Effect of Inventory on Supply Chain

Objectives of the study

• When the firms improve their inventory management, what is the reaction of
other Factors on supply chain?
• How to improve the inventory from cost effective perspective?

Method of Data Collection

In order to meet the objectives of the study data will be collected from
secondary sources. So the financial reports of a manufacturing company will be
obtained.

Review of literature
The Effect of Inventory on Supply Chain
Abstract: Supply chain management addresses the management of
materials and information across the entire chain from suppliers to producers,
distributors, retailers, and customers. In the past few decades, scholars gave
ample attention about the impact of inventory on Supply Chain Management
(SCM). Roughly speaking, research on supply chain management has been mainly
focused on three major issues. One is the behavior of information flow; The second
issue deals with inventory management; The third issue is orientated to planning
and operations management. In this paper the second issue, namely inventory
management will be discussed. The author will follow the phases of classifying
inventory; Identify cost factors; Assess cost components; Calculate EOQ; Giving
suggestion and effect of inventory on supply chain will be discussed. The result is
going to become clear under the analysis of two alternatives by using MCDM
(Multiple Criteria Decision Making) method. The conclusion is when optimizing the
inventory management; both upstream and downstream activities will run
effectively.

The Impact of Inventory and Flow Planning Parameters on

Supply Chain Performance: An Exploratory Study
Abstract: The primary objective of this paper is to study the impact of
selected inventory parameters and management techniques on the performance
of an expanded and comprehensive retail supply chain. Specifically, we study the
sensitivity of supply chain performance to three inventory planning parameters: (i)
the forecast error, (ii) the mode of communication between echelons, and (iii) the
planning frequency. We achieve this by constructing a detailed simulation model
and with data adapted from a case study which we were involved with. The studies
conclude that all the three parameters have a significant effect on performance.
Increasing forecasting errors and the re-planning frequency decreases service,
return on investment, and increases cycle time. Using a mode of communication
that facilitates exchange of information between echelons in the supply chain
yields a higher level of service when compared to the scenario where the entities
in different echelons plan material flows independently.
Effects of Inventory Policy on Supply Chain Performance: A
Simulation Study of Critical Decision Parameters
Abstract: This paper investigates the effects of information sharing and
early order commitment on the performance of four inventory policies used by
retailers in a supply chain of one capacitated supplier and four retailers. Model
parameters and operating conditions are emulated from a local business supplying
a standard product to its retailers. Through computer simulation and subsequent
analyses, we found that the inventory policy used by the retailers, information
sharing, and early order commitment can significantly influence the performance
of the supply chain. Out of the four inventory policies examined, the economic
order quantity rule is found to be the best for the retailers and the entire supply
chain, but periodic order quantity and Silver-Meal provide the best performance for
the supplier. The sharing of future order plans by the retailer and the supplier is
also shown to be the most effective way for reducing the supplier's cost and
improving its service level; however, the magnitude of these benefits achieved is
less for the retailers. In addition, early order commitment by the retailers is found
to be beneficial to the supplier and retailers in reducing their total cost.

Bullwhip Effect in Supply Chains

Abstract: We review a range of methodological approaches to solving the
bullwhip problem. The bullwhip problem is a dynamic consequence of supply chain
structures and replenishment policies. The roles of the structure of the demand
process, the treatment of time (continuous v discrete), forecasting techniques and
lead-times will be reviewed. In practice, and in the theory, a variety of techniques
have been used to smooth the dynamics of supply chains. These include, the use
of sophisticated forecasting, pooling of demand and inventories, proportional
feedback controllers and full-state feedback systems. Multi-echelon supply chains
also present a number of interesting innovations. From the traditional, arms-length
trading relationships, information sharing, vendor managed inventory and echelon
stock policies can be developed. More sophisticated collaboration and co-
ordination mechanisms may also lead to altruistic behavior and result in superior
performance. The impact of these procedures will be examined. Finally thoughts
on new directions in bullwhip research are presented.

