SCM

Module - 4
Uncertainty in Supply chain

Uncertainties in supply, process and demand are recognised to have a major impact on the
manufacturing function. Uncertainties propagate throughout the network and leads to inefficient
processing and non-value adding activities.

Sources of Uncertainties

• Inherent characteristics that cause more or less predictable fluctuations. Uncertainty may take the
form of high variability in demand, process or supply, which in tur creates problems in planning,
scheduling and control.

• Characteristic features of the chain that results in potential disturbance of system; chain
configuration, chain control structure, chain information system, chain organisation and governance
structure.

• Exogenous phenomena that disturb the system, such as changes in markets, products, technology,
competitors and government regulators.
Supply chain handling tools

• Demand Planning: It provides for advanced forecasting and demand planning tool to keep pace
with volatile changes in demand and produce accurate forecasts.

• Supply network planning: It synchronizes the market demand dynamically with sourcing and
production activities and plan material flow through the entire supply chain to optimize the
logistic network.

• Production planning: This gives a smooth and optimal flow of the resources by promoting
optimized production schedules to maximize the returns on the assets, minimize delays, improve
resource utilization, etc.

• Availability planning: This provides a global, multilevel rule based strategic planning facility to
match the supply chain with customers demand to upkeep the precise delivery commitment for
customer orders, and thereby fulfilling the promise made to the customer.
Solutions to Uncertainty

A. Managing supply

o Managing production capacity

o Tine flexibility from workforce

o Use of seasonal workforce

o Use of subcontracting

o Use of dual facilities- dedicated and flexible

o Designing product flexibility into the production processes

B. Managing inventory

o Using common components across multiple products, each with a predictably variable demand but with a
relatively constant overall demand.

o Building inventory of high demand or predictable demand products.

C. Managing Demand

• To manage demand with the goal of maximizing profit, companies must use pricing and production
decisions. The timing of the tools can have a tremendous impact on demand. Therefore, using pricing
to shape demand can help synchronize the supply chain.

D. Information centralization

• Demand details and inventory status updates are made readily available online instantaneously by
centralizing information. The benefit of information centralization is derived from the fact that most
orders are filled from the warehouse closest to the customer, keeping transportation costs low.

E. Specialization
Supply chain manager should make the key decision of whether to stock all products at every location.
Clearly, a product that does not sell in a geographical region should not be carried in inventory by the
warehouse or retail store located there.
F. Postponement strategy

o Purchasing postponement: Delay purchasing of some expensive and fragile materials

o Manufacturing postponement: Products in semi-finished forms and can be customized quickly in

production facilities

o Logistics postponement: Products in semi-finished forms and can be customized quickly in production
facilities close to customers

o Time postponement: Finished products are kept in central location and are distributed quickly to
customers.

o Product development postponement

G. Demand Forecasting

• Forecast of future demand are essential to a supply chain manager’s decision and planning processes.
 Role of cycle inventory in a supply chain
Cycle inventory or cycle stock inventory is the portion of inventory that a seller cycles through to fulfil regular sales order. It
represents the part of a business’s standing inventory.

The primary role of cycle inventory is to allow different stages in the supply chain to purchase products in lot sizes that minimize
the sum of the material, ordering and holding cost. If a manager were considering the holding cost alone, he or she would
reduce the lot size and cycle inventory. Economies of scale in purchasing and ordering, however, motivates a manager to
increase the lot size and cycle inventory. A manager must make the trade-off that minimizes the total cost when making the lot
size decision. Ideally, cycle inventory decisions should be made considering the total cost across the entire supply chain. In
practice, however, each stage often makes its cycle inventory decisions independently.

Any stage of the supply chain exploits economies of scale in its replenishment decisions in the three typical situations:

• A fixed cost is incurred each time an order is placed or produced.

• The supplier offers price discounts based on the quantity purchased per lot.

• The supplier offers short-term discounts or holds trade promotions.

