INVENTORY

MANAGEMENT IN
TRADE LOGISTICS
 CHAPTER OBJECTIVES
• To understand the nature of inventory at various
stages in international trade logistics.
• To explain the role of inventory in international
trade logistics.
• To explain the various motivations for holding
inventory in international logistics.
• To discuss the various techniques of inventory
management.
• To explain the contemporary development in
international inventory management.
 CHAPTER OUTLINE
• Introduction
• Nature of Inventory in Trade Logistics
• Understanding Inventory Function
• Motivations for Holding Inventory
• Types of Inventory in Trade Logistics
• Inventory Management Techniques
• Contemporary Developments in Inventory
Management
• Models Of Inventory In Trade Logistics
 INTRODUCTION
• Management of inventory is an important
function for firms engaged in international trade
• the exporter as well as the importer has to take
appropriate decision for maintaining an optimum
level of inventory.
• inventory management decisions encapsulate the
high-risk and high-impact for any international
trade firm competing in the global marketplace.
 INTRODUCTION
• Management of inventory is an important function for firms
engaged in international trade as it entails a considerable
working capital of the firms.
• Due to long distance involved in international transportation,
the exporter as well as the importer has to take appropriate
decision for maintaining an optimum level of inventory. If
they keep too much of inventory, the working capital remains
employed; if it is too low, they will lose potential customers
due to stock-out in sales operations.
• Therefore, inventory management decisions encapsulate the
high-risk and high-impact for any international trade firm
competing in the global marketplace.

© Oxford University Press 2015. All rights reserved.

Framework of Inventory Management in
International Logistics

Continuously
Strive for
Leverage
Improving
Logistics
the logistics
No
Integrate Decision
Customer Matrix system
New Cost Values to
<Existing Customer
Evaluate Trade Service Vs
Cost Logsitics
the New Inventory
Modify and Inventory System Carrying
Restructur Cost For Cost
Calculate e Existing
Inventory the Firm
Classify Trade
Cost of Logistics
and rank Existing
Evaluate existing System
Existing trade
Suppliers Logistics
Trade & Products
Logistics Networks
Networks
 Point of Imbalance in Inventory in
International Production Networks &
Logistics

SUPPLIERS 3RD PARTY LOGISTICS SHIPPING COMPANIES MANUFACTURER

RETAILER DISTRIBUTOR WHOLESALER

 Nature of Inventory in Trade Logistics
• Inventory management is an important function for any firm, be it
small or large, local or global, organized or disorganized,
manufacturing or services firm as it make firm liquid assets as
current assets requiring turnover again from current to liquid
assets. If a firm carries a large stock or inventories without being
sold for long time its assets remain blocked and profitability of the
firm get affected in the target market.
• Hence, manufacturer as well as traders wants to ensure a cycle of
their inventory in such a fashion so that ‘customer services’ as
well as ‘just in time’ stock can be maintained successfully.
Following are the characteristics of inventory in international
trade logistics.
 Nature of Inventory in Trade Logistics
• Exporter: Inventory has a long term financial dimension for a manufacturer-exporter as he has
to procure inputs to be used in production of exportable cargo such as raw material &
component parts to be used at different stages of production i.e. at work-in-process; finished
goods and packaging stage.

• Importer: Inventory characteristics with importer have although shorter time dimension but
usually have deeper financial commitments. An importer has to buy large quantities from an
exporter and sell it to the large no. of retailers. His financial commitments become bigger as
sometimes he has to give credit to retailers. The goods does not get sold sometimes resulting
due to changes in fashion or technology or goods may become obsolete for a particular
market.

