UNIT - III

bssahay@mdi.ac.in

UNIT III
Inventory mgt in SC Transportation choices in SC Formulating a supply chain strategy Distribution channel design & mgt

What Is Supply Chain Management?

INVENTORY MGT IN SC
Introduction Purpose of inventory in LS Types of inventory (costs & types presentation)
Inventory as an element of CS Principal issues in Inventory mgt (presentation) Performance measures
strategic choices

INVENTORY MANAGEMENT IN SC

WHY INVENTORY MGT. ATTENTION?

World wide recession
Changes in manufacturing philosophy Greater return on investment

Definitions
Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.
Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should

PURPOSE OF INVENTORY IN LOGISTICS SYSTEMSBallou(1978)

Improve the customer service Production economies Permits purchase and transportation economies Hedges against price changes Protects against demand and leadtime uncertainties Hedges against contingencies

ASCHNER (1990)
Demand/supply fluctuations Anticipation Transportation Hedging Lot size

Lambert & Stock(1993)

Economies of scale Balancing supply and demand Specialization Protection from uncertainties Inventory as a buffer

TYPES OF INVENTORY
Cycle stock In-transit inventories Safety stock Speculative stock Seasonal stock Dead/obsolete stock

Types of Inventory: Specific aspects

Deliver service expectations
Optimization of SC costs Exploration of exterior trade-off potentials - pipeline - Information systems

Strategic Choices
Who supplier? Who hold inventory & where? How much ? Where customer place orders? How order be delivered?

ULTIMATE OBJECTIVE of Inventory Control

To achieve satisfactory levels of customer service while keeping inventory costs within reasonable bounds
Level of customer service

Costs of ordering and carrying inventory

Material Requirements Planning (MRP) - Definition

A software tool which enables a manufacturer to plan, allocate and track material and financial resources for a production process

MRP I Materials requirement planning MRP II Manufacturing resource planning VMI Vendor managed inventory

INVENTORY AS AN ELEMENT OF CUSTOMER SERVICE

Availability + costs of lost sales Sales Response 2 Sales response 1

Cost of availability service Lost sales

Availability,R2 Availability,R1

100% A(SL))

Inventory: a stock or store of goods

Independent Demand

Dependent Demand

B(4)

C(2)

D(2)

E(1)

D(3)

F(2)

Independent demand is uncertain. Dependent demand is certain.

COSTS - Inventory
Ordering cost Overstock cost Stock out cost/under stocking cost/ down time out Inventory carrying cost

INVENTORY CARRYING COST

Direct cost
Capital costs Storage space cost Service cost Insurance Risk cost
obsolescence Damage Shrinkage

INVENTORY CARRYING COST

Indirect cost
Business risk lost sales, customers Opportunity costs inability to invest in alternatives Incremental increases in infrastructure costs
Facilities Transportation Service companies

TYPES OF INVENTORY
PREDICTABILITY OF DEMAND

Dynamics of inventory stockholding/Predictability of demand

Inventory holding

Fad products Seasonal Fashion products Core Business products Time

INVENTORY DEMAND TYPES

LOW Risk PROFILE

Inventory holding

Fad products Seasonal Fashion products Core Business products Time

High risk profile

Inventory holding

Fad products Seasonal Fashion products Core Business products Time

STOCKHOLDING POLICY
TYPE
BASE FLOW WAVE FLOW

SURGE FLOW 1 SURGE FLOW 2

CHARACTERI STICS Predictable High rates Slow rate, critical High critical Low value,long Lead Time Low critical High value

POLICY
Min(0) stocks Direct deliver Min

High level, safety stock, Min stockholdings

Principal issues in inventory mgt;

Techniques: ABC analysis(Paretos law/Always Better Control)

Forecasting methods:

Differ 20% of product range- 80% of total sales A Value of consumption levels HML,XYZ,VED,FSN,SDE,GOLF,SOS

Survey buying intentions Judgment sampling Past sales trends EPOS links with customer

Maintain high levels Of CS, plant utilisaTion,JIT

Principal issues in inventory mgt;

Inventory models
Produce Purchase Orders,Shipping Orders,Delivery notes & invoices Improving accuracy, decreasing costs but increasing dependencies

