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• Module overview
• 1. Introduction to supply chain management
  • Introduction
  • 1.1 What is supply chain management?
    • 1.1.1 Supply chain management: The concept
    • 1.1.2 Supply chain management: Evolution
    • 1.1.3 Supply chain management: The search for a definition
    • 1.1.4 Supply chain management: The drivers:
  • 1.2 Technology and supply chain management
  • 1.3 Supply chain management: New business models and challenges
    • 1.3.1 New supply chain business models
    • 1.3.2 Challenges
  • 1.4 Key issues in supply chain management

• 2. Supply chain management and information systems

  • 2.1 Introduction
  • 2.2 Goals of supply chain IT systems
  • 2.3 Supply chain IT goals: Challenges and means
    • 2.3.1 Standardisation
    • 2.3.2 Infrastructure
    • 2.3.3 Electronic commerce
    • 2.3.4 Supply chain management issues and IT
  • 2.4 Integrating the supply chain information systems
  • 2.5 Decision support systems
    • 2.5.1 The characteristics of decision support systems
    • 2.5.2 DSS components
    • 2.5.3 DSS in supply chain management
  • 2.6 Summary

• 3. Logistic network configuration

  • 3.1 Introduction
  • 3.2 The supply chain network
    • 3.2.1 Network design decisions
    • 3.2.2 Design consideration
  • 3.3 Logistics and facility costs in logistics network configuration
  • 3.4 Logistics network design and decision support systems
    • 3.4.1 The supply chain model
    • 3.4.2 Data and a network model
    • 3.4.3 Model and data validation
    • 3.4.4 Solution techniques
  • 3.5 Key features of a network configuration DSS

• 4. Inventory management and risk pooling

  • 4.1 Introduction
  • 4.2 Inventory: Basic concepts
    • 4.2.1 Why hold inventory: Inventory functionality
    • 4.2.2 Inventory related definitions
    • 4.2.3 Inventory related issues
  • 4.3 The inventory policy
    • 4.3.1 Basic inventory decisions and EOQ
    • 4.3.2 Inventory policy under conditions of uncertainty
  • 4.4 Risk pooling
    • 4.4.1 The Square Root Law of Inventory
    • 4.4.2 Centralised versus the decentralised system
    • 4.4.3 Supply chain inventory
    • 4.4.4 Inventory management: Practical issues
  • 4.5 Summary

• 5. Supply chain integration: The value of information

  • 5.1 Introduction
  • 5.2 Information and supply chain integration
    • 5.2.1 The bullwhip effect
    • 5.2.2 The reasons for bullwhip effect
    • 5.2.3 Quantifying the bullwhip effect
    • 5.2.4 Measuring bullwhip effect: The practical issues
    • 5.2.5 Bullwhip effect: Managerial insight
    • 5.2.6 Reducing bullwhip effects
  • 5.3 Effective forecasts and supply chain integration
  • 5.4 Collaborative supply chains and information integration
  • 5.5 Supply chain systems and information integration
  • 5.6 Information and the synchronised supply chain
  • 5.7 Summary

• 6. Supply chain integration: Distribution strategies

  • 6.1 Introduction
  • 6.2 Transportation and distribution
    • 6.2.1 Transport modes
    • 6.2.2 Inbound transportation
    • 6.2.3 Distribution
  • 6.3 Centralised versus decentralised control
  • 6.4 Distribution strategies
    • 6.4.1 Direct shipment
    • 6.4.2 Cross docking
    • 6.4.3 Warehousing and distribution strategies
    • 6.4.4 Transhipment
  • 6.5 Central versus local facilities
  • 6.6 Push versus pull systems
    • 6.6.1 Push systems
    • 6.6.2 Pull systems
  • 6.7 Summary

• 7. Supply chain simulation games:

  • 7.1 Introduction
  • 7.2 The Beer Game
    • 7.2.1 The purpose
    • 7.2.2 The Beer Game scenario
    • 7.2.3 Features and options
  • 7.3 Playing the Beer Game
    • 7.3.1 Beer Game projects
    • 7.3.2 The Beer Game: The learning tool
  • 7.4 The Risk Pooling Game
    • 7.4.1 Playing the Risk Pooling Game
    • 7.4.2 Risk pooling project
  • 7.5 Summary

• 8. Supply chain integration: Strategic partnering

  • 8.1 Introduction
  • 8.2 Strategic partnering
    • 8.2.1 Strategic partnering: A framework
  • 8.3 Supply chain partnership models
    • 8.3.1 Manufacturer and supplier partnership
    • 8.3.2 Strategic partnering with logistics service providers
    • 8.3.3 RSP or retailer supplier partnership
    • 4.3.4 Distributor integration
  • 8.4 Summary

• 9. International issues in supply chain management

  • 9.1 Introduction
  • 9.2 Globalisation and SCM issues
    • 9.2.1 Global business forces
  • 9.3 International supp ly chain - risks and advantages
    • 9.3.1 Risks in international supply chain
    • 9.3.2 Risk management strategies
    • 9.3.3 Risk management framework
  • 9.4 Issues in intern ational supply chain management
  • 9.5 Logistics infrastructure: Regional issues
  • 9.6 Summary

• 10. Product design and supply chains

  • 10.1 Introduction
    • 10.1.1 Matching the supply chain to the product
  • 10.2 Design for logistics
    • 10.2.1 Packaging
    • 10.2.2 Manufacturing: Concurrent and parallel processing
    • 10.2.3 Postponement or delayed differentiation
  • 10.3 Mass customisation and supply chains
  • 10.4 Supply chain is sues and the push-pull boundary
  • 10.5 Summary

