Logistics management inventory management decisions supply chain management

1. CUSTOMER-ORIENTED
LOGISTICS MANAGEMENT
PRESENTED BY:
Aruz Mahajan (16)
Anshul Pandoh (10)

2. LOGISTICS
The commercial activity of transporting goods to customers.
LOGISTICS MANAGEMENT
It is a supply chain management component that is used to
meet customer demands through the planning, control and
implementation of the effective movement and storage of
related information, goods and services from origin to
destination.

3. OBJECTIVES OF LOGISTICS
•COST REDUCTION: It is usually achieved by tactics such as altering the
number and location of warehouses, altering the mode of transport, route
optimization for the transport function, and optimizing the quantum of
inventory.
•CAPITAL REDUCTION: It is a strategy devoted towards minimizing the
level of investment in the logistical system. Also, substantial capital
reduction can be achieved by leasing and renting facilities without
affecting the service output to the customers.
•SERVICE IMPROVEMENT: It involves giving better service across the
dimension of service without substantially increasing the cost of logistics.

5. FACILITIES DECISIONS
Three generic types of outbound logistics strategies are possible:
• DIRECT SHIPMENT: In direct shipment strategies, goods once manufactured
are directly shipped to the point of sale without being stocked anywhere.
• WAREHOUSING: In warehousing strategies, however, goods once
manufactured are stored in warehouses waiting from orders from the retail outlets
or others point of sale.
• CROSS-DOCKING: In cross docking, while warehouses do exist, the storage
time is reduced to a minimum. In this strategy, items are distributed continuously
from suppliers through warehouses to suppliers with the items lying in the
warehouses for just a few hours.

6. Cross docking is possible only when certain conditions are
satisfied:
i. The inventory destination is known when stocks are received
ii. Customer is ready to receive inventory immediately
iii. The number of locations to ship inventories are not high
iv. It is possible to pre-label the inventory
v. Inventory arrives at a state where it is immediately conveyable

7. MAIN FUNCTIONS OF WAREHOUSING
OPERATIONS
The warehousing functions perform several specific activities
:
• MOVEMENT
• STORAGE
• INFORMATION TRANSFER

8. MOVEMENT FUNCTION
This function itself consists of several activities such as:
i. Receiving: the main activity at this stage involves the unloading of the goods,
updating of the inventory records, inspection of damage, and verification of
merchandise count against the orders and shipping records.
ii. Transferring: it involves transferring the shipment received to locations within
the warehouse specifically meant for the storage of that category of inventory
to enable easy access whenever required.
iii. Order picking or selection: this activity takes place whenever the warehouse
gets an order from the downstream recipient for the goods stored.
iv. Shipping: once the order is received, the order is picked and packed to be
shipped after selecting the mode of transfer, after adjusting the inventory
records.

9. STORAGE FUNCTION
Goods can be stored in a warehouse temporarily awaited an order from the
downstream intermediary or else, mainly in the case of seasonal products, goods
can be stored for a reasonably long period either to offset the seasonal demand
or on the basis of speculation or forward buying.
INFORMATION TRANSFER FUNCTION
Information on inventory levels, throughout levels, stock keeping locations,
inbound and outbound shipments, facility space utilization, order fulfillment data,
etc. are the are the type of information that a firm expects a warehouse to
provide.

10. MAIN DECISIONS IN WAREHOUSING
I. The location of the warehouse
II. The number of the warehouse

11. I. WAREHOUSING LOCATIONS
The location or site selection decision can be approached from macro and micro
perspectives.
MACRO PERSPECTIVES ON WAREHOUSE LOCATIONS: It examines the issue
of locating a warehouse within a broad geographical area and concerns issues
such as whether the warehouse should be located near the production plant, the
market, or the midway between both.
MICRO PERSPECTIVES ON WAREHOUSE LOCATIONS: The most popular
approaches are the-
Centre of gravity method: It considers the transportation rates and the points
volume for arriving at the exact location for the warehouse. It tries to minimize the
cost of logistics by selecting an appropriate site for locating the warehouse when
the transportation cost as well as the volume to be shipped to various markets is
known.
Cost-volume-profit analysis: it is a simple method which uses the break-even
analysis to select from a set of locations. In this we decide about a few alternative
locations and then select from this set of alternative locations.

12. II. NUMBER OF THE WAREHOUSE
Four factors are considered in deciding about the number of warehouses are:
a) Cost of lost sales: It is the stockout cost when a customers order is not
fulfilled due to lack of availability of stock within the permissible waiting time
allowed by the customers. This is basically an opportunity cost, as actual
outflow of money does not take place.
b) Inventory cost: These are the cost incurred in procuring and holding the
inventory for the entire system. Since every warehouse will have a specified
safety stock for all the item stocked, the inventory cost are estimated to go up
with the number of warehouses.
c) Transport cost: These are the cost incurred in transportation in the entire
system consisting of the transportation from the production point to the
warehouses, as well as warehouses to the points of sale.
d) Warehousing cost: It consists of the cost of renting, leasing or owning the
warehouse as well as the maintenance of the warehouse.