Factors Affecting the Level of Trust and Commitment in Supply

Chain Relationships
Abstract: The objective of this research, therefore, is to study factors
affecting the level of trust in supply chain management. Several constructs known
to be related to trust in the literature will be explored and tested, such as asset
specificity, behavioral uncertainty, information sharing and other constructs in
social exchange theory. Finally, this study attempts to explore a relationship
between trust and commitment based on Morgan and Hunt's framework. This
study proposes that commitment is a key success factor in achieving supply chain
integration and trust is a root in fostering such commitment. Although the
literature mentions a relationship between trust and commitment (Morgan and
Hunt 1994), there is a lack of empirical testing of such relationship in the supply
chain management area. This study attempts to test the connection between the
theoretical argument and empirical realities.

Inventory and Internal Logistics Management as Critical

Factors Affecting Supply Chain Performance
Abstract: This paper focuses on the inventory and internal logistics
management problem within a specific Supply Chain (SC) node (a Distribution
Centre (DC)). The objective is twofold: to monitor the performance of different
inventory control policies under distinct operative scenarios and to reduce the
Internal Logistic Costs (ILCs) by investigating the effect of some critical parameters
(i.e., the number of incoming/outgoing trucks from suppliers/to retailers, the
number of forklifts and lift trucks, etc.) for increasing the service level provided to
final retailers and allocating internal resources efficiently. To this end, a simulation
model of a real DC is implemented.

Identification of Factors Affecting Continuity of Cooperative

Electronic Supply Chain Relationships: Empirical Case of the
Taiwanese Motor Industry
Abstract: This study has developed a research framework that integrates
the three perspectives of resource dependence, risk perception, and relationship
marketing to identify the factors affecting the continuity of a cooperative electronic
supply chain. After constructing a structural equation model, empirical testing on
851 raw material and spare parts suppliers for the Taiwanese motor industry was
conducted. All path coefficients in the proposed model were statistically
significant, and were as hypothesized. Resource dependence, trust, and
relationship commitment are positively related to the continuity of the cooperative
electronic relationship. Risk perception is negatively related to the continuity of the
cooperative electronic relationship. This paper has theoretically developed an
extensive set of interrelationships among these variables illustrating their
comparative effects on supplier intention to use the internet for on-line
transactions. This empirical study provides consistent support for the proposed
business-to-business (B2B) e-commerce acceptance model. The primary
contribution of this research is the integration of constructs associated with
resources, environmental uncertainty, and relationship marketing, into a coherent
model that jointly predicts supplier acceptance of e-commerce.

Supply Chain Management and Supply Chain Orientation: Key

Factors for Sustainable Development Projects in Developing
Countries?
Abstract: In developing countries, many projects are seeking regional and
sustainable development by trying to promote local products and companies. Our
paper tries to evaluate Supply Chain Management (SCM) and Supply Chain
Orientation (SCO) in the design and implementation of projects aiming at the
enhancement of sustainable regional development in two Brazilian Amazonian
states. Our main objective is to evaluate if the lack of SCM and SCO is a factor of
failure of those projects. The paper begins with the definitions of the main
concepts related to the research. Then, it presents the context and analysis of six
projects aiming at the enhancement of sustainable development of local
communities through the promotion of the forest products by six different
collecting co-operatives. The evaluation was obtained by mixing case study and
empirical data from the six projects. The conclusion presents the outputs of the
analysis, which can be useful to similar projects, especially those related to the
design of sustainable and regionally adapted productions and supply chain
configurations.

