Assignment - 2

ASSIGNMENT # 2 – Date of Submission: 04th Dec 2016

INVENTORY MANAGEMENT
With Sir Asif Murtaza

TOPICS COVERED:
 Inventory Records
 Importance of Accuracy
 Inventory Replenishment System
 Challenges in Global Supply Chain
 Single-Echelon
 Multi-Echelon
D a n i s h Al i S ye d
 MRP & DRP
S e me s t e r – I
B atch – II
 Trade-Off Analysis
M BA – SC M , 1.5 YR S
KUBS
U N I VE R S I T Y O F K AR AC H I

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Q. 1: Illustrate inventory record and its importance of accuracy to

inventory replenishment systems?
Inventory records play a significant part of any inventory management system. Some
products tend to have inventory records off consistently in the positive direction and some in
negative direction.
For items in retail stores small expensive items tend to be stolen more often. When they
are stolen, the inventory records tend to suggest the retail store has more inventory than it
actually does. For these items there is a positive bias in the inventory records.
For items in retail stores that have high return rates, sometimes those returns are not
recorded properly and the retail store winds up with more inventory than the inventory records
suggest, creating a negative bias in inventory records. For these items, the inventory records are
unbiased but may still have many errors over time.

Here is a list of possible ways errors can enter the inventory record system:
 Theft,
 Damage,
 Failure to record upon receiving,
 Misplaced inventory,
 Mislabeled SKUs, and
 Many others.

Now what happens if these inventory records are wrongly entered in the system and inaccuracy
is caused? Well Inventory record inaccuracy is still a major problem in industry, particularly in
the retail industry. This can be illustrated with the following example:

If a shopper puts 2 cans of chicken noodle soup on the check stand along with 3 cans of
bean and bacon soup, 2 cans of clam chowder soup, 5 cans of creamy mushroom soup, 1 can of
tomato soup, and 17 cans of split pea soup, and the cashier scans a can of chicken noodle soup
and then hits “× 30,” the chicken noodle soup inventory record will be much lower than it
actually is, and the other cans of soup will have inventory records that are too high.

What is the importance of Accuracy in Inventory Records?

If inventory records are off in the negative direction, it will cause excess inventory.
If inventory records are off in the positive direction, there will be stock outs.
There is further elaboration of this issue in inventory management which is: If inventory records
are inaccurate:

If the firm uses a (Q, ROP) inventory replenishment process, it will not order at the correct time.
If the firm uses a (T, OUL) inventory replenishment process, it will not order the correct quantity.

Therefore Accurate Inventory records are the essence of a successful supply chain.

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Q. 2: What are the challenges faced by the global supply chain?

There are two different challenges with global inventory management:

1. Inventory management for global sourcing

2. Inventory management for selling in foreign markets
Above mentioned are fundamentally different and have different challenges, they are explained in detail
as follows;

1. Inventory management for global sourcing is a challenge because of the following issues;

 Long lead times

 Customs clearance
 Communication challenges

2. Inventory management for selling in foreign markets is a challenge due to the following;

 Differences in legal systems

 Lack of infrastructure
 Differences in consumer and shopper behavior
 Taxation rules and complexities

1. Inventory management for global sourcing is a challenge because of the following issues;

 Long lead times

o In managing inventory for global sourcing it is important to take into account various
transportation options and their impact on cycle stock, safety stock, and in-transit stock,
because the differences can be dramatic. The difference between air and inland
water/ocean can be three to four weeks. For example, going from the inland water/ocean
combination to air, if the difference is four weeks, then in-transit stock could be reduced
by around 90 percent. In addition, for a given level of demand uncertainty, the reduction
in safety stock could be around 75 percent. Of course the transportation costs are also
dramatically different, but the point is that good inventory management for global
sourcing must carefully consider transportation options and not just assume one method
is better than another. In addition, it is possible that in some circumstances that typically
ocean should be used with the allowance for emergency shipments using air or that some
base percentage of demand should be covered with ocean carriage while the most
uncertain portion of demand is covered with air carriage. All of these options must be
considered with respect to all of the costs and customer service targets.