13. INVENTORY MANAGEMENT
 Inventory management is all about having the right
inventory at the right quantity, in the right place, at
the right time, and at the right cost.
 Inventory levels directly influence the profitability of
a firm.
 Excess inventory –Greater chance of damage, More
cost
 Insufficient inventory- Missing out on sales, Missing out
on favourable prices.
 So optimal level of inventories are required.

14. INVENTORY MANAGEMENT DECISIONS
 4 main decisions:
1. Why do we need inventory?
2. Objective of inventory management
3. Inventory level decisions
4. Distribution resource planning system

15. WHY DO WE NEED INVENTORIES?
 Improves customer service: In the absence of
inventory, many customer orders might have to be
turned down.
 Smoothens the operations of logistics system:
Inventories reduces the pressure on logistics
system to cut the lead time.
 Reduces cost: Inventory carrying capacity can
reduce transportation cost by reducing the less-
than-truckload shipments. Moreover discount on
large shipments can also reduce cost.

16. OBJECTIVE OF INVENTORY MANAGEMENT
 Reduce inventory cost
 Developing accurate forecasts
 Reducing lead time
 Accurately calculating the inventory levels at
various locations
 Achieving customer service targets

17. Cost associated with inventory
1. Inventory procurement cost: These are fixed
costs which have to be incurred in setting up the
machinery, procurement of related materials,
transportation, order processing etc.
2. Inventory carrying cost: 4 categories
a) Capital cost
b) Storage space cost
c) Inventory service cost
d) Inventory risk cost

18. a) Capital cost: It is the cost of capital tied up in the
inventory. It is difficult to calculate.
b) Storage space cost: The storage space cost is a
combination of the warehouse rent or mortgage,
lighting, heating, air conditioning, plus the handling
costs of moving the materials in and out of the
warehouse.
c) Inventory service cost: These costs include
insurance paid on the inventory and taxes,
d) Inventory risk cost: It includes the cost associated
with obsolescence, damage, shrinkage of the unsold
goods

19. 3. Out-of-stock costs: Out-of-stock costs are
incurred when an order is placed but cannot be
filled from the inventory to which the order is
normally assigned.
Two types:
a) Cost of lost sale
b) Backorder costs

20. INVENTORY LEVEL DECISIONS
 Inventory level decisions are the decision related to
the quantity of inventory to be carried.
 As these decisions directly affect the inventory
carrying costs
 These decision mainly involve two main decisions:
 Push or pull inventory control decision
 Order quantity decisions

21.  Push vs pull inventory control:
 In push strategy, decisions about the inventory
levels are taken at the central level.
 The storage points are replenished after a fixed
time.
 In pull strategy, inventory levels are decided in
a decentralized manner.
 Can reduce inventory if implemented properly.
 Economies of scale is hard to achieve.

22.  Order quantity decisions: Decision related to the
quantity and time of reordering the product is taken so
that optimal inventory level is maintained
The effect of variability in demand can be reduced by :
1. Risk pooling- Reducing the number of storage points.
2. Echelon inventory: It is defined as the inventory
between a stage in the supply chain and the final
customer.

24. DISTRIBUTION RESOURCE PLANNING
SYSTEM(DRPS)
 It is a logistics information system innovation that
enables managers to plan effectively and efficiently
 It controls the flow of goods from production facility to
retailers in time phased manner.
 It helps manufacturers to make and ship just what is
needed for the current demand.
 Helps to reduce inventory investment, safety stock
levels and transportation costs
 Helps in improving customer service levels, flexibility in
the system, system-wide forecasts and the utilization of
manufacturing resources

25. TRANSPORTATION DECISIONS
3 decisions:
1. Mode selection: 5 modes of transport- air, rail, road, water
and pipeline. Managers must
consider cost, dependability and possibility of loss and
damage associated with the mode available to them.
2. Vehicle routing and scheduling: It tries to find out the best
path a vehicle should travel through a network of roads, rail
lines, shipping lines, etc so that the time and distance
travelled is minimized
3. Freight consolidation: It is mainly intended to reduce the
cost of transportation through bringing together smaller
quantities of inventory in order to create a higher quantity for
transportation

26. FACTORS AFFECTING TRANSPORTATION COST
1. Product related factors:
a) Density of the product:
b) Stow ability:
c) The ease or difficulty in handling
2. Market related factors:
a) Degree of intermode or intramode competition
b) Location of the market
c) Seasonability of the product movement

27. SUPPLY CHAIN MANAGEMENT
 Supply Chain Management includes every effort
involved in producing and delivering a final product
or service, from the supplier to the customer.
 Supply Chain Management includes managing
supply and demand, sourcing raw materials,
manufacturing and assembly, warehousing and
inventory tracking, order entry and order
management, distribution across all channels, and
delivery to the customer.

