Lecturer note, (Logistics in value chain ABVM451) 2022/23

Chapter- One: Introduction to Logistics

1.1.Definition and concepts of logistics

Pre-test
Please try to define what logistics is?
Introduction
Every organization has to move materials. Manufacturers have factories that collect raw
materials from suppliers and deliver finished goods to customers; retail shops have deliveries
from wholesalers; a television news service collects reports from around the world and delivers
them to viewers. When individuals order books from a website, a courier delivers them to their
door. These examples indicate that, every time you buy, rent, lease, hire or borrow anything at
all, someone has to collect it and deliver it to your door.
Definitions of logistics
There are many but related definitions given for logistics. Some of them are given below:
Definition 1: Logistics is part of the supply chain process that plans, implements, and controls
the efficient, effective forward and reverses flow and storage of goods, services, and related
information between the point of origin and the point of consumption in order to meet
customers‟ requirements.9
Definition 2: Logistics is that part of supply chain management that plans, creates and monitors
the efficient, cost-effective flow and storage of goods, semi-finished items and manufactured
products as well as related information between the point of origin and the point of consumption
in order to meet customers' requirements.

Definition 3: Logistics constitute those activities that relate to receiving the right product or
service in the right quantity, in the right quality, in the right place, at the right time, delivering to
the right customer, and doing this at the right cost (The seven R‟s).

Definition 4: Logistics refers to the process of planning, implementing, and controlling

procedures for the efficient and effective transportation and storage of goods including services,
and related information from the point of origin to the point of consumption for the purpose of

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conforming to customer requirements. This definition includes inbound, outbound, internal, and
external movements.

From above given definitions, one can infer the two major functions of materials management
and physical distribution from the activities composing logistics. Their short and brief definitions
are given as follows.

Materials management (MM): Considers all the activities related to the manufacturing of
commodities in all their stages of production along a supply chain. It includes production and
marketing activities such as production planning; demand forecasting; and purchasing and
inventory management. One major aspect of materials management to be considered is that it
must insure that the requirements of supply chains are met by dealing with a wide array of parts
for assembly and raw materials, including packaging (for transport and retailing) and, ultimately,
recycling discarded commodities. All these activities are assumed to be inducing physical
distribution demands. As a result, materials management is alternatively named as the induced
transport segment.

Physical distribution (PD): Refers to the collective term for the range of activities involved in
the movement of final goods from points of production to final points of sale and consumption.
One important requirement of physical distribution is that it must insure that the mobility
requirements of supply chains are entirely met. It comprises all the functions of movement and
handling of goods particularly transportation services (e.g. trucking, freight rail, air freight,
inland waterways, marine shipping, and pipelines); transshipment and warehousing services (e.g.
consignment, storage, inventory management);and trade, wholesale and, retail services. The
process of Physical distribution is also called the derived transport segment. Because, all the
physical distribution activities are assumed to be derived from materials management demands.

One important confusion with regard to physical distribution is using logistics management as a
synonym. However; these two functions are very different from each other and need to be
clarified. Accordingly, physical distribution only considers distributing final products to the
customers. Whereas; logistics management includes many activities from supplying the

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materials to customers satisfaction. Alternatively expressed, logistics management is a

composition of a physical life cycle and physical distribution. Furthermore; logistics
management covers almost all management functions like planning, controlling, coordinating,
organizing.
1.2.Logistics concept development: Historical perspective
The probable origin of the term logistics is the Greek word logistics, meaning „skilled in
calculating‟. It was initially developed in the context of military activities in the late 18 th and
early 19th centuries and launched from the military logistics of World War II. In the military
activity, logistics perform getting soldiers and munitions to the battlefront in time for fight.
Military typically incorporate the supply, movement and quartering of troops in a set. The main
background of its development was the recession of America in the 1950s that caused the
industrial to place importance on goods circulations. Hence, it is seen as an integral part of the
modern production process.

The concept of logistics was used by the ancient Greek generals, mainly by Leon the Wise, and
Alexander the Great, in order to describe all the procedures for the army‟s procurement on food,
clothing, ammunition, etc. Kingdoms and generals with strategic planning on logistics were
those who won the war. World War II was the major motivation of logistics to increase
recognition and emphasis, following the clear importance of their contribution toward the Allied
victory.

Business logistics was not an academic subject until the 1960s. A key element of logistics, the
trade-off between transport and inventory costs, was formally recognized in economics at the
mid-1880s.