 Customs clearance

o If a product has a questionable country of origin or a debatable product classification, it

can cause shipments to be held up in customs, depending on the product and the country
where importation is occurring. For example, a garment sourced from a country in Asia
might have the dominance of value added in that country, whereas ocean carriage may be

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a small fraction of the total cost of the garment. At the same time, the duty on the
garment could be around the same amount as that of the production cost in Asia.
Consequently, it might make sense to use a foreign trade zone (FTZ). If product is
brought into the United States through an FTZ, it is possible that duty can be delayed
until product leaves the FTZ. Details like this can affect the optimal inventory positioning
in the supply chain. When products are imported, they must go through customs, and the
products must be classified according to the Harmonious Tariff Schedule of the United
States (HTSUS). The origin of the product and the product classification has a significant
impact on whether a tariff is imposed and the magnitude of the tariff. Consequently, this
has an impact on the inventory investment and the inventory cost after the product is
imported, which has an impact on optimal product placement and logistics network
design. If you have a silk tie, where the silk comes from China, the product is sewn and
assembled in Bangladesh, and is designed and sold from an Italian company, what is the
country of origin? Generally, from a cost perspective you would like the country of origin
to be one with the lowest tariff, but from a marketing perspective, you might want it to be
from the country with the most stores. Determining country of origin is important and
requires expertise from someone such as a customs broker.

 Communication challenges

o Many times production and labor costs are the key drivers in sourcing decisions when in
fact other factors should be weighed:
 inventory holding costs,
 transportation costs,
 stock-out costs,
 Taxation and regulatory compliance costs.
 It is also important to notice where costs are added to the inventory.

2. Inventory management for selling in foreign markets is a challenge due to the following;

 Differences in legal systems

o A retailer running operations in a foreign country would need to understand holidays, not
only for shopping behaviors but also for hourly labor behaviors. In some countries,
hourly labor travel to their hometowns for certain holidays. For a retailer, this has
implications for forecasting demand since some cities have high densities of temporary
labor and therefore may face a reduced demand in those areas when people leave for a
holiday, whereas the areas where the labor is going for the holidays may face increased
demand.

 Lack of infrastructure

o Managing retail inventory in foreign markets can be challenging, especially when coming
from a homogeneous market. For example, while there are many different demographics
in the United States, the overall grocery and general merchandise assortment is relatively
homogeneous, especially in comparison to a country like China. Throughout China there
are many different cuisines and raw materials that go into making those cuisines.
Consequently, the retail assortments in China are more mixed than those in the United
States. In China, the sources of the grocery products are more regional as well. This

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leaves fewer products for centralized distribution. So on one hand you have more
homogeneous assortments and more regional sourcing. All of this leads to the need for
more inventory, and lower transportation efficiency.

 Differences in consumer and shopper behavior

o As a company moves operations to a foreign country to sell or distribute its product,

forecasting can be difficult because of the fact that the country has different cultural
events and holidays.

 Taxation rules and complexities

o These variables clearly affect the optimal level of automation in a distribution center,
which in turn affects the fixed versus variables costs, the payback, and the ROI. In some
countries where land is relatively expensive you find distribution centers that are
multilevel and highly automated, whereas in countries with low land costs you find
sprawling distribution centers with large yards. If the optimal solution is to have a
multilevel, highly automated distribution center, the distribution center will probably be
smaller than it would otherwise be.

In addition, the economics of using distribution centers in various countries differs widely due to the
following:

o Infrastructure,
o Shopper preferences,
o Homogeneity of product assortment,
o Transportation capacity and competition,
o Warehouse availability,
o Land costs,
o Labor costs,
o Labor regulations, and
o Value added tax (VAT) rules.