28. THE SCM NETWORK

30. PRINCIPLES OF SUPPLY CHAIN MANAGEMENT
The four principles of SCM are:
1. Efficiency
2. Reliability
3. Flexibility
4. Innovation

31. 1.EFFICIENCY
 The principle of efficiency requires that any supply
chain should be conscious of cost reduction in all
the activities. Efficiency leads to reduction in the
wastage of resources, including wastage of time.
The principle of efficiency is reflected in initiatives
such as JUST-IN-TIME(JIT).

32. 2.RELIABILITY
 Reliability is associated with consistency.
Consistency should be measured mainly in terms of
the consistent delivery time achievement, accuracy
in order fulfillment, consistency and accuracy in
payment processing time, installation support and
after-sales service.

33. 3.FLEXIBILITY
 Flexibility is associated with the ability of the entire
supply chain to adapt to changes in the demand or
supply pattern. Flexibility is also termed as the
agility of the supply chain.

34. 4.INNOVATION
 Innovation is important as it could generate a
sustainable competitive advantage for the firm.
Supply chains that do not innovate will slowly erode
their comparative advantage with regard to their
competitors.

35. GENERIC SUPPLY CHAIN MANAGEMENT
STRATEGIES
Four different Generic Supply Chain Management
Strategies are:
1. Rationalization strategy
2. Synchronization strategy
3. Customization strategy
4. Innovation strategy

36. 1.RATIONALIZATION STRATEGY
 Rationalization strategy places greater emphasis on
process rationalization that eventually leads to
better net margin. This strategy involves closely
assessing the process and working about ways of
reducing wastage wherever possible.

37. 2.SYNCHRONIZATION STRATEGY
 Synchronization strategy involves elements such as
collaborative inventory management, perfect order
fulfillment and optimal inventory placement. One of
the most popular supply chain practices that follows
from synchronization strategy is JIT inventory
management.

38. 3.CUSTOMIZATION STRATEGY
 Customization strategy involves developing specific
Strategies for profitable customers and executing it
with a view to establishing a long term relationship
with them. The elements of customization strategy
involves mass customization, lifetime relationships,
customer profitability management, customer
knowledge management and value analysis.

39. 4.INNOVATION STRATEGY
 Supply chain innovation strategy involves exploiting
the competitive advantage generated by a strong
supply chain to introduce successful new products
in the market at a much higher rate than
competitors. For a company like apple developing a
constant stream of new product involved working
closely with their partners in research and
development (R&D).

40. SUPPLY CHAIN TECHNIQUES
 Supply chain techniques are the bunch of activities
that the SCM process should incorporate, in order
to achieve the objectives set in the SCM strategy.
According to Jacoby (2010) the essential supplies
and techniques are as follows:

41. 1. SUPPLY CHAIN NETWORK DESIGN
 Network design is probably the most critical part of
supply chain management. To achieve the optimum
supply chain performance it is necessary to
establish a powerful network design. Fairness and
transparency contribute to the sustainability of a
network design.

42. 2. CAPACITY PLANNING
 Capacity planning is associated with the ability of
the network to respond to change in demand
patterns and market conditions. Capacity planning
requires both long term as well as short term
orientation. For instance capacity planning should
address issues such as- if the demand increases
gradually how the requirements for additional
inventory storage limit after 2 years? In the short
term how the short term dip in demand affect
storage space productivity?

43. 3.RISK MANAGEMENT
 Environmental factors such as sudden increase in
cost of certain components or disruptions to the
physical flow of goods due to natural disasters
could create tremendous disruption in the whole
system. Risk management is therefore very critical
in SCM strategies.

44. 4.ORGANIZATIONAL CHANGE MANAGEMENT
 SCM is also an Organizational process involving
organizational players including departments,
teams and informal groups. SCM involves a
continuous adaption to market changes, the
organization will also need to change constantly. An
organization that refuses to change will find it
difficult to adopt SCM.

45. 5.PERFORMANCE MEASUREMENT AND
MONITORING
 Developing and implementing performance
monitoring process is also very crucial to success
of a SCM strategy. Performance metrics and
measurement provide the crucial feedback that
guides the SCM strategy. Lack of proper feedback
or faulty feedback leads to faulty implementation of
the strategy.