Summaries & Keywords based on the 3rd
edition of the Global Logistics and Supply
Chain Management book, by John Mangan
& Chandra Lalwani.
Initially meant for the Supply Chain
Management class (part 2) & exam of
Saxion Enschede 2017 – 2018
Supply Chain
Management 2
Summary chapters 9, 10, 13, 14, 15, 18 +
LAW
Kathleen Gaillot
, Table of Contents
Chapter 9: Inventory Management .................................... 1 LEVEL 3 – Organisations and Inter-Organisational
9.1 The Importance of Inventory Management …………..1 Networks ................................................................... 17
9.2 The Economic Order Quantity (EOQ) Model ……..…..1 LEVEL 4 – The Macro-Environment ........................... 17
9.3 Inventory Control Systems ………..………..………..……….3 Chapter 14: Sustainable Logistics and Supply Chain Systems
.......................................................................................... 18
9.3.1 The Reorder Point Inventory Control System .... 3
14.1 The ‘Green Revolution’ and Supply Chain Redesign 18
9.3.2 The Periodic Inventory Control System ............. 3
14.2 The Link Between Economic Growth and Transport
9.4 Supply Chain Inventory Management………..…………. 4 Growth ………..………..………..………..………..………..………….19
9.5 Matching Inventory Policy with Inventory Type………5 14.3 The Role of ‘Scale’ in Logistics and SCM …………….19
9.5.1 ABC Analysis: Too many SKUs! ........................... 5 14.4 Efficiency Solutions ………..………………..……………....19
9.6 Inventory Reduction Principles ………..………..……….. 6 Chapter 15: Reverse Logistics ........................................... 20
9.6.1 Just-in-Time Inventory System (JIT) ................... 6 15.1 Definition of Reverse Logistics ………..………..……….20
Chapter 10: Warehousing and Materials Handling ............ 7 15.2 Motivation for Reverse Logistics ………..………..……20
10.1 Warehousing in Global Supply Chains ………..………..7 15.3 Recovery Options in Reverse Logistics ……………….21
10.2 Warehouse Layout and Design ………..………..………..7 15.3.1 Closed versus Open Loop Logistics Systems .. 21
10.3 Warehouse Management Systems ………..………..…..9 15.4 Characteristics of the Remanufacturing Environment
10.4 Materials Handling and Storage ………..………..……….9 in Reverse Logistics ………..………..………..………..……………22
10.5 Work Organisation and Job Design ………..…………..12 15.5 Factors for successful Reverse Logistics
Implementation ………..………..………..………..………..……….23
Chapter 13: Supply Chain Vulnerability, Risk, Robustness and
Resilience ………..………..………..………..………..………..…………..13 15.6 Performance Measures of Reverse Logistics ………24
13.1 Some Working Definitions………..………..………..….…13 Chapter 18: Emerging Supply Chain Designs .................... 25
13.2 Changing Times and an Uncertain World………….…13 18.1 Strategies and Practices in SCM ………..……………….25
13.2.1 Known unknowns, knowable unknowns and 18.2 The Ever-Changing Context ………..………..………..….25
unknowable unknowns ………..………..………..………..….13 18.3 Synchronising Product Design and Supply Chain
13.2.2 Y2K: The Millennium Bug ............................... 14 Design ………..………..………..………..………..………..…………….26
13.2.3 Creeping Crises ............................................... 14 18.4 The Supply Chain Manager of the Future …………..26
13.2.4 Post-9/11 Security Matters ............................ 14 LAW ................................................................................... 27
13.2.5 Corporate Scandals, Operational Risk and Week 1: Introduction ………..………..………..………..………..27
Business Continuity ………..………..………..………..………..14 Week 2: Negotiations, Agreements, Contracts, CISG …29
13.3 The Shortcoming of Risk Management………..………15 Week 3: Contracts & E-Commerce ………..………..………..30
13.4 The Need for Holistic Approaches ………..………..…..16 Week 4: Incoterms & Distribution ............................ 32
13.5 A Simple Framework for a Wicked Problem ………..16 Week 5: International Trade ............................................. 35
LEVEL 1 – Process Engineering and Inventory Week 6: Cases Practice ..................................................... 36
Management ………..………..………..………..………..………..17
Notes & What to Study ..................................................... 38
LEVEL 2 – Assets and Infrastructure Dependencies …17
,Chapter 9: Inventory Management 9
9.1 The Importance of Inventory Management
• Inventory is another name for materials and is any material that a firm holds in order to satisfy customer demand
(and these customers may be internal and / or external to the firm) (reminder: 3 flows = information, resource
(money/staff), materials)
• Inventory costs money! It ties up working capital and affects cash flow
• Inventory takes up space
• Firms need to hire people to take care of inventory
• The goal in inventory management: minimise inventory holding & maintain a desired customer service level.