Cycle inventory optimization with reference to Indian distribution channels

Inventory optimization is an approach to understand and quantify the uncertainties involved in the demand
and supply chain across multilevel supply chain scenario. It has become very crucial in the past few years due
to its increased usage in improving business revenue. Cycle inventory is essential to growing businesses
because they are there to fulfil customer orders immediately. Changes in cycle stock inventory over time can be
a good measure of how well a business is faring, as it directly reflects the dales forecast for a given period.

With growing businesses, there should be an efficient, effective and innovative inventory management
technique system which will not only keep track of the growing stock requirements but also maintain a high
rate of warehouses used to store these stocks. In India, studies have shown that almost half (46 percent) of
small businesses do not use inventory control techniques at all and manage their inventories using
spreadsheets and documents, which can be quite inefficient for a growing industry.
Key elements of Inventory optimization

• Demand forecasting

• Inventory policies: Determining which products to keep in stock and how much to keep the stock.

• Replenishment: To calculate the point of reordering, order quantities and turn them into the actual orders. To optimize purchase, supplier
reliability and awareness of goods in transit are crucial.

Some inventory optimization techniques that can be used by Indian business firms are as follows:

• Stock Auditing: Usually, inventory management fails in many organisations due to unorganised product labels, tagging, and other inventory
detail management. Software like SalesBabuCRM provides a cloud based centralized database which will have clear details on every raw
material, purchased goods, the location of each item and other information on each and every product.

• Preparation of Inventory Budget: Budgets are the basis of the inventory management in many organisations which deals with a huge amount of
stock purchases. These budgets should be created well advance to understand the amount in hand for stock procurement and stock
adjustments from past purchases.

• Just-in-time Inventory: This technique allows companies to decrease the amount of inventory in their warehouses by keeping a low stock of
various product and replenishing it as needed.
• ABC analysis: Every item in a warehouse has its won value and wear and tear. Hence, to maintain
these different items, businesses should have specific way to deal with different level of care
needed for various varieties of products in stock.

• Demand forecasting: this technique is employed to understand the trend of demand and supply
chain and make more informed decision on the required stock levels in the warehouse.

• Organisation’s planning process: Strategic, tactical and executional planning is the key to a
successful business model. Starting with organisation plans at the strategic level such as- where
products will be manufactures, which raw materials will be required, which locations will store
inventory and others like vendor supply chain and target customer service levels and more,
followed by tactical plans like how much of each product to make, when and how much safety
stock will be needed. Finally, these plans go to execution with ERP management processes.
Hridhya P Nigelesh
LMC20MBA21
The Role of Safety Inventory in a Supply Chain
Safety inventory : Inventory carried for the purpose of satisfying demand that exceeds the amount forecasted in a
given period. Safety Inventory Is Carried because
Safety Inventory Is Carried because
• Demand is Uncertain.
• A Product Shortage may result if actual demand exceeds the forecast demand. Safety inventory is the average
inventory remaining then the replenishment lot arrives

Safety inventory is inventory carried to satisfy demand that exceeds the amount forecasted for a given period. As
such, it tends to have a negative impact on supply chain cost but a positive impact on supply chain
responsiveness. Safety inventory is carried because product demand and lead time are uncertain and a product
shortage may result if actual demand during lead time exceeds the forecast amount.
Impact of supply chain uncertainty on safety inventory
The required safety inventory increases with an increase in the standard deviation of periodic
demand. The standard deviation of periodic demand is a function of the variance in the lead time
and the variance in the demand. Anything that causes supply to be more deterministic will minimize
the need for safety inventory.

• D: Average demand per period

• σD: Standard deviation of demand per period
• L: Average lead time for replenishment
• sL: Standard deviation of lead time
Impact of aggregation on safety inventory
In practice, supply chains have varying degrees of inventory aggregation. For example, Barnes & Noble sells
books from retail stores with inventory geographically distributed across the country. Amazon, in contrast,
ships all its books from a few facilities. Seven-Eleven Japan has many small convenience stores densely
distributed across Japan. In contrast, supermarkets tend to be much larger, with fewer outlets that are not as
densely distributed. Redbox rents its movies from tens of thousands of kiosks distributed across the United
States. In contrast, Netflix centralizes its DVD inventory at fewer than fifty distribution centers.