Based on the American experience, the development of logistics could be divided into four
periods of: before 1950s; 1960s-1970s; 1980s-1990s; and 21st centuries. Before the 1950s,
logistics was under the dormant condition. Production was the main part of the managers
concerned, and industry logistics was once regarded as “necessary evil” in this period. During
the 1950s to and 1960s, applying new ideas of administration on business was a tendency. This
period is considered as the development years. Due to petroleum price rise in 1973, the effects of

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logistics activities on enterprises grew. Slow growth of market, pressure of high stagflation,
release of transportation control, and competitions of the third world on products and materials
all increased the significance of logistics system on planning and business at that time i.e. take-
off years. The further tendency of logistics in the early 21st century is logistics alliance, Third
Party Logistics (TPL) and globalized logistics. Logistics circulation is an essential of business
activities and sustaining competitiveness, however, to conduct and manage a large company is
cost consuming and not economic. Therefore, alliance of international industries could save
working costs and cooperation with TPL could specialize in logistics area.

Today, logistics plays a key role in every economy, and the market volume of logistics has
already reached a substantial level in many economies. Companies that are successful worldwide
have long recognized the critical role logistics plays in creating added value. Furthermore, a
close focus on the customer is becoming a critical factor for companies working together in a
supply chain. There is a general consensus that, the significance of global logistics markets will
continue to increase in response to economic and social conditions.

The topic of megatrends has recently gained a prominent place on the business agenda, and this
development will have a further impact on logistics. These megatrends include increasing
globalization; internationalization of procurement, production, and sales; shortened product life
cycles, and growing environmental concerns. These development resulted evolution of a service
society from a manufacturing-based society.

1.3. Inbound and outbound logistics

Based on the direction of movement of materials, logistics is classified into two groups. These
are inbound or inward logistics and outbound or outward logistics. Both are briefly and shortly
summarized as follows:

Inbound (inward) logistics: refers to moving materials into the organization from suppliers.
Procurement and the related materials management are among the major components of inbound
logistics. Procurement is the process (completion of a series of activities) of obtaining goods and

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services for the firm consistent of user requirements. It links members in the supply chain and
assures the quality of suppliers in that chain. The quality of the materials and services that are
input affects finished product quality and hence customer satisfaction and revenue. Whereas,
materials management can be described as the planning and control of the flow of materials that
are a part of the inbound logistics system. It usually includes the activities of procurement,
warehousing, production planning, inbound transportation, receiving, materials quality control,
inventory management and control, and scrap disposal.

The differences that exist among the inbound systems of different companies have important
implications for the design and management of logistics supply chains. A supply chain is made
up of a series of individual companies.

Outbound (outward) logistics: refers to the process of moving materials out to customers.This
implies that, outbound logistics starts at the end of the production line and ends with the
allocation to or arrival at the customer. Planning, controlling, and monitoring of the physical
flow of goods as well as the associated flow of information are the main activities under
outbound logistics. Besides, it covers the processes of warehousing, transportation, and handling
as well as picking and packing.

Customer service, which is related to final output, is a critical element of outbound logistics.
Final output can be a physical product (for example, a sofa), a service (for example, travel
service) or a combination of both (for example, a fast food restaurant). As far as customer service
is concerned, it is important to consider that it is not only about good service levels but also the
financial costs incurred from providing quality customer services. This is mainly because
minimizing costs is key to survival and prosperity in a competitive marketplace.

From the above definitions of inbound and outbound logistics, the role of logistics is indicated to
be moving materials. But the question is what do materials mean and what does it constitute?
The first component of materials is tangible goods. Example, when a power station brings coal
from a mine; a farmer takes potatoes to a market; or a computer manufacturer delivers PCs to a
warehouse. With these tangible goods it is easy to see the role of logistics.The second component

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of materials is intangible services. In this case the flow of materials is less clear. Some of the
example includes, when a television company delivers entertainment to its viewers; a telephone
company provides a communications service; an internet service provider (ISP) gives access to
the Web; or a research company creates knowledge.

Then logistics is responsible for moving both tangible goods and intangible services – and this
might include materials, components, finished products, people, information, paperwork,
messages, knowledge, consumables, energy, money, and anything else needed by operations. A
television company uses logistics to transmit programmes to customers, in the same way that an
oil company uses logistics to deliver petrol. The clear message is that every organization moves
materials, and for this it needs logistics.

In short, materials are all the things needed to make a product, and these can be both tangible
(such as raw materials) and intangible (such as information).

1.4.Role and importance of logistics

Among others, creation of time and place utility; order processing; inventory management; and
transportation are considered to be the value (role) of logistics.

Creation of time and place utility: Customer services relates to the quality with which the flow
of goods and services are managed. Logistics create time and place utility through their ability to
deliver the right product to the right customer at the right place, in the rightcondition and right
quantity at the right time, at the right (lowest possible) costs, are one major role of logistics.