↓ “Inventory is everywhere!” Inventory locations throughout a supply chain
Inventory turnover: concept used to measure a firm’s
performance in inventory management, it compares the
annual sales a firm achieves with the amount of average
inventory held throughout the year: the higher the turnover,
the better a firm is doing in keeping its inventory costs down.
Cost of all goods sold in a year
𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑡𝑢𝑟𝑛𝑜𝑣𝑒𝑟 =
Value average inventory held throughout the year
Inventory is used as a buffer between processes along a supply
chain. buffers are required to absorb the variability in demand,
supply and internal processes.
Buffer Against Uncertainty Economic Trade-Offs
Maintain customer service levels for volatile demand Production batch size
Hedge against price and exchange rate fluctuations Transportation batch size Related to inventory is the
Protect against delivery lead-time variability Transportation mode concept of forward cover
Buffer against unreliable supply sources Order quantity size
– the inventory available
Buffer against seasonal demand and supply Order frequency duration
Maintain supply of scarce supply Bulk purchase savings to the company to support
Provide cover for emergencies Supply price fluctuations the sales plan/forecast.
Are stocks bad?
Pros Cons
Immediate delivery Less dependent upon suppliers Dead capital Stock keeping cost (handling/maintenance)
Less uncertain Customer service improves Risk; obsolete; expired; damage; theft
9.2 The Economic Order Quantity (EOQ) Model
Inventory Costs:
Item Carrying Cost Ordering Cost Stockout
Cost ▪ Cost of capital ▪ Storage costs ▪ Setup cost(production) ▪ purchase order Cost
▪ Risk (obsolescence, pilferage, cost ▪ transportation cost ▪ receiving cost
deterioration, damage) ▪ checking/ paying/ invoice registration
Reorder point = when inventory level drops to a certain
point, that is when a purchase order is issues for this item.
After a certain length of time (lead time), the order is filled
and inventory level increases by the amount of the order,
Q. Inventory level is kept above a certain amount, called
the safety stock
Inventory build-up and depletion →
1
, D Annual use of a particular item, in numbers of items per year
9
The costs associated with inventory
S Order-processing cost, in $/order is classified into two categories:
p Price per unit, in $/unit procuring and holding.
H Holding cost per unit per year, in $/unit/year H = c × I (unit
cost * annual carrying cost as %: interest) Procurement is broken into two parts:
Q Number of items ordered in one purchase orders, in units money spent to process a procurement
T Time periods between purchase orders in fraction of a year order, and money spent to actually buy
SS Safety stock, in units the inventory.
L Lead time, in fraction of a year
I Current inventory on hand, units
Opportunity cost, held in
TAC Total annual cost
inventory: this is the amount of
▪ Annual costs to buy item: D = units p = price per unit $
money the firm would have earned
Purchase cost = p X D
if the money were invested
elsewhere other than in inventory
▪ Annual holding cost which includes opportunity cost of inventing the
money currently tied up in the inventory: ← **If there is no safety stock,
SS = Safety Stock Q = Number of items ordered in one purchase order exclude it from the calculation.
H = Holding cost per unit, $/unit/year Maximum inventory held = SS + Q
Q (SS + Q + SS) 𝑄
𝐴𝑛𝑛𝑢𝑎𝑙 𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = (SS + ) × 𝐻 𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝐿𝑒𝑣𝑒𝑙 = = 𝑆𝑆 +
2 2 2
▪ Annual order processing cost, where D = annual usage of the item Q = number of items purchased per order
D
𝐴𝑛𝑛𝑢𝑎𝑙 𝑂𝑟𝑑𝑒𝑟 𝑃𝑟𝑜𝑐𝑒𝑠𝑠𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 = ( ) × 𝑆 S = Order-processing cost, $/unit
Q
▪ Total annual inventory costs associated with this particular item: TAC = Total annual cost
𝑇𝑜𝑡𝑎𝑙 𝐴𝑛𝑛𝑢𝑎𝑙 𝐶𝑜𝑠𝑡 = purchase cost + Holing cost + Order processing cost
Q 𝐷
= p × D + (𝑆𝑆 + ) × 𝐻 + ( ) × 𝑆
2 𝑄
Small versus large order quantities ↓
To minimize the total annual cost, there is a best order quantity, (economic order quantity), this represents a balance
between order processing costs and inventory holding costs. With lower order quantity there are too many orders, the
order processing costs are high and dominate the total costs. With higher order quantities, the average inventory holding
cost is high and dominates the total costs.
