Chapter 8
Reason for holding inventory in the Firm
● Batching Economies or Cycle Stocks
• Arises from three sources.
○ procurement
○ production
○ transportation
● Uncertainty and Safety Stocks
• All organizations are faced with uncertainty.
• On the demand side, there is usually uncertainty in how much customers will buy and when they will
buy it.
• On the supply side, there might be uncertainty about obtaining what is needed from suppliers and
how long it will take for the fulfillment of the order.
● Time/In-Transit and Work-in-Process Stocks
• The time associated with transportation means that even while goods are in motion, an inventory
cost is associated with the time period. The longer the time, the higher the cost.
• WIP inventories, associated with manufacturing, can be significant while the length of time the
inventory sits in a manufacturing facility waiting and should be carefully evaluated in relationship to
scheduling techniques and the actual manufacturing/assembly technology.
● Seasonal Stocks
• Seasonality can occur in the supply of raw materials, in the demand for finished product, or in both.
• Those faced with seasonality issues are constantly challenged when determining how much
inventory to accumulate.
• Seasonality can impact transportation.
● Anticipatory Stocks
• A fifth reason to hold inventory arises when an organization anticipates that an unusual event might
occur that will negatively impact its source of supply.
The Importance of Inventory in Other Functional Areas
• Logistics interfaces with an organization’s other functional areas.
○ Marketing
○ Manufacturing
○ Finance
Basic Assumptions of EOQ model:
Demand is known & constant –
no safety stock is required
Lead time is known & constant
No quantity discounts are available
Ordering (or setup) costs are constant
All demand is satisfied (no shortages)
The order quantity arrives in a single shipment
Chapter 2 & 1
Value-Added Roles of Logistics
● Form Utility ● Place Utility
● Time Utility ● Quantity Utility
● Possession Utility
Logistics Activities
● Transportation ● Industrial packaging
● Warehousing and storage ● Materials handling
● Inventory control ● Order fulfillment
● Demand forecasting ● Production planning/scheduling
● Procurement ● Customer service
● Facility location
Cycle View of Supply Chain Processes
Cycle View: The processes in a supply chain are divided into a series of
cycles, each performed at the interface between two successive stages of the
supply chain.
Each cycle follows a similar pattern: a buyer places an order, the supplier
processes and fulfills it, and the buyer receives it A cycle view of the supply
chain clearly defines the processes involved and the owners of each process.
This view is useful when considering operational decisions because it
specifies the roles and responsibilities of each member of the supply chain
and the desired outcome for each process.
Chapter 2 & 1
Push/Pull View: The processes in a supply chain are divided into two
categories, depending on whether they are executed in response to a
customer order or in anticipation of customer orders. Pull processes are
initiated by a customer order, whereas push processes are initiated and
performed in anticipation of customer orders.
Pull: execution is initiated in response to a customer order (reactive)
Push: execution is initiated in anticipation of customer orders (speculative)
Chapter 2 & 1
Design Options for a Transportation Network
When designing a transportation network
1. Should transportation be direct or through an
intermediate site?
2. Should the intermediate site stock product or
only serve as a cross-docking location?
3. Should each delivery route supply a single
destination or multiple destinations (milk run)?