School of Strategy and Leadership

Answer Paper for Spring 2020 Exams

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Question Number Question 2

Economic Order Quantity (EOQ) is utilised in inventory management which refers to the appropriate
amount of inventory to be ordered so as the business could be able to minimise total inventory – related
costs. Total costs of inventory consist of ordering cost and holding cost.
The formula of EOQ is as follows:
Q=
Where: Q = EOQ
U = total annual demand
A = ordering cost
C = holding cost

One of the most important issues in relation to inventory management is the holding cost and storing cost
of inventory. It is likely that expense for storage of inventory is relatively expensive for many businesses,
including warehouse cost, labor cost, inventory management software system, to name but a few.
Application of EOQ in inventory control would, without doubt, assist management level in determining
whether to purchase a large amount of inventory in fewer orders in order to utilise discount bulk from
suppliers and reduce ordering cost, leading to cost minimisation. Moreover, the EOQ model provides other
inventory – related information including re-order level, lead time, how much inventory needs to be hold in
warehouse, how many SKUs of inventory should be order before running out of stock (Hae Lee 2016). The
re-stocking process can operate smoothly in order to meet consumer’s demand.

On the other hand, in order to apply EOQ in inventory, management level has to make an assumption that
an annual consumer demand is constant. In addition, as can be seen from the formula, it is assumed that
ordering cost and holding cost are constant. Notwithstanding, the fact remains that these assumption is not
realistic and practical since there are an abundant number of unpredictable events would happened such as
pandemic, seasonal changes, customer demand’s changes, reduction in sales revenue due to lack of
materials, to name but a few. The most popular unexpected event is happening at this time is the pandemic
of Covid-19 which has detrimental impacts on all activities of businesses in any industry in the economy. It is
obvious that total demand per year will collapse, ordering cost and holding will definitely witness an
upsurge. Lead time also changes or lasts longer than usual due to several external factors such as natural
disasters, supply delays.
In the business and economic conditions of non-stability, the application of EOQ in inventory control seems
not to be effective. Besides, the EOQ model is only applied for one single product which is not in line with
the practice that business often combines different products in one order.
Therefore, it could be concluded that it is necessary to apply EOQ in inventory control as business could find
optimal quantity of inventory to be order in the right time before being out-of-stock. However, business
should adopt another solution for inventory control due to impossible assumption of the EOQ method.

References
Hae Lee, Y. (2016).’Smart logistics and global supply chain management’. Maritime Economics & Logistics,
18(1), pp.1-2.

Question Number Question 3

The fact remains that the concept of globalisation has given rise radical changes in all aspects of the
economy for many years. Particularly, the distribution system or logistics has made a transformation with
the utilisation of container. In the initial time, the innovation of container was taken use of in maritime
transportation. Notwithstanding, the global supply chain has put an emphasis on containerisation in
distribution system not only in maritime sector but also other sectors such as roads and rails. Container
plays an intermediate channel that could be suitable for ship, railway or road trailer. In other words,
containerisation provides a flexibility of carrying products in different types and sizes, including commodities
(rice, wheat, coal), frozen food, household appliances, cars, liquids (chemicals, oil, petrol), to name but a
few. Moreover, the emerging of container in logistics would address existing concerns including time and
costs. Container could be store huge amount of products in one delivery that is approximately 20 times less
expensive than other conventional transportation means such as airplane (Cooper and Levinson, 2006).
Each container is considered a warehouse to bring the highest level of safety or security in comparison with
other channels in distribution system since the door of container is only opened at the original destination
of shippers or sellers, at customs for custom check and at the final destination of buyers. Therefore, the
possibility of product lost could be minimised. It could be concluded that containerisation is a crucial
innovation in logistics sectors and gradually has been becoming the most popular means in distribution
system.
Shipping alliance, which is known as strategic alliance, is considered a type of cooperative agreement
between liner shipping companies. Liner shipping companies containing carriers provide service for shippers
in determining various trade routes with shipping schedule through utilisation of containers thanks to the
partnership of an abundant number of members in distribution system on a global manner. In logistics
sector, carriers could be able to take advantage of shipping alliance to stimulate wider range of services as
well as low price offerings. Shipping alliance is seen as a vital factor in global trade since it brings benefits to
all participants in the distribution system. Variable costs could be reduced to the lowest point by sharing
resources of specific routes, fixed schedules, port terminals and networks. For giant shipping lines, available
resources of all members are utilised in an effective manner whereas smaller shipping lines could widen
service coverage without much investment in resources.

References
Cooper, R. and Levinson, M. (2006). ‘The Box: How the Shipping Container Made the World Smaller and the
World Economy Bigger’. Foreign Affairs, 85(5), p.161.

Question Number Question 5

Last-mile delivery seems to be a strain for many businesses nowadays, especially in the technology-shaped
era when online shopping has been becoming more popular than ever. Customer’s expectation has
increased remarkably that they need a real-time tracking for their orders, free delivery, two-hour delivery or
same-day delivery, to name but a few. As a result, it is necessary for business to enhance the stage of ‘Order
Delivery’ to improve the ‘last-mile delivery’ and reduce lead time. Firstly, it is necessary to establish various
delivery options for delivery steps. Third-party logistics is currently utilised by numerous companies to
reduce lead time and stimulate better experience for customers. Third-party logistics (3PL) service provider
could be able to provide a wide range of delivery options in which business has to invest much resource. As
a service provider, 3PL can consolidate orders from customers, consolidate goods in different locations of
the business’s warehouse in a rapid, efficient and easy manner. Due to a variety of global network, 3PL help
business in distributing goods in various countries in the world, in remote areas or urban areas. In addition,
3PL has experience in re-packing and bundling products upon customer’s orders. Hence, the business could
save human resource, financial resource and even time. Moreover, 3PL has developed its technology in
optimizing routes for delivering orders to customers. This would, without doubt, lead to quicker delivery,
effective utilisation of resources and reduction in operational costs. Apart from enhancing delivery option,
business could stimulate its transport management with the aim of improving last-mile delivery by applying
enterprise resource planning (ERP) (Jim Wu, 2007). It is necessary to have an effective forecast of means of
transportation in order to reduce long lead time or delaying time. It is essential to assess available means of
transportation as well as have a plan to obtain alternative transportation means for faster delivery. It would
be better for not having idle time of existing vehicle. This would be in line with optimising transportation
schedule with new orders incur. An omnichannel fulfilment system should be adopted in order to re-
optimising transportation means with added orders. The system would consolidate new orders added,
available transportation means, available shippers as well as confirmed existing deliveries. After gather
those information, the system would propose possible timeframe with given means of transportation as
well as available shippers for new orders. ERP system would be able to give optimal result for new orders
based on confirmed information.

References
Jim Wu, Y. (2007). ‘Contemporary logistics education: an international perspective’. International Journal of
Physical Distribution & Logistics Management, 37(7), pp.504-528.

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