The order quantity that
√2DS
𝐸𝑐𝑜𝑛𝑜𝑚𝑖𝑐 𝑂𝑟𝑑𝑒𝑟 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = minimizes the total annual
𝐻
cost (EOQ) is the following:
D = annual usage of the item
S = Order-processing cost, $/unit Order quantity versus total
H = Holding cost per unit, $/unit/year annual cost →
By ordering in lots of
economic order quantity,
the total annual cost is the lowest it can be.
2
,9.3 Inventory Control Systems 9
9.3.1 The Reorder Point Inventory Control System
In this system, inventory levels are continuously monitored, and orders are issued when the inventory is depleted to a
predetermined level, called the reorder point (ROP). The order quantity is calculated on the basis of the EOQ formula.
When an order is issued at the reorder point, it is gradually depleted to the safety stock (SS) level over the lead time
(L). the use of inventory over the lead time L is D x L, since the annual demand is D. thus the reorder point given is:
𝑅𝑂𝑃 = D × L + SS
9.3.2 The Periodic Inventory Control System
After the passage of a certain period of time (T), orders are reviewed periodically. At each review time, the current
inventory level (I) is determined, and enough inventory is ordered to bring the inventory level to a target maximum
level (M)
Q = M – I; ordered at time of review, but arrived later
Target Maximum Level (M)
Firms may decide on a weekly or fortnightly ordering cycle,
but in the absence of such a policy, the time period T may be
calculated on the basis of the EOQ. If orders are made in
quantities of EOQ, each order will cover a period of EOQ/D.
this time period may be used as the fixed time period.
L L
I EOQ
T T 𝑇=
𝐷
Target maximum level: 𝑀 = D × (L + T) + SS
However some of this requirement will be met by the current inventory level (I), *As D = annual demand, L and
thus the order quantity is: 𝑄 = 𝑀 − 𝐼 T should also be measured in
The reorder point system allows closer control of inventory than the periodic time units of years
system, the latter only reviewing inventory at specific periodic intervals. The
reorder point system is thus preferred for high-value inventory items in particular. The periodic system may be used
for other inventory items because of its convenience.
The inventory control systems allow for a safety stock, SS: this is the amount of inventory stocked by the system in
case of unforeseen events arising. There are many events that could occur and disrupt the careful inventory planning:
i.e. late deliveries. Without safety stock, if the delivery takes longer than the average lead time L, some inventory
demand may not be met, possibly causing serious disruptions. What happens if the inventory use if higher than that
forecast? without safety stock, customer service will suffer. Other reasons for maintaining safety stock include providing
a safeguard against issues such as poor quality, production problems and transportation problems. Safety stock is thus
sometimes referred to as buffer stock.
The root reason for safety stock could be described as variation – variation of demand, variation of lead time,
variation of production, etc. if there was no variation, firms would not need safety stock. Safety stock needs to be held
in proportion to such variations.
Safety stock is not free! It is included as part of the total annual cost. (SS x H)
3
,9.4 Supply Chain Inventory Management 9
• Inventory centralisation: variation of total demand is reduced. (what if all the inventory could be centralized, at
the manufacturer’s location? They will need to consider the total demand, but the variation of the total demand will
be less than the total variation of the demand considered separately. Thus less safety stock will be needed)
the demand at the central location is a combination
of the demand at the three DCs; however, the
variation of the total demand is less than the sum of
variations at the three DCs. Hence the safety stock
needed is less than the safety stock required for
multiple locations.
With integrated supply chains, the central location
could be anywhere, inventory nay even be
distributed at different centres (and still inventory
would be saved), so long as all locations have access
to inventory information and the transfers between
locations can be quick. This concept is called
replacing inventory by information.
The concept of inventory reduction by centralisation
is sometimes stated as the ‘square root rule’: this is
an approximation and states that the inventory
buffer needed is proportional to the square root of
the number of locations. Thus in the above instance,
the inventory buffer at the central location would be
in the ratio (√1:√3=0.58) of the combined buffer at
the three locations, a saving of approximately 42%.