Order processing systems

Reduce OCT,increase order entry, order processing, replenishment

Models for Inventory Management:

EOQ

EOQ minimizes the sum of holding and setup costs Q = 2DCo/Ch D = annual demand Co = ordering/setup costs Ch = cost of holding one unit of inventory

Classifying Inventory Items

ABC Classification (Pareto Principle) A Items: very tight control, complete and accurate records, frequent review B Items: less tightly controlled, good records, regular review C Items: simplest controls possible, minimal records, large inventories, periodic review and reorder

PERFORMANCE MEASURES
Indicators: Customer complaints, order cancellation Level of stockholding,backorders Storage space Stock obsolescence Different measures used: Financial Operational Marketing performance

Effective Inventory Management

A system to keep track of inventory

A reliable forecast of demand

Knowledge of lead times

Reasonable estimates of
Holding costs Ordering costs Shortage costs

A classification system

PART II TRANSPORTATION IN SUPPLY CHAIN

Text book : Managing the supply chain strategic perspective By J L Gattorna & D W Walters Chap 9 : page nos 137 - 147

SUB - TOPICS
Transportation/logistics/marketing
interface.

Factors affecting the choice of

transport selection.

DEFINITION OF TRANSPORTATION
It is a linkage process in logistics and often

consumes

much

of

resources provided to the logistics

function.

INTRODUCTION
Three factors to be considered:
Operational factors: Choice of transport mode: Channel strategy:

It creates place & time utility value.

The transportation/logistics/ marketing interface

Identify the areas of flexibility & inflexibility of the decisions. Decisions influenced by transportation considerations: Customer communications Market coverage Sourcing decisions [cms ppc] Processing/manufacturing Pricing decisions Customer service decisions

FACTORS AFFECTING THE CHOICE OF TRANSPORT SELECTION

Strategic issues influencing logistics & transportation selection:
Slater (1990) Five factors
Company characteristics & philosophy Market structure Product characteristics weight, size, shape, shelf-life, danger,value Customer characteristics Environmental issues

SIZE & WEIGHT RESTRICTIONS

Air: little or no flexibility
Sea:unlimited Rail: height Road: height & weight

Cost per unit

Air: High
Sea:low Rail: low Road: Moderate

SAFETY

Air: Highly regulated

Sea: less regulated Rail: few restrictions

Road: less regulated

TRANSPORTATION COSTS
Influenced by:
Characteristics modes & Characteristics of customer service policy. of alternative transport

CHARACTERISTICS OF ALTERNATIVE TRANSPORT MODES

Horizontal trade-offs: within & between
different modes- perform same task Vertical trade-offs: change in one area offers greater benefit in another Lateral trade-offs: costs weighted against lower costs in other areas

CHARACTERISTICS OF CUSTOMER SERVICE POLICY

Influenced by:
Market characteristics Competitive offers

Important factors:
Order cycle time reliability

TRANSIT TIME & RELIABILITY

Air: Fast & reliable
Sea: Slow, R varies from port(FCL)

Rail: Dedicated services R

Road: Versatile, L & UL slow, Reliability service policy

TRANSPORTATION COSTS
FIXED COSTS & VARIABLE COSTS

Fixed costs

Direct cost Vehicle investment Specialist equip. Service support Labour costs Insurance risk

InDirect cost Facilities no Admin & OH Opportunity Costs of capital VARIABLE COST: Maintenance:labou r, materials, fuel

SERVICE COMPANY SELECTION: CONSIDERATIONS

Current performance Acceptance of responsibility Flexibility Comprehensive services offer Information system Financial stability Compatibility

PERFORMANCE MEASURES
Productivity Utilization Performance

CONCLUSION: CHOICE OF TRANSPORTATION

Customer service policy
Company characteristics Costs

END OF PART II

PART III : FORMULATING A SUPPLY CHAIN STRATEGY

Text book : Managing the supply chain strategic perspective By J L Gattorna & D W Walters Chap 9 : page nos 165 - 175