Order processing: Logistics are the means by which firms in the logistics processes exchange
order information. Order processing involves all the activities in the order cycle, including
collecting, checking, entering and transmitting order information. The information collected will
provide useful data for market analysis, financial planning, production scheduling and logistics
operations.

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Inventory management: In this aspect, logistics facilitates proper management of inventory

levels that are helpful to serve the demand in a supply chain.

Transportation: Another role of logistics is transportation that is concerned with the ways in
which physical items, for example, materials, components and finished products, are transferred
between different parties, for example, raw materials suppliers, distributors, retailers and end
customers, in a supply chain.

As far as the roles of logistics are concerned, effective and efficient logistics management is a
key to the success of business firms. Otherwise, poor logistics management can result in higher
logistics costs. Logistics plays a key role in the economy, and the market volume of logistics has
already reached a substantial level in many economies as a result. Companies that are successful
worldwide have long recognized the critical role logistics plays in creating added value. In
addition, a close focus on the customer is a critical factor for companies working together in a
supply chain.

The significance of logistics, in a global comparison, depends largely on the overall economic
power of a country. For instance, logistics has been far advanced in the United States, Japan and
Europe for a long time. In other words, logistics significance and capabilities depend largely on
the economic power and developmental stage of a country. One critical factor, for instance, is the
availability of an intact infrastructure. The range of logistics service providers extends from pure
transport functions to modern, complex logistics systems, depending on the conditions of a
particular country.

1.5.Basics of Logistics Integration

As industrial activities extend globally, logistics will involve more material and information
flows throughout a supply chain from sources to customers, which extends beyond national
borders. In restructuring supply chains, logistics need to be managed as an integrated process that
seeks to optimize these flows. If all firms involved in a particular supply chain optimize their
logistics systems independently of other firms in that chain, the management of flows across the

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whole chain is likely to be sub-optimal. To overcome this problem, integrated logistics is

advised.

The main role of integrated logistics is to extend functional management to include customers,
suppliers and manufacturers. This is because companies can no longer afford to focus on supply-
side efficiency alone. Rather, they need to use business strategies to integrate their demand and
supply sides for achieving a competitive advantage. This involves the complete set of activities
and organizations relevant to production and distribution, as well as their connecting supply
links. Decisions made in each area impact others so that it becomes a single, interdependent
system.
1。5。1。 Levels of logistics integration

It is worthwhile to indicate the different levels of logistics integration. The two main integrations
of industrial logistics are indicated as follows:

The functional logistics integration: This method, mostly, will be used in case of fragmented
supply chain with many stakeholders involved. The main roles of functional logistics integration,
among others, include helpful for integration of different divisions within the same company
responsible for sales and distribution activities; helps companies to gain functional excellence
and cost advantages in their global supply chain operations of sourcing, conversion, distribution
and after sales service; removes companies‟ internal barriers and lead them to focus on tactical
solutions (e.g. rationalization of non-value-added activities, working capital, inventories,
customer services, etc). Furthermore; the functional logistics integration may develop into
internal integration where different companies under the same corporate structure combine
facilities, equipment, systems and personnel in more flexible modes of deployment.

The market channel or external integration: This is called the most extensive integration
among industries. This level of integration requires that enterprises extend their internal supply
chain process both upstream with suppliers of raw materials and downstream to final consumers.
In this way, all companies in the supply chain are integrating their activities with those of other
companies to achieve economies of joint operation. The market channel now becomes a virtual

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enterprise with common goals, systems, organizations, facilities and shared management. Firms
at this level are working in project organization with suppliers and customers, and investments
are made jointly. Companies achieving this level of integration have the potential to realize
superior levels of performance.

Besides above two methods, some companies have adopted logistics techniques and tools, and
incorporated advanced ICT, the emphasis for most is on achieving optimal flows between two
consecutive companies in a chain. Many companies are still grappling with the problems of
internal integration, with respect to both physical activities and information systems.

1。5。2。 Effects of integrated logistics on business practices

The progressive integration of logistics across supply chains has profound effects on business
practices. These include the following trends:

 Higher interdependency between firms interlinked within the business network, which has
become the new reality of industry. Performance by an individual firm affects the
performance of all, and determines the ultimate performance of the network as a whole.

 A more globalised economy links the sourcing of material and product components with
production and markets across national boundaries, invoking problems of time, distance,
cultures and diverse market preferences. It intensifies competition and increases the
complexity of supply by expanding product variety, searching for higher efficiency while
responding to diverse and rapidly changing markets.

