying
the finalization of product features until a customer order is received. This can be
possible by standardizing the upstream product process and dividing the entire
manufacturing process into various stages so that product differentiation can be
delayed. This kind of postponement strategy is used by companies which ship their
products to different markets. The components which are of high value are specific
to a particular market are added only after the customer order is received. This
strategy would help in reducing the waiting time and improved customer service by
customizing the product to meet the specific market needs.

b) Time Postponement
Time postponement concentrates on delaying the implementation time of activities
like distribution or the actual delivery of the product till the customer demand is
known to certainty. In this kind of strategy company reduces its inventory held up at
the retail outlets and centralizes the inventory from its dealers in its own distribution
center. Mostly companies rely on direct distribution to customer location there by
responding to customer’s orders immediately.
 Challenges Faced in Implementing

The concept of postponement strategy is intimidating the companies in implementing

it due to the following challenges.

 Complete visibility of the supply chain is required to understand “where,

when & how” to postpone.
 Complete understanding of the risks involved in the design and execution of
the strategy.
 Successful implementation would involve fundamental changes in the
manufacturing process and internal operations which demand for top
management involvement.
 External collaboration with suppliers is critical as they have to respond to
changes that arise due to its implementation.
 Company should have good information technology resources in order to
successfully implement this strategy.

The need to have a competitive advantage in the continuously changing business

environment is forcing the companies to implement some aspects of postponement
in their supply chain network. In spite of technological advancements acting like a
key driver in implementing such strategies many other metrics are creating hurdles
for its successful implementation.

33 Re-Order Level

Re-order level is a stage or time of placing a new order where the total stock in hand
is sufficient to meet not only the normal consumption over normal lead time (Lead
Time consumption) but also to meet uncertainties arising out of fluctuations in lead
time and/or demand/consumption pattern (safety stock).In short, as soon as the stock
in hand becomes equal to Lead time consumption plus desired safety stock, it is a
time for the company to place fresh order to avoid any stock outs.

A ) Fixed Quantity Replenishment System (Q Technique)

Reordering points are fixed in terms of quantity for each item by taking into account
lead time required for procuring /producing that item & consumption / Demand pattern
during the lead time.

Quantity To Be Recouped = Maximum Quantity (EOQ) + Minimum Quantity (Safety

Stock + Lead Time Cons.) + Uncompleted Demand – Stock On Hand – Quantity On
Order

The order is placed as soon as the stock level reaches pre-determined Re-order level
of inventory (Minimum) irrespective of future trend of consumption or demand to
maintain the stock level at Maximum level.
In practice both lead-time & demand fluctuate. Under this system Safety stocks are
provided to meet the fluctuations in lead-time & demand.

B) Fixed Period Replenishment System (P Technique)

Reordering Period is fixed for placing orders for replenishing the stock to reach at
pre-fixed Maximum Level. Under this technique the stock position is reviewed on the
fixed date and orders are placed for the quantity to bring back the stocks back to
maximum level

Fixed quantity Replenishment = EOQ Quantity (Where Review Period is short, a

week or Fortnight)

Variable Quantity Replenishment: Review Period depends On 12 / Nos. of Orders

Placed
(Nos. Of Orders = Annual demand / EOQ)

Review Period = 12 X EOQ / Annual Demand

Quantity To Be Replenished = Maximum Quantity (EOQ) + Minimum Quantity (Safety
Stock + Lead Time Cons.) + Uncompleted Demand – Stock On Hand – Quantity On
Order

This technique considers the change in Demand or Lead-time during the review
Period as a result of which risk of stock out does not exists under this system. This
system also considers the future trend of demand or change in lead-time

C) Two Bin System

For simplicity some organizations split the physical stocks in to Two Bins. Second Bin
holds predetermined Minimum Stocks (Reorder Point stock) quantity & the First one
holds the EOQ quantity.
The Issues are made from the first Bin & as soon as the stocks in that bin is
exhausted; the order is placed for quantity equal to EOQ. Issues are then made from
second Bin.
As soon as replenishment stocks are received, the second Bin is filled up to the
Minimum Level & balance stocks are kept in first Bin from which issues are made
first.

Because of this physical separation of stocks in to Two Bins, It is called Two Bin
system.