• Delayed product differentiation: reducing variation by combining demand at different points is the case of a
manufacturer making multiple products. This makes use of the principle of postponement. The manufacturer will
need to manage inventories of each of these products, with safety stocks for each product. Imagine each of these
products have a precursor: some intermediate product from which all the (different) final products are made. If the
processing steps from the intermediate product to the final products are not that significant, the manufacturer could
stock the intermediate product in place of the final product, thus combining the safety stock required and gaining
similar advantage as above. This give the manufacturer the flexibility of meeting the demand of the final products,
using the intermediate product, as the demand occurs. This delayed product differentiation has the potential to not
only save on inventory holding, but also gives greater flexibility and simplicity to manufacturing.
• Part commonality: attempts simply to reduce the number of different parts in a
product range wherever possible. It is similar to product differentiation; delayed product
differentiation would use the same parts and processes in all earlier stages of
manufacture, differentiating products as late as possible, however, part commonality
attempts simply to reduce the number of different parts wherever possible.
Shows product A as built from components B and C, while product X as made from
components Y and Z. if components B and Y are quite similar, and the designers could
substitute both B and Y by a third component D, then the manufacturer needs to hold a
combined inventory of D in place of separate inventories for B and Y. this if often possible to
do in manufacturing since engineered products often use similar components, such as
simple nuts and bolts, or even complex components such as fuel injectors.
Using common parts across products↑
4
,• Transit inventory reduction: Reduce leadtimes: cheaper transport modes may be slower. 9
in transit = inventory moving across the chain, whether upstream or downstream, which means incurred costs.
Considering: Q = order quantity or the quantity that is transferred in one consignment, L is the delivery lead time or
the duration when the order is in transit, and H is the inventory holding cost per item per year.
𝐻𝑜𝑙𝑑𝑖𝑛𝑔 𝐶𝑜𝑠𝑡 𝑓𝑜𝑟 𝑜𝑛𝑒 𝑜𝑟𝑑𝑒𝑟 = 𝑄 × 𝐿 × 𝐻, 𝑠𝑖𝑛𝑐𝑒 𝑖𝑡 𝑖𝑠 ℎ𝑒𝑙𝑑 𝑜𝑛𝑙𝑦 𝑓𝑜𝑟 𝑝𝑒𝑟𝑖𝑜𝑑 𝐿
𝐷 𝐷
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑟𝑑𝑒𝑟𝑠 𝑖𝑛 𝑎 𝑦𝑒𝑎𝑟 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝑡𝑟𝑎𝑛𝑠𝑖𝑡 𝑖𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦 𝑐𝑜𝑠𝑡 = 𝑄 × 𝐿 × 𝐻 × ( ) = 𝐷 × 𝐿 × 𝐻
𝑄 𝑄
One must find a balance between selecting an expensive yet fast transportation mode, or a cheap yet slow
transportation mode, which results in higher transit costs.
IN-TRANSIT INVENTORY
A key strategy of most organisations is to reduce the amount of inventory that they hold. In many instances warehouses
are eliminated altogether. One consequence of this is that sometimes companies use transport as a ‘mobile or rolling
warehouse’. The mode of transport that they use may depend on how fast they want to get product to market. One
industry professional describes this as the ‘gearbox’ approach to inventory management: speeding up and slowing
down the flow of inventory through the supply chain by using alternative transport modes. In-transit inventory is thus
an important category of inventory, and one which can sometimes account for large volumes of inventory.
9.5 Matching Inventory Policy with Inventory Type
9.5.1 ABC Analysis: Too many SKUs!
• ABC analysis separates out the most important items so that more attention can be focused on those items
• It is based on the principle that out of the myriad of items an inventory manager needs to handle, there are only a
few that account for most of the inventory expenses.
←to carry out this analysis the expenses incurred
annually for each individual item are collected and the
items are listed in the order from the highest expense to
the lowest expense.
The items are then divided into three classes: A = 20% of
the count, but 65% of the expense. B = the next 30% of
the count, and C = the rest of the items. These
percentages are just an indication; the idea if that a few
important items are given more attention than the more
numerous but less important items.
ABC analysis is a focusing tool, permitting attention to
be focused on the most important inventory items. For instance, different
inventory control systems may be used for the different classifications: A
items may be controlled closely, using the reorder point system; the less
demanding periodic system may be used for B items; and C items may
be blanket purchased once or twice in a year.