FORMULATING A SUPPLY CHAIN STRATEGY

Introduction Identifying the criteria for evaluation strategic fit

Strategic development criteria: logistics implications

The logistics strategy components & corporate logistics strategy process

INTRODUCTION
Strategy:
plan or formula to compete effectively in a marketplace

Logistics strategy :
integrate corporate & marketing strategies

IDENTIFYING THE CRITERIA FOR EVALUATING STRATEGIC FIT

Rumult(1988) Four criteria - Business strategy
Consistency: goals& policies Consonance: adaptive response to ext. envi

Advantage: creation& maintenance of CA

Feasibility

CRITERIA LOGISTICS STRATEGY SELECTION: D.W.WALTERS & J.L GATTORNA

Consistency
Longitudinal Temporal consistency

Consonance: change:Environment Competitive environment business

Continuity:Gilbert & strebel-1988 ILC

Systems,style,staff,skills & structure & values

Creativity: Competitive advantage

Superior resources,superior skills, create real value added superior positioning perception of value added

Capacity utilization

Capacity aspects of culture:

Credibility Corporate performance

STRATEGIC DEVELOPMENT CRITERIA: LOGISTICS IMPLICATIONS

Linking up all the criteria.

COMPONENTS OF LOGISTICS STRATEGY Profit,ROC,ROE

Corporate objectives Corporate strategy Marketing objectives Marketing strategy I,O,S,R,B Transaction Channels strategy Transaction C Objectives DD,CL,CB PP,DI.CS.C

MP,MD, PD,D,

Logistics Strategy F,IM statement TM,IM Physical distribution Strategy &resources

OCL DR PD Service objectives

THE LOGISTICS STRATEGY PROCESS

OPERATIONAL DECISIONS Logistics Trade-OFF

Customer expectations

CUSTOMER SERVICE CHARACTERISTICS

STRATEGIC DECISIONS

Logistics Investment & Resource Allocations

CUSTOMER SERVICE CHARATERISITICS

Order cycle profile Inventory availability Order size constraints Ordering process & progress detail Delivery times & flexibility invoicing Returns Company representation

OPERATIONAL DECISIONS
Order processing & information costs Inventory costs Transportation costs

Order size cost Operational service

Facility costs

STRATEGIC DECISIONS
CORPORATE LOGISTICS STRATEGY
Facilities
No Size Location tech

Supply Chain considerations

Transportation Modes
Flexibility capacity

Inventory: Stock Locations Stock levels

Logistics Information system

Alliances & Partnerships -------------Channels considerations

CONCLUSION
To develop logistics strategy in an organization 8 Criteria Logistics strategy is integrated with corporate strategies and marketing strategies which includes transaction channel and physical distribution strategies.

PART IV:
DISTRIBUTION CHANNEL DESIGN

&
MANAGEMENT

TOPICS OF DISCUSSION
Create customer value Channel tasks Role of Distribution channel design in integrated logistics strategy
Criteria for selecting channel partners Market coverage & product characteristics Total cost integration : dual channel issue Cost trade-off

CREATING CUSTOMER VALUE:

Adding value to improve Customer Satisfaction
profit

Logistics & Margins cost Marketing cost

Time & place utility Possession utility Form utility

Manufacturing cost

CHANNEL TASKS
GAPS : Production & Consumption Alderson (1954):4 Gaps
Time gap: Space gaps Quantity gap Variety gap

Guirdham(1972): additional gap

Communication/information gap

CONCEPT OF SORTING INTO 4 BASIC CHANNEL TASKS

Sorting out: Accumulation: Allocation Assorting:

ALDERSON (1957)

It is the process (retailer) which combines a no. of product groups into specific offer to meet the needs of a target consumer group.

MARKETING FLOWS IN CHANNELS Vaile et al(1952)

PP O P

N F
R

O
P

Commercial channel subsystem

CHANNEL FLOWS & SPECIALIST ACTIVITIES

/title flows Product flows: Raw material producers-- manu- dealer-buyers

Payment flows: RMP<---Banks--m---B--D---B--B

Information flows: MD----B

Promotion flows: Advertising agency m--D-B

ROLE OF DC DESIGN IN AN INTEGRATED LOGISTICS STRATEGY

Customer Service expectations Value added char.