 Changing the concept of corporate enterprise. Organizations have shed peripheral

activities to concentrate on core competencies that offer the promise of unique value.
Greater external dependence therefore forces attention to inter-organizational relationships
for coordinating activities and processes. In some cases, the shift towards core business
has led to the creation of “virtual” organizations, where the majority of business

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operations have been outsourced to external parties, including third and fourth party
logistics.
 Transformation of organizational structure of the corporation from a hierarchy, in which
the manager dispenses knowledge and workers perform, to the point where knowledge is
widely diffused throughout the organization and workers manage their own activities. This
places collaborative decisions closer to the point of action. In a logistics framework, it
places a premium on inter-organizational relationships through formal and informal
contact, as well as on data and information systems across organizational boundaries.
 Changing the government environment, creating both problems and opportunities. Much
of the economic regulation of transport and telecommunications has been liberated,
leading to new market-based combinations of service providers who offer transport
combined with warehousing, telecommunications, product assembly and related services.
Other forms of regulations to cover consumer protection, environment and safety are
replacing the former economic restraints.
Summary
Logistics refers to the function responsible for all aspects of the storage and movement of
materials on their journey from original suppliers through to final customers. Physical
distribution and materials management are the two major functions of logistics activities.
Furthermore; the value (role) of logistics can possible is explained by creation of time and place
utility; order processing; inventory management and transportation.

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Chapter Two: Warehouse and Inventory

Pre-test
Dear learner, what is the difference between warehouse and warehousing? Please list some
functions of warehouses?
______________________________________________________________________________
2.1.Introduction to warehouse and warehousing
People need different types of goods in their day-to-day life. They may buy some of these items
in bulk and store them in their house. Similarly, businessmen also need a variety of goods for
their use. Some of them may not be available all the time. But, they need those items throughout
the year without any break. Let‟s consider one example, case of sugar factory. This factory needs
sugarcane as raw material for production of sugar. As it is known, sugarcane is produced during
a particular period of the year. Since sugar production takes place throughout the year, there is a
need to supply sugarcane continuously. But how is it possible? Here storage of sugarcane in
sufficient quantity is required. Again, after production of sugar it requires some time for sale or
distribution. Thus, the need for storage arises both for raw material as well as finished products.
Storage involves proper arrangement for preserving goods from the time of their production or
purchase till their actual use. When this storage is done on a large scale and in a specified
manner it is called „warehousing‟. The place where goods are kept is called „warehouse‟. The
person in-charge of warehouse is called warehouse-keeper.

Warehousing refers to the activities involving storage of goods on a large-scale in a systematic

and orderly manner and making them available conveniently when needed. In other words,
warehousing means holding or preserving goods in huge quantities from the time of their
purchase or production till their actual use or sale. Warehousing is considered as one of the
important auxiliaries to trade. This is mainly because it creates time utility by bridging the time
gap between production and consumption of goods.

Despite above indicated roles, warehousing is costly in terms of human resources and the
facilities and equipments required. This implies that developing a proper warehousing is not a

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simple task. For instance, inadequate design or managing of warehouse systems will jeopardize
the achievement of required customer service levels and the maintenance of stock integrity, and
result in unnecessarily high costs. Furthermore, warehousing performance will directly affect the
overall supply chain performance. Because, warehousing is an important element of activity in
the distribution of goods from raw materials, and work in progress through, to finished products
across the supply chain.

Warehousing is also an integral part to the supply chain network within which it operates and as
such its roles and objectives should synchronize with the objectives of the supply chain. It is not
a „Stand-alone‟ element of activity and it must not be a weak link in the whole supply chain
network. Along with this, the pressure on supply chain due to increasing customers service
levels; inventory optimization need; time compression and cost minimization have inevitably
changed the structure of supply chains as well as the location and working warehouses within the
supply chain network.

A simple definition of a warehouse indicates that it is a planned space for the storage and
handling of goods and materials. In general, warehouses are focal points for product and
information flow between sources of supply and beneficiaries. In other words, warehouse
indicates performance of administrative and physical functions associated with storage of goods
and materials. It is also a commercial building for storage of goods.

As far as the objective of warehouses is concerned, maximum utilization of storage space;higher

labor productivity; maximum asset utilization; reduction in material handling; reduction in
operating cost; increased inventory turnover andreduced order filling time are the main one.

Warehousing alternatives: There are three types of warehousing ownership. These are called
private warehouses, public warehouses and contract warehouses. These warehouse alternatives,
with their characteristic features, are illustrated in following paragraphs.

The private warehouses: Refers to those owned or leased by the product owner. The main
features include that ownership is not the criterion;control is fully on the hand of the product

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owner; the product owner exercises overall control on warehouse management. Furthermore;
changes can be made to integrate the warehouse with rest of the logistical system. The private
warehouses also provide market presence to the product owner and are considered to be cheaper
as there is no profit to be added to the cost.