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Q. 3: Differentiate the following;

1. Single Echelon vs. Multi Echelon

2. Material Requirements Planning (MRP) vs. Distribution
Requirements Planning (DRP)

1. Single Echelon vs. Multi Echelon

Echelon in other words also means Tier, in order to better understand Echelon model we must
first understand what does it means, Echelon means a Level or Height, In inventory it is used in
place of Tier, at various levels at which the inventory is held. i.e. Factory, Warehouse,
Distributors warehouse, or at retailers warehouse etc. So single Tier and Multi-tier are discussed
in this part and the same is differentiated. How? Let’s find below:

Single Echelon Multi Echelon

Tactical decisions are involved Strategic Decisions are involved
It Only represents elementary level inventory It represents universal Level inventory
optimization method. optimization method.
Each facility is forced to keep safety stock toEach facility is considered as a member of the
cover uncertainties in demand and lead-time. network hence it is decided as in which facility
will keep safety stock.
High inventory buildup Low Inventory buildup
Low Cost in terms of Carrying and Holding High Costs in terms of Carrying and Holding
Optimize level per level Optimize Universal full network
High Internal service levels required from one Pooling risks of multiple steps into less
echelon to the other. locations which increases service levels
towards customers.
The model is Simple The Model is Complex
Historical method Futuristic method
Information and Metrics are used to support Increased demand may be delayed, inferior fill
decision making. rate resulting in lost sales.
Push – Make to Stock Inventory Strategy Pull – Make to Order Inventory Strategy
Efficient Responsive
More of a Centralized – Independent More of a Decentralized - Dependent
Periodic Review Replenishment process Continuous Review Replenishment Process
No Bullwhip Effect More Bullwhip Effects
Mostly realistic as it’s a serial model and Sometime Unrealistic which can hinder the
Information passed on is sometime accurate. decision making, accuracy and effectiveness

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2. Material Requirements Planning (MRP) vs. Distribution

Requirements Planning (DRP)
There is a very thin line between both the MRP & DRP as Both DRP and MRP depend on a
forecast of demand with an objective of avoiding shortages with minimum inventory investment,
They are further differentiated as follows in the table:

MRP DRP
Time phased Planning. Similar Logic in different situations.
More Stock-outs often as the information/data In Pull Methodology: Goods are moved up
is not accurately updated in the system. through the network.
Lead-times are increased. In Push Methodology: Goods are moved down
through the network.
Certainty and stability Bullwhip effect is caused.
Time Horizon as the farther into the future you Lower costs due to Shipments planned globally
plan, the more uncertain the plans will be. stored centrally.
Depends on Lot sizing. Service level is affected
MRP takes the MPS, ISF, and BOM and Multi-Echelon model is served.
creates a time-phased plan for producing
or ordering parts, components,
subassemblies, and assemblies that go
into making the final product
Periodic Order Quantity Continuous Order Quantity
Minimizes Total Cost Minimizes total cost.
Inbound Logistics Outbound Logistics
Based on Production schedules Based on Customer demands
Under control Out of control
Coordinates integration of materials into Coordinates demand between outlets and
finished goods suppliers
Low Inventory levels High Buildups
Definition of the distribution structure

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Q. 4: What is Trade-off analysis? Support your statement with

examples.
Considering the hypothetical inventory decision that results a significant reduction in inventory
costs and carrying costs, yet also causes an increase in transportation costs to maintain adequate customer
service levels. Transportation is a significant cost driver and function in supply chains. Interestingly,
changes in inventory performance due to managerial decisions often have an impact on transportation
costs and performance. This is the concept of the “trade-off.” Also a Tradeoff can be understood by
keeping in mind the following;

Let’s understand the main types of trade-offs in inventory management:

 Inventory-Transportation Trade-Off
 Product Variety-Inventory Trade-Off
 Lot Size-Inventory Trade-Off
 Labor-Equipment Trade-Off
 Service-Cost Trade-Off
Inventory-Transportation Trade-Off:

FTL < LTL Transportation costs decrease as transportation volumes increase. This allows for the
spreading out of operating costs across more items during transit. As such, shipping in full truckload
(FTL) and full container load (FCL) quantities is usually always cheaper than quantities that are less-than-
full truck Load (LTL).

Transportation Cost > Inventory Cost Demand for inventory will not be in full-load quantities.
Therefore, shipping in such quantities certainly results in associated inventory-related costs. The cost of
transportation increased with the use of air transport, but the cost of carrying inventory decreased. There
was a cost trade-off between the two drivers.