Inventory Performance of Some Supply Chain Inventory

Policies under Impulse Demands
Abstract: This paper attempts to study the impact of impulsive demand
disturbances on the inventory-based performance of some inventory control
policies. The supply chain is modeled as a network of autonomous supply chain
nodes. The customer places a constant demand except for a brief period of sudden
and steep change in demand (called demand impulse). Under this setting, the
behavior of each inventory policy is analyzed for inventory performance of each
node. It is found that the independent decision-making by each node leads to a
bullwhip effect in the supply chain whereby demand information is amplified and
distorted. However, under a scenario where the retailer places a constant order
irrespective of the end customer demand, the inventory variance was actually
found to decrease along the supply chain. The variance of the inventory remained
constant along the chain when only the actual demands are transmitted by each
node. The results also showed that the inventory policy which is best for one
supply chain node is generally less efficient from a supply chain perspective.
Moreover, the policy which performs poorly for one node can be most efficient for
the supply chain. In a way, our results also provide a case for coordinated
inventory management in the supply chain where all members prepare a joint
inventory management policy that is beneficial for all the supply chain nodes. The
results have significant industrial implications.

Vendor-Managed Inventory in the Retail Supply Chain

Abstract: Vendor-managed inventory (VMI) is one of the most widely
discussed partnering initiatives for improving multi-firm supply chain efficiency.
Also known as continuous replenishment or supplier-managed inventory, it was
popularized in the late 1980’s by Wal-Mart and Procter & Gamble. Various
published accounts have described VMI benefits that range from cheaper new
product introductions to reduced returns at product end-of-life, but the literature
often fails to explain just why these benefits have resulted from VMI. To begin, we
examine how each partner in a VMI relationship reduces cost and improves
service. We provide fresh insights into the approach, along with plausible answers
to these questions. We start by explaining why savings so often accrue from VMI.
We then describe some underlying technologies required to make the arrangement
work. Next, we introduce a simulation model that examines VMI quantitatively in
order to understand the effects of key variables. Finally we address several less
than ideal conditions often found in consumer electronics industry in order to
assess the robustness of the approach.

Inventory Management of Indian Commercial Vehicles Industry

 Abstract: This paper presents & analyses statistically the key inventory
ratios of Indian Commercial Vehicles Industry & observes significant company-to-
company differences in inventory ratios reflecting differences in inventory
management policies.

Book: Inventory and Supply Chain Management with Forecast

Updates
Abstract: Inventory and Supply Chain Management with Forecast Updates is
concerned with the problems of inventory and supply chain decision making with
information updating over time. The models considered include inventory decisions
with multiple sources and delivery modes, supply-contract design and evaluation,
contracts with exercise price, volume-flexible contracts allowing for spot-market
purchase decisions, and competitive supply chains. Real problems are formulated
into tractable mathematical models, which allow for an analysis of various
approaches, and provide insights for better supply chain management. The book
provides a unified treatment of these models, presents a critique of the existing
results, and points out potential research directions. Attention is focused on
solutions that is, inventory decisions prior and subsequent to information updates
and the impact of the quality of information on these decisions. Supply chain
management research has attracted a great deal of attention over the past ten
years. Moreover, it is an area of research that covers an enormous territory
involving multiple disciplines. Supply chain management is studied and practiced
in both academic as well as by practitioner circles. This is a book that is written for
students, researchers, and practitioners across a number of domains including
Operations Management Science, Operations Research, Applied Mathematics and
Engineering. …. …. Over.
An Introduction to Supply Chain Management
RamGaneshan
TerryP.Harrison

A supply chain is a network of facilities and distribution options that performs

the functions of procurement of materials, transformation of these materials into
intermediate and finished products, and the distribution of these finished products
to customers. Supply chains exist in both service and manufacturing organizations,
although the complexity of the chain may vary greatly from industry to industry
and firm to firm.

In a very simple supply chain for a single product, raw material is procured
from vendors, transformed into finished goods in a single step, and then
transported to distribution centers, and ultimately, customers. Realistic supply
chains have multiple end products with shared components, facilities and
capacities. The flow of materials is not always along an arbores cent network,
various modes of transportation may be considered, and the bill of materials for
the end items may be both deep and large.