Company objectives
Mkt& fin

Integrated logistics strategy

Physical Distribution Channel strategy&mgt. Customer Service, Product characteristics

Transaction channel Strategy & Mgt. Mkt coverage Product chara

PRODUCT CHARACTERISTICS Transaction channels strategy

Value Technology Consumer acceptance Product complements Product substitutes

PRODUCT CHARACTERISTICS
Value Bulk Perishability Geographic cover Seasonality Width & depth

Criteria for selecting channel partners

Financial strength Sales activities & performance Reputation Market coverage Mgt. Strength Advertising & promotions Training & development

Criteria for selecting channel partners

Sales compensation Facilities & equipment After sales servicing facilities Supplier commitment Willingness to share info Willingness to carry inventory

Total cost Integration: A Dual Channel Issue

Physical distribution channel Company or Carrier transport Third party distributor Finished Goods store Regional dc Third party dc Local delivery To retailer Transaction channel HO sales

District sales office

distributor retailer

Consumer/end user

COST TRADE-OFF REQUIRED WITHIN THE LOGISTICS SYSTEM

Customer service Levels (cost of Lost sales) Transportation Inventory costs End user customer costs Satisfaction expectations

Order size cost

Facility costs

END OF UNIT III

IMPORTANT QUESTIONS
What is inventory mgt. in SC as an elementary customer service. Various components of logistics strategy Discuss various inventory techniques, which can be adopted in the context of uncertain demand and uncertain lead-time. Procedure for developing an integrated logistics strategy Various choices in inventory and transportation available What is distribution channel design and mgt. how does logistics help on creating customer value? Factors affecting the choice of Transport selection Formulating SC strategy

MRP I Materials requirement planning

1960s & 1970s managerial perspective It consists of a computer system, manufacturing information system & a concept and philosophy

MRP II Manufacturing resource planning

Updated to include financial, marketing and logistics Company wide system facets of business, including sales, production, eng. Inventory and cash flows

VENDOR MANAGED INVENTORY(VMI)

VMI reduces stock-outs and optimize inventory in supply chain .
Shortening of Supply Chain Centralized Forecasting Frequent communication of inventory, stock-outs and planned promotions. Trucks are filled in a prioritized order.

CASE STUDY
AUTOMATIC ITEM REPLACEMENT FOR A LEADING RETAILER

The scenario
The retailer's item replenishment system was custom-built around a third party-product forecasting and inventory management software. The retailer experienced inefficient replenishments for key items when product demand varied significantly with rapidly changing factors such trends, seasonality, service levels, vendor discounts and promotional buys. The item replenishment system was rigid in its functioning with no provision for a what-if analysis.

The objective
Improve supply chain efficiencies with better forecasting and inventory management for just-in-time (JIT) replenishment. Sample key

goals:
Ability to make forecast updates at the store level Ability to increase sales forecast based on peak season demand or alter projections

based on a upcoming promotion

THE SOLUTION- To improve the system TCS Consultants

Automated process to ensure better inventory levels at the stores Provision for forecast updates at the store level - a limitation of the earlier package Peak season demand-handling strategy A strategy for altering projections based on upcoming promotions using additional days of supply or with date ranges and multipliers Simulation or what-if analysis for usercontrolled parameters Reducing cost of inventory due to missed events

THE VALUE
The retailer now operates a highly automated and flexible item replenishment system which provides for JIT replenishment, realising significant improvements in supply chain efficiencies

Brief History
Automatic Identification (Auto-ID) and Data Collection (AIDC) Technologies How Old Are These Technologies? 1930s, 40s: Magnetic Stripes 1950s, 70s: Bar Codes, 1949: Radio Frequency ID

RFID Basic Idea- code (unique identifier) is stored in a RFID Tag

Tag is attached to a product Product becomes now unique identifiable use labeling Product transmits code from the embedded tag (active tag) Reader gets the message (code) code needs to be processed corresponding action(s) to be taken here

RFID - Use Cases Badges/Smart keys Agriculture Livestock Tracking Toll roads Tracking and charging Asset Management Maintenance Aircraft Intelligent Toolbox Supply Chain Mgmt Inventory control Logistics

RFID Supply Chain Mgmt Innovate ways to identify, locate and monitor goods as they travel through the supply chain of many industries First Benefits Increase accuracy of orders Reduce inventory handling cost Improve inventory handling Fewer misplaced items (in warehouse) Reduce losses from theft