The public warehouses: This type of warehouses is that available to companies on hire. Public
warehouses are characterized by overhead costs distributed over large customer base (i.e. makes
the usage cheaper); offer expertise in management since warehousing is their core business;
flexibility of location (i.e. if the product owner needs to change the location of warehouse, it is
only a question of terminating the contract and starting a new one); significant economies of
scale; several users and resultant volume and benefits in transportation costs. Moreover; public
warehouses are classified into five categories of general merchandise, Refrigerated, Special
commodity, Bonded and Household goods and furniture.

Contract warehouses: In this case, contract warehouse operators take over logistics responsibility
from manufacturing company. The contract warehouses have features of warehouse owner offers
long term relationship and customized service; product owner gets the benefit of management
expertise of the warehouse owner; and as the warehouse owner centrally controls several
warehouses, product owners get the benefit of shared resources with several clients. This brings
down the cost.

2.2.Warehouse operation and management

The main warehousing operations comprises of receiving goods and accepting responsibility;
identifying goods using place, label, color code and etc; sorting out the received goods for
appropriate storage area; dispatching goods to storage for ease of accessibility; holding goods for
security against pilferage and deterioration; selecting, retrieving, packing and grouping items
according to customers order for dispatch; marshaling goods( i.e. check whether the items of a
single order are complete and order records are updated); dispatching goods using the proper
transport and preparing records and advices- of stocks and replenishment requirements.

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Warehouse management deals with receipt, storage and movement of goods, normally finished
goods, to intermediate storage locations or to final customer. In the multi-echelon model for
distribution, there are levels of warehouses, starting with the central warehouse(s), regional
warehouses services by the central warehouses and retail warehouses at the third level services
by the regional warehouses and so on. The objective of warehouse management is to help in
optimal cost of timely order fulfillment by managing the resources economically. Warehouse
management is equivalent to management of storage of products and services rendered on the
products within the four wall of a warehouse.

Warehouse management is also helpful to manage goods and space more effectively, to reduce
costs and waste, and to gain control over warehouse operations. Moreover, with access to real-
time and accurate inventory data, warehouse professionals can possibly save time in locating
items or performing physical inventories. Similarly, sales representatives can keep tabs on stock
availability, and buyers can maintain optimum stock levels while minimizing carrying costs. In
other words, tracing items by lot or serial numbers helps to quickly identify from where the items
were purchased, how they were used in the production processes, and where they were sold.

A key part of supply chain that primarily aims to control the movement and storage of materials
within a warehouse and the associated transactions, including shipping, receiving, put away and
picking, is called warehouse management system. The warehouse management system is also
helpful to direct and to optimize stock put away based on real time information about the status
of bin utilization. To efficiently monitor flow of products, the warehouse management systems
often utilize Auto ID Data Capture (AIDC) technology, such as barcode scanners, mobile
computers, wireless LANs and potentially Radio-frequency identification (RFID).Once the data
has been collected, there is either batch synchronization with, or a real-time wireless
transmission to a central database. The database can then provide useful reports about the status
of goods in the warehouse.

To provide a set of computerized procedures to handle the receipt of stock and returns into a
warehouse facility; to model and manage the logical representation of the physical storage
facilities (e.g. racking etc); to manage the stock within the facility and to enable a seamless link

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to order processing and logistics management in order to pick, pack and ship product out of the
facility are among the major objectives of a warehouse management system.

Economic benefits of warehouses: There are five main economic benefits of warehouses. These
are movement consolidation, break-bulk, cross-dock, processing (postponement) and stock
pilling. To clearly understand these economic benefits, it is important to define them. The
movement consolidation benefit indicates that warehouses reduce transportation cost by
consolidating movement. This will be realized through the mechanism that several plants supply
their products for the same customer to a warehouse and from this warehouse the products are
sent in bulk shipment to the customer. The process of movement consolidation can possibly be
shown in Figure 1.

Plant A
(Product A for
customer L)

Consolidation Customer L
Plant B
Warehouse (Product A+ product
(Product B for
customer L) B+ product C)

Plant C
(Product C for
Figure
customer L) 1. The movement consolidation warehouse mechanism
Figure 1. The process of movement consolidation role of warehouses

Figure 1.The consolidation warehouse mechanism

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The break-bulk benefit of warehouses implies that goods from a plant for various customers are
shipped to a warehouse obtaining the benefit of bulk shipment and then sent to the customers.
This is shown in Figure 2.

Customer H
Plant A:
Product A for Break-bulk Customer I
(H+I+J) Warehouse
customers

Customer J

Figure 2. The break-bulk warehouse mechanism

The cross-dock benefit of warehouses indicates that several plants send their goods to the
warehouse and from the warehouse the goods are moved across the dock to various customers as
per order. A chain of retailers would like items as per movement of their stocks. The cross-dock
warehouses benefit is shown in Figure 3.

