Inventory Management: Safety Stock and Transportation Strategy

Case Study: Daily Maersk

1. Provide the computation for the safety stock when using Maersk daily departure vs weekly
departure.

2. What impact does daily vessel departure have on inventory?

The adoption of a daily departure schedule, as exemplified by the Daily Maersk concept,
offers a range of strategic advantages for companies in the realm of inventory management and
supply chain operations. Firstly, the transition to daily departures results in a reduced safety
stock requirement. This reduction is attributable to the shorter lead times between shipments,
which, in turn, diminish the variability in delivery times. With a more frequent shipping
schedule, the standard deviation of lead time decreases, mitigating the need for excessive safety
stock to meet a given service level.

A subsequent benefit is the lowering of inventory holding costs. Safety stock serves as a
buffer to address uncertainties in lead time and demand. By optimizing the safety stock
requirement, companies can minimize the overall inventory they need to hold. This, in turn,
translates into tangible reductions in carrying costs, as less capital is tied up in inventory, and
storage expenses are consequently minimized.

The introduction of daily departures significantly contributes to improved

responsiveness within the supply chain. The enhanced frequency enables businesses to react
swiftly and efficiently to changes in demand, disruptions in the supply chain, or shifts in market
conditions. This heightened agility facilitates better adaptation to dynamic market demands and
concurrently reduces the risk of both stockouts and overstock situations.

Master in Business Administration

Reflection & Analysis Paper
By Mercury
 Furthermore, daily departures play a pivotal role in optimizing overall supply chain
efficiency. The more frequent shipping schedule allows companies to synchronize production
schedules, thereby reducing order cycle times. This, in turn, enhances visibility across the
supply chain, leading to cost savings and operational efficiencies throughout various stages of
the supply chain.

The daily departure schedule also facilitates enhanced service levels. With the reduction
in safety stock requirements, companies can consistently meet customer demands with a higher
level of service. This is particularly crucial for industries dealing with perishable or seasonal
products, where maintaining a high service level is imperative for customer satisfaction and
retention.

Lastly, the impact of daily departures extends beyond the implementing company to its
customers, including both direct customers and intermediaries like forwarders. The lower
inventory costs at destination points directly contribute to cost savings for customers. These
cost savings not only improve customer satisfaction but also foster increased loyalty, creating
a mutually beneficial relationship between the shipping company and its customers. In essence,
the shift to daily departures emerges as a strategic initiative that not only optimizes internal
processes but also delivers tangible benefits to customers, reinforcing the overall
competitiveness and sustainability of the supply chain.

3. Which other factors could be included in this analysis? The case restricted its analysis only to
sailing lead time.
While the case study predominantly centered around sailing lead time, a more holistic
analysis of the impact of daily vessel departure on inventory management should encompass a
spectrum of factors beyond just the time-related considerations. One critical aspect is ordering
costs, which involve expenses associated with placing and processing orders. This includes
administrative costs, paperwork, and communication costs, all of which can significantly
influence the overall cost structure and efficiency of the inventory management process.

The incorporation of production lead time is equally essential, especially when the
production cycle exceeds the shipping lead time. Understanding the time required for
manufacturing and production processes is crucial for synchronizing the supply chain
effectively and optimizing inventory levels.

Examining demand variability is pivotal in this analysis. The evaluation of fluctuations

in customer demand provides insights into the need for safety stock. A more volatile demand
may necessitate higher safety stock levels to mitigate the risk of stockouts, ensuring that the
supply chain can meet customer needs consistently.

Master in Business Administration

Reflection & Analysis Paper
By Mercury
 Consideration of order size and Economic Order Quantity (EOQ) is paramount.
Analyzing the optimal order quantity that minimizes total holding and ordering costs, factoring
in shipping and handling costs, contributes to an efficient inventory management strategy.

Supplier lead time is another crucial factor. Understanding the time it takes for suppliers
to fulfill orders and deliver raw materials or components is essential for maintaining a seamless
and responsive supply chain.

Assessing transportation costs is vital in comparing the overall costs associated with
daily versus weekly departures. This includes evaluating fuel costs, port fees, and other
logistical expenses, providing a comprehensive understanding of the financial implications of
the shipping frequency.

Market conditions and trends must be analyzed to anticipate changes in demand and
supply. These factors significantly influence the need for safety stock and the overall
effectiveness of inventory management strategies.