An ABC analysis may be done with different criteria as the need dictates,
thus a retailer may use the criterion of total sales per year, and a
distributor may use the amount of money spent on an item (or SKU).
Other criteria used for ABC analysis include frequency of order picking
(examining which items are picked more often than others) and
frequency of customer complaints received on product items.
As a rule of thumb, 20% of inventory items, be they finished goods or raw materials, account for 80% of the volume.
5
,↓ Typical cumulative volume for SKUs in a company: note how the most important A items only make up
the first 20% of the SKUs but account for 80% of the volume
Percentage of Volume 9
Percentage of Stock Keeping Units (SKUs)
Inventory flow types ↑
The management approach for each of these inventory types needs to be tailored to the product and market
characteristics.
Stockholding policies for alternative inventory flow types
Type Characteristics Stockholding policy
Base flow Predictable high flow rates Minimum stocks. Direct deliveries from suppliers
Wave flow Slow moving flow rates. High criticality. Minimise stockholding, building them during peak
Perishable. Peaks are relatively predictable. demand period. Direct delivery from supplier where
possible
Surge flow (1) High criticality. Low value. Long lead time. Hold high level of stock thereby allowing safety stock
Small physical size. delivery lead time and demand fluctuations.
Surge flow (2) Low criticality. High value. Bulky physical Minimize stockholding, building them only during
characteristics. Peaks are relatively peak demand period. Direct delivery from supplier
predictable. where possible
9.6 Inventory Reduction Principles
• Pool inventory: Wherever demand for inventory can be combined, the safety stock can be lowered, still
providing the same service level
• Reduce variation: Wherever variation can be reduced, safety stock can be reduced too. (variation of lead
time, demand, supply, quality…) i.e. with variable quality, more inventories are needed in case the inventory
turns out to be defective.
• Reduce lead time: When the lead time is long, we need to forecast more into the future, thus the accuracy
of the forecast suffers, increasing the variability of demand and consequently requiring higher safety stock.
The reorder point can be reduced if the lead time is reduced.
9.6.1 Just-in-Time Inventory System (JIT)
Just-in-time inventory system (JIT): making do with the minimum possible level of inventory holding.
• Inventory hides problems! By purposely removing inventory holdings, the problems the inventory was
covering are surfaced, and the problems are then proactively fixed
• Small lot production: Ordering in small quantities keeps the average inventory level small
– Hence reduce order processing costs so that the ideal of small quantity ordering can be accomplished
• The time and effort spent in process setups are the manufacturing equivalent of order processing costs:
Hence, reduce the time and effort in setups
6
, Chapter 10: Warehousing and Materials Handling 10
10.1 Warehousing in Global Supply Chains
Global supply chains require multiple echelons, spread across various international locations:
Supply chains have extended in-transit
inventory travelling between disparate
locations, as well as inventory stored at
multiple stages in various stages of
manufacture or assembly. Each
echelon means different functions.
Global distribution centre: high-value,
low-volume goods, (silicon chips.) Local
level: low-value, high-volume goods,
require short lead times, (photocopy
paper.) Inventory holding at a single
level requires close collaboration
between all parties involved & rapid
exchange of information.
Warehousing is seen as a costly necessity for an inefficient supply chain (costs are brought by the inventory itself,
labour, administration, energy, racks and forklifts…)
Material storage and handling systems have two key objectives: to minimise cost and to add value.
Value-Adding Activities: activities that enhance products to increase the customer’s perceptions of those products’
benefits. Customer value can be added to a product by:
– Improving its quality during storage (e.g. maturing whiskey, wine, cheese or cured meats)
– Improving the service associated with it (e.g. delivery information availability or specialist packaging)
– Reducing its cost (e.g. reduced packaging/reduced admin costs) &/or reducing its lead time (e.g. cross docking)
Warehousing operations can achieve these
objectives in various ways →:
● Creating bulk consignments
● Breaking bulk consignments
● Combining freight
● Smoothing supply to meet demand
Downstream distribution centres offer more than
storage and handling: also assembly & packaging...
so that order fulfilment can occur as close to the
end customer as possible, postponing stock
handling until the order is confirmed.
Postponement can reduce inventory significantly
where appropriate.
Information flow related to value-adding activities
such as product tracking & cycle counting are essential to
warehousing functions, and improve their performance.
10.2 Warehouse Layout and Design
Four generic functions, from which all warehouse activities
can be associated with: →
7