Plant A CustomerH
(Product A) (A+B+C)

Customer I
Plant B (A+B+C)
Cross-
(Product B) dock
Warehouse Customer J
(A+B+C)

Plant C
(Product C) Customer K
(A+B+C)

Figure 3. The cross-dock warehouse mechanism

The processing/postponement benefit of warehouses implies that products uncommitted to a

customer are sent to the warehouse and as per their order labels, they are attached to the
products. Process of committing the product is postponed until just in-time.

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The stock piling benefit of warehouses indicates that, agricultural products which are produced
during harvest are sold round the year and hence they need stocking. For example, woolen
garments are sold during winter but produced earlier.

Service benefits of warehouses: Like economic benefits, warehouses mainly have five service
benefits. These are spot stocking, assortment, mixing, and production support and market
presence. Each of them is shortly defined below.

The spot stocking refers to a process of stocking products in strategically located warehouses
during demand sensitive period. For instance, agricultural implements are spot stocked during
the growing season. This is one service benefit of warehouses.

The assortment service benefit of warehouses implies that a wholesaler would like to stock
assortment of items from different manufacturers so that his/her customers and/or retailers can
choose what they want. The wholesalers can stock assortments based on customer‟s requirement.

The mixing service benefit of warehouses indicates that, in the warehouse, products from various
plants are received and combinations are prepared as per the order and sent to customers. For
ease of understanding, the mixing role of warehouses is shown in Figure 4.

CustomerH
(A+B+C+D)
Plant A
(Product A)

Mixing Customer I
Plant B
(A+B+C+D)
(Product B) warehouse
(Make
product D)
Plant C
(Product C)
Customer J
(A+B+C+D)

Figure 4. The mixing service benefit of warehouses

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The production support service benefit of warehouses implies that components and
subassemblies required by several assembly lines are stocked economically in a common
warehouse and supplied to lines. This process is indicated in Figure 5.

Assembly Line P
Vendor A
(Part A)

Manufacturing
warehouse Assembly Line Q
Vendor B
(Part B)

Assembly Line R
Vendor C
(Part C)

Figure 5. The production support function of warehouses

The Market presence service benefit of warehouses implies that warehouses offer quick response
to customer demand.

2.3.Inventory management and control

Before going into detail of inventory management and control, it is important to know what
inventory means. Accordingly, inventory is a stock or store of goods. It also includes raw
materials or stock incoming suppliers. As far as the questions of what to inventory are
concerned, raw materials and purchased parts; partially completed goods; finished goods
inventories or merchandise; replacement parts, tools and suppliers and goods in transit to
warehouses or goods in progress can be considered.

There are two types of demand for inventory items. These are dependent demand and
independent demand. The dependent demand refers to those items that are typically
subassemblies or component parts that will be used in the production of a final or finished
product. Subassemblies and component a part is derived from the number of finished units that
will be produced. Example: Demand for wheels for new cars. While the independent demand

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refers to inventory items that are the finished goods or other end items. These items are sold or at
least shipped out rather than used in making another product.

Another important point to be considered in this section is that of functions of inventory. This is
helpful to answer the question „why inventory is needed? Among other, the following are
assumed to be the main functions of inventories:

 To meet anticipated customers demand: These inventories are referred to as

anticipation stocks because they are held to satisfy planned or expected demand.

 To smooth production requirements: Firms that experience seasonal patterns in

demand often build up inventories during off-season to meet overly high requirements
during certain seasonal periods. Companies that process fresh fruits and vegetable deal
with seasonal inventories.

 To decouple operations: The buffers permit other operations to continue temporarily

while the problem is resolved. Firms have used buffers of raw materials to insulate
production from disruptions in deliveries from suppliers, and finished goods inventory to
buffer sales operations from manufacturing disruptions.

 To protect against stock-outs: Delayed deliveries and unexpected increases in demand

increase the risk of shortages. The risk of shortages can be reduced by holding safety
stocks, which are stocks in excess of anticipated demand.

 To take advantage of order cycles: Inventory storage enables a firm to buy and produce
in economic lot sizes without having to try to match purchases or production with
demand requirements in short run.

 To hedge against price increase: The ability to store extra goods also allows a firm to
take advantage of price discounts for large orders. And,

 To permit operations: Production operations take a certain amount of time means that
there will generally be some work-in-process inventory.

The functions of inventory imply that, inadequate control of inventories can possibly result two
main adverse effects. First, under stocking results in missed deliveries, lost sales, dissatisfied
customers and production bottlenecks. Second, overstocking unnecessarily ties up funds that

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might be more productive. These highlights a need for due attention to inventory management
and control by the business owners or managers. The major aspects of inventory management
and control are discussed in below.