Considering global events and disruptions is imperative in a comprehensive analysis.

External factors such as geopolitical events, natural disasters, or pandemics can disrupt the
supply chain and necessitate adjustments to inventory management strategies. Companies need
to be agile and adaptable to navigate unforeseen challenges.

Examining inventory holding costs is vital, encompassing expenses related to storing

inventory, such as warehouse space, insurance, and potential obsolescence. This holistic
understanding ensures that the overall cost implications of inventory management are
considered.

Regulatory compliance is another crucial dimension. Ensuring compliance with

international trade regulations and customs requirements is essential for maintaining the speed
and efficiency of shipping processes and avoiding potential legal issues.

In conclusion, a thorough analysis of the impact of daily vessel departure on inventory

management should extend beyond sailing lead time and include these various factors. By
comprehensively assessing these elements, businesses can develop a robust and adaptive
inventory management strategy that considers both operational efficiency and cost-effectiveness
in the dynamic landscape of global supply chains.

4. What are the risks that Maersk Line might encounter by providing daily service? What can be
done to mitigate the identified risks?

Master in Business Administration

Reflection & Analysis Paper
By Mercury
 Implementing daily services in the shipping industry comes with various risks that
Maersk Line must proactively manage to ensure the success and sustainability of this
operational model. One primary risk is the challenge of demand variability, where daily
services may face difficulties in predicting and managing fluctuating demand. To mitigate this,
Maersk Line can deploy robust demand forecasting tools and establish close collaborations
with customers, gaining visibility into their demand patterns. Flexible scheduling and adopting
agile supply chain practices would further enhance the company's ability to adapt swiftly to
changes in demand.

Operational disruptions represent another significant risk, encompassing factors such

as weather, port congestion, or mechanical failures. Maersk Line can address this risk by
implementing comprehensive contingency plans, diversifying routes, and having alternative
strategies in place to minimize the impact of unexpected events. Regular maintenance and
monitoring of vessels can also contribute to preventing mechanical failures.

Daily departures may lead to increased operating costs due to higher fuel consumption,
port fees, and logistical expenses. To mitigate this risk, Maersk Line should optimize route
planning, vessel utilization, and fuel efficiency. Leveraging technology for monitoring and
managing costs, along with negotiating favorable contracts with suppliers, can contribute to
controlling operating expenses effectively.

Capacity management is a crucial consideration, as maintaining consistent capacity

with daily departures can be challenging and may lead to underutilization or overcapacity
issues. Implementing dynamic capacity management systems, regularly reviewing and adjusting
capacity based on market trends, and exploring partnerships or alliances to share resources
can help optimize capacity utilization.

Effective supply chain collaboration is essential for the success of daily services. Maersk
Line should foster transparent communication with customers and logistics partners.
Implementing robust information-sharing systems and leveraging technology can enhance
collaboration and visibility across the supply chain, minimizing the risk of miscommunication
and inefficiencies.

Daily international shipping involves navigating complex regulatory requirements that

may change over time. To address this risk, Maersk Line should stay informed about
international trade regulations, conduct regular audits to ensure compliance, and engage legal
experts to navigate evolving legal landscapes.

In the face of competitive pressures, Maersk Line can differentiate its services by
offering value-added features such as enhanced customer support, real-time tracking, or

Master in Business Administration

Reflection & Analysis Paper
By Mercury
 sustainability initiatives. Continuous monitoring of the market and the ability to adjust pricing
strategies accordingly are essential for maintaining profitability.

Dependence on technology introduces the risk of technical failures or cyber threats.

Maersk Line should invest in robust cybersecurity measures, regularly upgrade technology
infrastructure, and develop contingency plans to address system failures, ensuring data security
and operational continuity.

Lastly, daily services may strain customer relationships if expectations are not
consistently met. Maersk Line can mitigate this risk by establishing clear service level
agreements (SLAs), transparently communicating with customers about the benefits and
limitations of daily services, addressing customer concerns promptly, and continuously seeking
feedback for improvement. In summary, a comprehensive risk management approach
encompassing these strategies will position Maersk Line to navigate the challenges and
capitalize on the advantages of daily services in the shipping industry.

Master in Business Administration

Reflection & Analysis Paper
By Mercury