Traditionally, marketing, distribution, planning, manufacturing, and the

purchasing organizations along the supply chain operated independently. These
organizations have their own objectives and these are often conflicting.
Marketing's objective of high customer service and maximum sales dollars conflict
with manufacturing and distribution goals. Many manufacturing operations are
designed to maximize throughput and lower costs with little consideration for the
impact on inventory levels and distribution capabilities. Purchasing contracts are
often negotiated with very little information beyond historical buying patterns. The
result of these factors is that there is not a single, integrated plan for the
organization---there were as many plans as businesses. Clearly, there is a need for
a mechanism through which these different functions can be integrated together.
Supply chain management is a strategy through which such integration can be
achieved.

Supply chain management is typically viewed to lie between fully vertically

integrated firms, where the entire material flow is owned by a single firm and
those where each channel member operates independently. Therefore
coordination between the various players in the chain is key in its effective
management. Cooper and Ellram [1993] compare supply chain management to a
well-balanced and well-practiced relay team. Such a team is more competitive
when each player knows how to be positioned for the hand-off. The relationships
are the strongest between players who directly pass the baton, but the entire team
needs to make a coordinated effort to win the race.

Supply Chain Decisions

We classify the decisions for supply chain management into two broad
categories -- strategic and operational. As the term implies, strategic decisions are
made typically over a longer time horizon. These are closely linked to the
corporate strategy (they sometimes {\it are} the corporate strategy), and guide
supply chain policies from a design perspective. On the other hand, operational
decisions are short term, and focus on activities over a day-to-day basis. The effort
in these types of decisions is to effectively and efficiently manage the product flow
in the "strategically" planned supply chain.

There are four major decision areas in supply chain management: 1)

location, 2) production, 3) inventory, and 4) transportation (distribution), and there
are both strategic and operational elements in each of these decision areas.
1. LOCATION DECISIONS: The geographic placement of production facilities,
stocking points, and sourcing points is the natural first step in creating a
supply chain. The location of facilities involves a commitment of resources to
a long-term plan. Once the size, number, and location of these are
determined, so are the possible paths by which the product flows through to
the final customer. These decisions are of great significance to a firm since
they represent the basic strategy for accessing customer markets, and will
have a considerable impact on revenue, cost, and level of service. These
decisions should be determined by an optimization routine that considers
production costs, taxes, duties and duty drawback, tariffs, local content,
distribution costs, production limitations, etc. (See Arntzen, Brown, Harrison
and Trafton [1995] for a thorough discussion of these aspects.) Although
location decisions are primarily strategic, they also have implications on an
operational level.
2. PRODUCTION DECISIONS: The strategic decisions include what products to
produce, and which plants to produce them in, allocation of suppliers to
plants, plants to DC's, and DC's to customer markets. As before, these
decisions have a big impact on the revenues, costs and customer service
levels of the firm. These decisions assume the existence of the facilities, but
determine the exact path(s) through which a product flows to and from these
facilities. Another critical issue is the capacity of the manufacturing
facilities--and this largely depends upon the degree of vertical integration
within the firm. Operational decisions focus on detailed production
scheduling. These decisions include the construction of the master
production schedules, scheduling production on machines, and equipment
maintenance. Other considerations include workload balancing, and quality
control measures at a production facility.

3. INVENTORY DECISIONS: These refer to means by which inventories are

managed. Inventories exist at every stage of the supply chain as either raw
material, semi-finished or finished goods. They can also be in-process
between locations. Their primary purpose is to buffer against any uncertainty
that might exist in the supply chain. Since holding of inventories can cost
anywhere between 20 to 40 percent of their value, their efficient
management is critical in supply chain operations. It is strategic in the sense
that top management sets goals. However, most researchers have
approached the management of inventory from an operational perspective.
These include deployment strategies (push versus pull), control policies ---
the determination of the optimal levels of order quantities and reorder
points, and setting safety stock levels, at each stocking location. These levels
are critical, since they are primary determinants of customer service levels.