There are, principally, two main concerns in inventory management. These are level of
customer‟s service (i.e. to have the right goods, in sufficient quantities, in the right place and at
the right time) and cost of ordering and carrying inventories. These two issues are considered to
be main focus areas due to their higher link with the objectives of inventory management. To
achieve satisfactory levels of customer service while keeping inventory costs within reasonable
bounds are the two essential objectives of inventory management. To realize these objectives,
specifically,decision makers try to achieve a balance in stockingand fundamental decision must
be made related to the timing and size of orders.

The success of effectively managing inventories depends on several requirements on the sides of
management bodies of business enterprises. These mainly incorporate: A system to keep track of
the inventory on the hand on order (inventory counting system); a reliable forecast of demand
that includes an indication of possible forecast error; knowledge of lead times and lead time
variability; reasonable estimates of inventory holding costs, ordering costs, and shortage costs;
and a classification system for inventory items. These pre-conditions are shortly explained as
follows.

Inventory counting systems: There are four major types of inventory counting systems for
effective inventory management and control. These are the periodic system, the perpetual
(continual) system, the two-bin system and the tracking (Universal Product Code) system.

The periodic inventory counting system: Refers to the physical count of inventory items made at
periodic intervals (e.g. weekly, monthly, quarterly etc) in order to decide how much to order for
each item. Major users of this counting system are supermarkets, discounts stores and
department stores. This inventory counting system has its own advantage and disadvantages.
Accordingly, making orders for many items at the same time results in economies of scale in
processing and shipping orders. This is considered as the advantage of periodic inventory

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counting system. In contrast, lack of control between reviews; the need to protect against
shortages between review periods by carrying extra stock and the need to make a decision on
order quantities at each review are among the disadvantages of this system.

The perpetual (continual) inventory counting system: This system keeps track of removals from
inventory on a continuous basis to provide information on the current level of inventory for each
item. The main advantages of this inventory counting system constitute the control provided by
the continuous monitoring of inventory withdrawals and the fixed-order quantity, helpful to
identify an economic order size by the management. Whereas, the added cost of record keeping
continuously is indicated as main drawback of this system.

The two-bin method inventory counting system:This system of inventory counting works with
principle of assuming two containers of inventory, reorder when the first container is empty. The
advantage of this system is that there is no need to record each withdrawal from inventory.
While, the disadvantage is that the reorder card may not be turned in for a variety of reasons.

The tracking (Universal Product Code) system: The Universal Product Code printed on a label
that has information about the item to which it is attached. This bar coding system represents an
important development for other sectors of business besides retailing. For instance, in
manufacturing, bar codes attached to parts, subassemblies, and finished goods greatly facilitate
counting and monitoring activities.

Demands forecast and lead time information: As far as the demand forecast and lead time
information pre-conditions for effective inventory management is concerned, managers need to
know the extent to which demand and lead time might vary. The greater the potential variability,
the greater the need for additional stock to reduce the risk of a shortage between deliveries. Lead
time refers to the time interval between ordering and receiving the order.

Estimates and types of inventory costs: There are three major types of inventory costs. These
are holding (carrying) cost, ordering cost and storage cost.

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Holding (carrying) cost: Represents the cost incurred to carry an item in inventory for a length of
time, usually a year. This cost includes interest, insurance, taxes, depreciation, obsolescence,
deterioration, spoilage, pilferage, breakage, etc.

Ordering cost: This is a cost incurred for ordering and receiving inventory. These include
determining how much is needed, preparing invoices, inspecting goods upon arrival for quality
and quantity, and moving the goods to temporary storage.

Storage cost: This is a cost incurred when demand exceeds the supply of inventory on hand.
These costs can include the opportunity cost of not making a sale, loss of customer goodwill, late
charges, and similar costs.

Classification system for inventory items: An important aspect of inventory management is

that items held in inventory are not of equal importance in terms of money invested, profit
potential, sales or usage volume, or stock-out penalties. Hence, it would be unrealistic to devote
equal attention to each of these items. For this, there are two approaches used by inventory
managers. These are called the A-B-C approach and the Economic Order Quantity (EOQ) model.

The A-B-C approach: This approach classifies inventory items according to some measure of
importance, usually annual money usage, and then allocates control efforts accordingly. Hence,
A-represents very important inventory items; B-represents moderately important inventory items
while C-represents least important inventory items.