While inventory is improving, transportation cost efficiencies are suffering, inventory and
transportation costs are two significantly large cost categories in supply chain management. This theory
can be illustrated with the following example: sometimes this is done by holding some shipments for days
(instead of hours or minutes). As a result, inventory carrying costs increase to allow for the transportation
cost saving. Likewise, receiving shipments from suppliers in full-load quantities is often done to take
advantage of the inbound transportation cost efficiencies.

Product Variety-Inventory Trade-Off

Product variety is often viewed as a revenue-generating strategy, where more products that meet
the specific needs of different market segments should lead to increases in current and future sales.
Product variety requires more inventory to maintain customer service levels, since more products have to
be held due to the various stock keeping units (SKUs) available. This trade-off concept is one that many
firms, like Coca-Cola, constantly struggle with and consider when planning customer service and product
strategies.

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Customers have preferences, which ultimately lead many firms to manufacture a multitude of
different products as a means of catering to the needs of various customer segments. For Example, Coca-
Cola would want to offer more variations in order to fulfill the Product variety but to fulfill this product
variety have ou thought about how many different sweeteners, different caffeine levels and different
flavor add-ins to be maintained. This affects the inventory cost as they prefer to manufacture in larger lots
and standardized products.

Lot Size-Inventory Trade-Off

As suggested to earlier, manufacturing organizations likely prefer to produce in large lot size
quantities. This allows for better process control, per unit costs to decrease, and overall efficiency gains.
The issue with this, however, is that demand is typically in much smaller lot size quantities. Thus, to take
advantage of large production runs, firms often have to hold more inventory to service customers.

This trade-off must be considered when, for example, inventory performance measures appear to
be an indication of poor management decisions and inefficiencies (lower turns, for example). The reality
may be that the net effect of the seemingly lackluster inventory position is a level of manufacturing cost
reductions that eclipse the costs due to slower moving inventory.

To maximize productivity and minimize cost, warehouse management must

work with the following:

Labor-equipment trade-off
Materials handling equipment represents the second-largest capital cost and labors the
largest operating cost. There is a trade-off between the two in that labor costs can be reduced by
using more materials handling equipment.

Services-Cost Trade-off

Generally, but not always, an increase in customer service requires an increase in cost,
which is one of the major trade-offs. The larger the sample size, the greater the inspection cost.
Thus there is a trade-off between the producer’s and consumer’s risks and the cost of inspection.

Trade-off of Push vs. Pull

Trade-off of Responsiveness vs. Efficiency

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Q. 5: A convenience store chain attempts to be responsive and provide

customers what they need, when they need it, where they need it. What
are some different ways that a convenience store supply chain can be
responsive? What are some risks in each case?

To start with this question it’s already divided in to 2 Sets of Questions i.e.

1. Different ways for a convenience store to be Responsive in Supply Chain.

2. Risks in Each case.

I would like to begin with the objective of the convenience store of delivering what, when
and where its customers want product and service delivery and by what ways. For this The Firm
must plan the priorities (what goods to make and when) to meet that demand. Priority and
capacity must be planned and controlled to meet customer demand at minimum cost. If
customers have to wait too long for delivery, they might take their business elsewhere.

Now to make the Supply chain responsive and reach out its customers in responsive manner
It can be achieved by increasing the number of outlets and or by increasing the fleet to deliver
goods and services in responsive manner it is hence the duty of person concerned with Material
management to find the combination of inputs to maximize service and minimize the cost. It can
be illustrated with a simple example i.e. customer service can be improved by establishing
warehouses in major markets. However, that causes extra cost in operating the warehouse and in
the extra inventory carried. To some extent, these costs will be offset by potential savings in
transportation costs if lower cost transportation can be used.

Now To avoid the Risk there is a Trade-off to be made between level of customer service and
cost of providing that service. As we all know the cost and service are inversely proportional so
the cost will rise with the increase in service levels. By increasing no of retail outlets the
customers can be reached responsively. But apparently the cost will incur of holding and
carrying moreover making extra retail outlets.

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