• 11. Supply chain management and customer value

  • 11.1 Introduction
    • 11.1.1 The concept of value
    • 11.1.2 Customer service and value
  • 11.2 Supply chain management and customer value
    • 11.2.1 Tailored logistics
    • 11.2.2 Customer value dimensions
  • 11.3 Customer value measures
    • 11.3.1 Customer based measures
    • 11.3.2 Supply chain performance measures
  • 11.4 Information technology and customer value
  • 11.5 Summary

4.4.4 Inventory management: Practical issues

In your text

Cycle counting is an inventory system where items in the inventory are counted continuously to identify slow movers and quick movers and to identify trends in the depletion of the inventory on the basis of each individual item or SKU.

Read Section 3.6 in your text. The section contains a summary of a survey finding on effective inventory reduction strategies. The strategies mentioned are straight forward and you are familiar with many of the concepts. The main focus is on reduction of the level of inventory in the supply chain.

A survey of 200 manufacturing firms in the USA, reported in the Inventory Reduction Report (2000), states that the solutions contributing to the significant inventory reduction achieved by these firms were mainly such strategies as better forecasts in supply chain management, supplier managed inventory, the adoption of cycle counting and better training techniques (Wilson & Delaney 2001).

For your information

Just to confirm some definitions you are probably already familiar with:

usage rate:
the rate at which inventory is depleted

lead time:
the time required for the item to be available after the order is initiated

safety stock:
how much stock must be kept in hand, depending on consumption rate, variation in demand and lead time, all of which the manager must determine with periodic reviews

Periodic inventory review policy . The periodic inventory review policy requires the manager to review the inventory at a fixed time interval. The order size is decided every time after the review. The review helps the manager to identify characteristics of inventory items, such as slow moving items, fast moving items, dead or static items or special storage and handling requirements for a particular item. The manager can then take appropriate decisions regarding inventory control by setting inventory levels for each item after closely monitoring each item's usage rate, lead time and safety stock.

ABC approach . This refers to inventory profiling in terms of value and volume into three groups - A, B and C - and setting the periodic review frequency on the basis of priority for the high value, high volume class of inventory. This is a well known concept and has been covered in your Logistics Management subject.

Reduction of safety stock. The usual focus is on the reduction of lead time. Read the following for possible strategies regarding safety stocks and lead times.

Reading 4.4

Evers, PT (1999, second quarter). 'The effect of lead times on safety stock', Production and Inventory Management Journal , pp.6-10.

Quantitative approaches. The focus of firms is on achieving the right balance between inventory holding and ordering costs.

Inventory turnover ratio. This is very important concept and is one of the key foci of management in reducing inventory. Though it is said that the focus of firms is not on reducing costs but on increasing the inventory turnover ratio, these two are intimately related.

Inventory turnover ratio is sometimes referred as inventory velocity as it indicates how fast inventory moves through the system.

The ratio measures how many times per year average inventory turns over. Inventory turnover varies widely among firms in different industries and also among firms in similar industries. The typical inventory turnover figure for the US manufacturing industry is said to range from five to ten and for wholesale and retail firms, from ten to twenty (Coyle et al 2001).

A high inventory turnover ratio implies more effective inventory management as inventory moves quickly through the system; but its impacts on customer service levels have to be monitored as certain fast moving items may not be available when ordered unless care is taken. Order processing and transportation systems have to be made compatible to inventory velocity in order to maintain customer service requirements.

As inventory turnover increases, both average inventory and the cost of carrying average inventory will show decreases. Figure 4.6 shows the typical relationship between inventory turnover ratio and inventory carrying cost. It shows the impact of increasing inventory turnover ratio on inventory carrying costs, based on an assumed total annual inventory of $20,000,000 and for various inventory turnover ratios between 1 and 10. The annual inventory carrying cost is assumed to equal 30% of the average inventory value.

Figure 4.6 Savings in inventory dollars by inventory turnovers
(Source: Coyle et al 2003)

Activity 4.4

1. Calculate the average inventory at a warehouse during each inventory cycle for inventory turnover ratios of 2 to 12 with a total annual inventory of $ 360,000,000.
2. Refer to your EOQ model and consider the carrying cost part of the equation. Workout the holding or carrying cost for inventory related to each turnover ratio using 25% carrying cost. Try to derive a curve yourself which will be similar to the one above.
3. How does the inventory turnover ratio affect the fixed cost associated with the warehouse?

It must be appreciated that inventory turnover is a financial ratio. A great amount of information is forfeited, however, when SKU (stock keeping unit)/quantity data are converted to cost data. There are other techniques like MOH (month in hand) analysis, which is the average monthly inventory divided by monthly demand , both in units. Robison cites the following example of IPA or inventory profile analysis which identifies trends of excess or shortage items in an inventory and allows better customer service (Robison 2001).

Reading 4.5

Robison, JA (2001, second quarter) 'Inventory profile analysis: An aggregation technique for improving customer service while reducing inventory', Production and Inventory Management Journal , pp.8-13.

Inventory visibility. Inventory visibility implies comprehensive knowledge about inventory throughout the system. The challenge is quite onerous. It requires (Coyle et al 2001):

• tracking and tracing inventory at SKU level throughout the supply chain system
• detailed reports on all logistics related activities
• notification of failure and delay in flow of inventory throughout the system.

Visibility can reduce requirements for all kinds of inventory.

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