The Economic Order Quantity (EOQ) model: This model identifies the optimal order quantity
size in terms of minimizing the sum of certain annual costs that vary with order size. In other
words, EOQ model is targeted at order size that minimizes total cost. The EOQ model works
taking into account the following assumption. The first one is that only one product is involved;
second annual demand requirements are known; third demand is spread evenly throughout the
year so that the demand rate is reasonably constant; fourth lead time does not vary; fifth each
order is received in a single delivery and finally there are quantity discounts. Furthermore; the

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optimal quantity, that minimizes the sum of annual total cost (carrying plus ordering cost), will
be obtained by applying the following formula.

Where EOQ-represents the optimal quantity

D-Annual demand
S- Ordering cost
H- Holding (carrying) cost per unit

2.4.IT in warehousing and distribution

Information technology really began to explode. This gave organizations the ability to better
monitor transaction intensive activities such as the ordering, movement, and storage of goods
and materials. Combined with the availability of computerized quantitative models, this
information increased the ability to manage flows and to optimize inventory levels and
movements. Systems such as materials requirements planning, distribution resource planning,
and just-in-time (JIT) allow organizations to link many materials management activities, from
order processing to inventory management, ordering from the supplier, forecasting and
productions scheduling. Other factors contributing to the growing interest in logistics include
advances in information systems technology, an increased emphasis on customer service,
growing recognition of the systems approach and total cost concept, the profit leverage from
logistics, and the realization that logistics can be used as a strategic weapon in competing in the
marketplace.
2.5.Outsourcing and tender process
It is worthwhile to define what outsourcing and tender mean before going into detail of
outsourcing and tender process. Accordingly, outsourcing is a process of utilizing a third-party
provider to perform services previously performed in-house. Examples include manufacturing of
products and call center/customer support. Whereas, tender refers to the document which
describes a business transaction to be performed.

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Outsourcing: There are many reasons why enterprises choose to outsource business functions.
These include permitting concentration on core business activity; to reduce overhead costs; to
utilize leading-edge technology and/or specialist skills.

Outsourcing involves some processes starting from getting an advice on tendering and the tender
process; preparation of tender documentation; reviewing and advising on tender documentation,
prime contractors or sub-contractors; Negotiation, preparation and completion of contractual
documentation including service level agreements; liability and insurance; changing control
processes; advice on staff transfers and other employment considerations; and exit management.

Tender process: are sought for the supply of legal services. The primary objective of tender
process is to establish a panel of legal practitioners to provide legal advice and representation to
persons. Such advice and representation, in most cases, will be provided in conjunction with
lawyers employed by the legal representation office. The legal practitioners are to provide legal
services of a high quality in an efficient and cost effective manner. Besides, the tender document
is expected to include the following elements:

The cover sheet: This section provides details of the tender name and number, name of the
company and reference number.

Covering letter: In this section, detail of the submission of specific tender (name and number),
thanking the company for being given the opportunity to tender for the project or work are
expected to be indicated clearly.

Scope of offer or executive summary: This section of the tender document includes the summary
of the proposal to be submitted addressing the key points from the call for tender document.
Besides, it is important to highlight the key issues in the executive summary.

Tender returns: This section refers to the specific documents which went out with the call for
tender from the company and must be acknowledged by the bidder. Up on completion, these
documents must be returned to the company along with the rest of the bid.

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Commercial terms and conditions: Generally this is the financial elements of the bid. Besides, in
this section, there is a need to present the financial statements and guarantees along with the
commit to complying with the company‟s requirement. The commercial terms and conditions
mainly incorporate history of tenderer, the structure of the company, statement of compliance,
details of the parties involved, timing, testing and defects, payment, penalty clauses, liabilities,
termination and options clause.

Technical requirements: While the previous elements of the tender document deals with the
commercial aspects of the project or bid, the technical requirements pertain more to the actual
operation or system i.e. the physical doing part of the bid. Main components under the technical
requirements include statement of compliance with the generic or equipment specifications,
description of products, support policy, testing, training, module repair, delivery, evaluation and
product brochures.

Learning activity

 Learners are expected to identify the main functions and management of warehouses
along with the role of IT in warehouse and distribution of products

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Summary

Warehousing refers to the activities involving storage of goods on a large-scale in a systematic

and orderly manner and making them available conveniently when needed. Warehouse is defined
as a planned space for the storage and handling of goods and materials. Maximum utilization of
storage space; higher labor productivity; maximum asset utilization; reduction in material
handling; reduction in operating cost; increased inventory turnover and reduced order filling time
are among objectives of warehouses. The three types of warehouse ownership are private
warehouse, public warehouses and contract warehouses. There are two types of demand for
inventory items. These are dependent demand and independent demand. The dependent demand
refers to those items that are typically subassemblies or component parts that will be used in the
production of a final or finished product. While the independent demand refers to inventory
items that are the finished goods or other end items.

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