• Retailers: Retailer is an important stakeholder in international inventory cycle as major portion

of product sales are only through retailer to end consumer. He is first point of contact with
diverse global customers and his knowledge and updates on latest trends and customer
preferences are of immense significance to not only importer but to manufactures and
exporters. He gives early lead about the international inventory cycle and sales.
 Trade Cycle and Inventory Features

Retailer Importer Exporter

Raw Material &
Inventory at Inventory at
Semi-Processed
Warehouse Warehouse
Inputs

Finished
Inventory at Inventory in
Products
Display Transit
Inventory
 Understanding Inventory Function

Demand Inventory Physical

Inventory Inventory
Manageme Optimizatio Inventory
Planning Ordering
nt n Systems Control
 Motivations for Holding Inventory in
International Logistics

• Protection from Uncertainties

• Principle of Specialization
• Economies of Scale
• Balancing Supplies with Demands
• Time and Place Utilities
Location of Buffer Interfaces of Inventory

International
Manufacturers &
Suppliers & Importers
Exporters
Purchasers

Intermediaries Distribution & Marketing &

and Customers Intermediaries Distribution
 Types of Inventory in Trade Logistics

• Raw Materials Inventory

• Stores and Spares
• Work-in-Process Inventory
• Finished Goods Inventory
Inventory Management Techniques

Economic
Order Quantity
Sub-System

INVENTORY
MANAGEMENT
TECHNIQUES

Reorder
Stock Level
Point Sub-
Sub-System
System
 Inventory Management Techniques –
Economic Order Quantity Subsystem
HOW TO CALCULATE ECONOMIC ORDER SIZE
TOTAL INVENTORY COST = IMPORT ORDERING COST + INVENTORY CARRYING COST

Total Import Ordering Costs The Total Carrying Costs

Number of Import Orders per Year X Average level of inventory x Price per unit x
Transactional Cost per Order Carrying cost (percentage)
i.e. i.e.
=$U/QXF Total carrying costs
Where =$Q/2xPxC
U = Annual Usage of Product in = $ QPC over 2
International Market Where
Q = Quantity Ordered for Imports Q = Quantity Ordered for Imports
F = Fixed Cost per Import Order P = Purchase price per unit
C = Carrying cost as % or Transactional
Cost
 Inventory Managements Techniques –
Reorder Point Subsystem

Normal
Consumption
Reorder Point Safety Stock
During Lead
Time

i.e. Reorder point = S x L + F (S x Rx L)

Where
S = Usage in units
L = Lead time in days
R = Average number of units per order
F = Stock-out acceptance factor
In case of fast moving consumer goods,
method used for calculating reorder level
is as under :-

Average
Reorder Lead-time
Daily Usage
Level In Days
Rate
Inventory Management Techniques – Stock-
Level Subsystem

• This technique is very easy to implement and is widely practiced

by small level firm to manage their standard goods inventory. This
system is largely executed manually.
• Under this system of inventory management, logistics managers
have to keep track of the goods held by the firm in international
warehouses and markets.
• They also have to keep record of dispatch of goods from place of
manufacturing and arrival of sales orders in countries of final
consumption.
• They have to maintain the certain level of inventory in key markets
which is arrived on by factoring the initial inventory plus inventory
received and by subtracting the goods sold.
Contemporary Developments in Inventory
Management

Just in Time

ABC Analysis
Contemporary Developments
In Inventory Management
Vendor Managed Inventory

Inventory Tracking system

 Models of Inventory in Trade Logistics

• Onsite Importer's Hubs

• Onsite Exporter Hubs
• Off-Site Supplier Hubs
 Companies Popular Design of Inventory
Management in International Trade Logistics
Sr. Inventory Inventory Replenish Descriptor Example
No.
Ownershi Location ment
p Control
1 Buyer Buyer Buyer Traditional Model Standard
2 Supplier Buyer Buyer Consignment Model Pepsi-Cola;
Volkswagen
3 Buyer Buyer Supplier VMI With Consignment Saturn
4 Supplier Supplier Buyer Importer controlled Exporter Dell Amazon
onsite Hubs
5 Supplier Buyer Supplier VMI With Consignment Nokia; Smart
6 Supplier Supplier Supplier Traditional Model Standard
7 Buyer Supplier Buyer Propositioning Reverse Seagate;
Consignments
8 Buyer Supplier Supplier Forward Buying Cisco; Starbucks
9 Supplier Third Supplier VMI with Consignment & Third Apple Computer
Party Party Owned Hub
10 Third Supplier Supplier Exporter hub with inventory Circuit City
Party Financing