Limitations Of P & Q System Inventory Models In Practice

 P & Q systems are not employed due to frequent changes in demand & lead
time pattern & inventory values
 Fluctuation in demand for finished goods
 Limitations of storage space to accommodate maximum stocks
 Storage at multiple locations
 High risks in maintaining stocks
 Economies of production & distribution
 Seasonal Inventories

Seasonal supply or demand may make it necessary for a firm to hold inventory. The
cost of establishing production capacity to handle the volume at the peak periods
would be substantial.

In addition, substantial idle capacity and wide fluctuations in the workforce would
result if the company were to produce to meet demand when it occurs. The decision
to maintain a relatively stable workforce and produce at a somewhat constant level
throughout the year creates significant inventory build-up at various times during the
year but at a lower total cost to the firm.

On the other hand, demand for a product may be relatively stable throughout the year
but raw materials may be available only at certain times during the year (e.g.,
producers of canned fruits and vegetables). This makes it necessary to manufacture
the finished products in excess of current demand and hold them in inventory.

34 Safety / Insurance / Buffer Stock.

Safety or Buffer or Insurance stock is an additional stock held by the company for
meeting the eventualities or uncertainties arising out of fluctuation in the lead time
and/or fluctuation in the consumption /demand pattern. In other words, it is the
security against the possible or likely stock-outs.

The safety stock depends on factors like Lead time, Consumption rate, Stock out
costs, Nature of the item, Risks of obsolescence, Availability of storage space,
Financial capability, Availability of the product (Seasonal / Non-seasonal) & the
company’s inventory policy. The more the safety stock, higher the services level but
also higher the inventory.
35 Trade-Offs in Logistical Activities

The logistics activities must be well coordinated in order to achieve the lowest total
logistics cost. Trade-offs may increase the total cost if only one of the activities is
optimized. For example, full truckload (FTL) rates are more economical on a cost per
pallet basis than less than truckload (LTL) shipments. If, however, a full truckload of a
product is ordered to reduce transportation costs, there will be an increase in
inventory holding costs which may increase total logistics costs. It is therefore
imperative to take a systems approach when planning logistical activities. These
trades-offs are key to developing the most efficient and effective Logistics and SCM
strategy.

36 Unitization,

It in the form of pallets and slip sheets and freight containerization has been a
common place for decades. Pallets have been standardized mostly along lines.
Containers, most 20 feet and longer in length some 40-feet containers, have served
as the basis for the International standards

37 Vendor Managed Inventory

Vendor-managed inventory (VMI) is a family of business models in which the buyer of

a product provides certain information to a supplier of that product and the supplier
takes full responsibility for maintaining an agreed inventory of the material, usually at
the buyer's consumption location (usually a store). A third-party logistics provider can
also be involved to make sure that the buyer has the required level of inventory by
adjusting the demand and supply gaps.

As a symbiotic relationship, VMI makes it less likely that a business will

unintentionally become out of stock of a good and reduces inventory in the supply
chain. Furthermore, vendor (supplier) representatives in a store benefit the vendor by
ensuring the product is properly displayed and store staff is familiar with the features
of the product line, all the while helping to clean and organize their product lines for
the store.

One of the keys to making VMI work is shared risk. Often if the inventory does not
sell, the vendor (supplier) will repurchase the product from the buyer (retailer). In
other cases, the product may be in the possession of the retailer but is not owned by
the retailer until the sale takes place, meaning that the retailer simply houses (and
assists with the sale of) the product in exchange for a predetermined commission or
profit. A special form of this commission business is scan-based trading whereas VMI
is usually applied but not mandatory to be used.

VMI helps foster a closer understanding between the supplier and manufacturer by
using Electronic Data Interchange formats, EDI software and statistical
methodologies to forecast and maintain correct inventory in the supply chain.

Vendors benefit from more control of displays and more contact to impart knowledge
on employees; retailers benefit from reduced risk, better store staff knowledge (which
builds brand loyalty for both the vendor and the retailer), and reduced display
maintenance outlays

Consumers benefit from knowledgeable store staff who are in frequent and familiar
contact with manufacturer (vendor) representatives when parts or service are
required, store staff with good knowledge of most product lines offered by the entire
range of vendors and therefore the ability to help the customer choose amongst
competing products for items most suited to them, manufacturer-direct selection and
service support being offered by the store.