Our goal is to understand how aggregation in each of these cases affects forecast accuracy and safety
inventories. Consider k regions, with demand in each region normally distributed with the following
characteristics:
• Di: Mean periodic demand in region i, i = 1, . . . , k
• σi: Standard deviation of periodic demand in region i, i = 1, . . . , k
• Pij: Correlation of periodic demand for regions i, j, 1 ≤ i ≠ j < k
Impact of Replenishment Policies on Safety Inventory in a
Supply Chain
In this section, we describe the evaluation of safety inventories for both continuous and periodic- review
replenishment policies. We highlight the fact that periodic review policies require more safety inventory than
continuous review policies for the same level of product availability. To simplify the discussion, we focus on the CSL
as the measure of product availability. The managerial implications are the same if we use fill rate; the analysis,
however, is more cumbersome
1. Continuous Review Policies
2. Periodic Review Policies

1. Continuous Review Policies : When using a continuous review policy, a manager orders Q units when the
inventory drops to the ROP. Clearly, a continuous review policy requires technology that monitors the level of
available inventory. This is the case for many firms such as Walmart and Dell, whose inventories are monitored
continuously.
Given a desired CSL, our goal is to identify the required safety inventory ss and the ROP. We assume that demand is
normally distributed, with the following inputs:
D: Average demand per period
σD: Standard deviation of demand per period
L: Average lead time for replenishment
The ROP represents the available inventory to meet demand during the lead time L. A stockout occurs if the
demand during the lead time is larger than the ROP. If demand across periods is independent, demand during
the lead time is normally distributed with the following:

2. Periodic Review Policies : In periodic review policies, inventory levels are reviewed after a fixed period of
time T and an order is placed such that the level of current inventory plus the replenishment lot size equals a
prespecified level called the order-up-to level (OUL). The review interval is the time Between successive orders.
Observe that the size of each order may vary, depending on the demand experienced between successive
orders and the resulting inventory at the time of ordering. Periodic review policies are simpler for retailers to
implement because they do not require that the retailer have the capability of monitoring inventory
continuously. Suppliers may also prefer them because they result in replenishment orders placed at regular
intervals.
Akshay KS
LMC20MBA06
Supply chain through postponement
Postponement is first implemented in manufacturing processes to reduce cost of inventory and
improve service level within the company while the product variety increases. The concept of
postponement is to delay the change in form, identity and place to the latest possible point until
customer commitments have been obtained. It is by exploiting the commonality between items and
by designing the production and distribution process so as to delay the point of differentiation.
Postponement is closely intertwined with modularization where products in a certain product family
are designed where all of them consist of different standardized units. With modularization,
combination of different standardized sub-components allows the producing of different end
products. The form, function and place of the product are altered and is in contra with the push
systems in which goods are manufactured entirely in anticipation of future customer orders and
stored downstream without customer’s formulated specifications.
ROLE OF TECHNOLOGY IN INVENTORY MANAGEMENT

Technology has become vital and integral part of every business plan. It has a bigger
impact on inventory control in terms of efficiency, ease of accessing information and
accuracy thereby affecting organization performance. Therefore , modern inventory
systems should be implemented since it forms a platform for ease of evaluating risk
in which the organization invest a lot of money in purchasing inventory. When it
comes to managing inventory organization need to maintain enough stock without
investing in more than they require. Inventory management systems track the
quantity if each item a company maintains triggering an order of additional stock
when the quantities fall below a predetermined amount.
OBJECTIVES

The main objective of this study is to investigate the impact technology in inventory
systems. this includes;

1)To minimize the overall total cost in inventory management

2)To maximize the firms revenue or profitability
3)To develop and implement effective systems in controlling inventory
4)To promote global inventory control systems compatible with sustainability objectives of
the organizations
5)To supplement process changes with improved technology
6)To use a forecasting system that support customer level forecasting
7)To deploy supply chain visibility systems
THANK YOU