4. TRANSPORTATION DECISIONS: The mode choice aspects of these decisions

are the most strategic ones. These are closely linked to the inventory
decisions, since the best choice of mode is often found by trading-off the
cost of using the particular mode of transport with the indirect cost of
inventory associated with that mode. While air shipments may be fast,
reliable, and warrant lesser safety stocks, they are expensive. Meanwhile
shipping by sea or rail may be much cheaper, but they necessitate holding
relatively large amounts of inventory to buffer against the inherent
uncertainty associated with them. Therefore customer service levels and
geographic location play vital roles in such decisions. Since transportation is
more than 30 percent of the logistics costs, operating efficiently makes good
economic sense. Shipment sizes (consolidated bulk shipments versus Lot-for-
Lot), routing and scheduling of equipment are key in effective management
of the firm's transport strategy.

Supply Chain Modeling Approaches

Clearly, each of the above two levels of decisions require a different
perspective. The strategic decisions are, for the most part, global or "all
encompassing" in that they try to integrate various aspects of the supply chain.
Consequently, the models that describe these decisions are huge, and require a
considerable amount of data. Often due to the enormity of data requirements, and
the broad scope of decisions, these models provide approximate solutions to the
decisions they describe. The operational decisions, meanwhile, address the day to
day operation of the supply chain. Therefore the models that describe them are
often very specific in nature. Due to their narrow perspective, these models often
consider great detail and provide very good, if not optimal, solutions to the
operational decisions.

To facilitate a concise review of the literature, and at the same time

attempting to accommodate the above polarity in modeling, we divide the
modeling approaches into three areas --- Network Design, ``Rough Cut" methods,
and simulation based methods. The network design methods, for the most part,
provide normative models for the more strategic decisions. These models typically
cover the four major decision areas described earlier, and focus more on the
design aspect of the supply chain; the establishment of the network and the
associated flows on them. "Rough cut" methods, on the other hand, give guiding
policies for the operational decisions. These models typically assume a "single site"
(i.e., ignore the network) and add supply chain characteristics to it, such as
explicitly considering the site's relation to the others in the network. A simulation
method is a method by which a comprehensive supply chain model can be
analyzed, considering both strategic and operational elements. However, as with
all simulation models, one can only evaluate the effectiveness of a pre-specified
policy rather than develop new ones. It is the traditional question of "What If?"
versus "What's Best?”.

NETWORK DESIGN METHODS:

As the very name suggests, these methods determine the location of
production, stocking, and sourcing facilities, and paths the product(s) take through
them. Such methods tend to be large scale, and used generally at the inception of
the supply chain. The earliest work in this area, although the term "supply chain"
was not in vogue, was by Geoffrion and Graves [1974]. They introduce a
multicommodity logistics network design model for optimizing annualized finished
product flows from plants to the DC's to the final customers. Geoffrion and Powers
[1993] later give a review of the evolution of distribution strategies over the past
twenty years, describing how the descendants of the above model can
accommodate more echelons and cross commodity detail.

Breitman and Lucas [1987] attempt to provide a framework for a

comprehensive model of a production-distribution system, "PLANETS", that is used
to decide what products to produce, where and how to produce it, which markets
to pursue and what resources to use. Parts of this ambitious project were
successfully implemented at General Motors.

Cohen and Lee [1985] develop a conceptual framework for manufacturing

strategy analysis, where they describe a series of stochastic sub- models, that
considers annualized product flows from raw material vendors via intermediate
plants and distribution echelons to the final customers. They use heuristic methods
to link and optimize these sub- models. They later give an integrated and readable
exposition of their models and methods in Cohen and Lee [1988].
 Cohen and Lee [1989] present a normative model for resource deployment in
a global manufacturing and distribution network. Global after-tax profit (profit-local
taxes) is maximized through the design of facility network and control of material
flows within the network. The cost structure consists of variable and fixed costs for
material procurement, production, distribution and transportation. They validate
the model by applying it to analyze the global manufacturing strategies of a
personal computer manufacturer.

Finally, Arntzen, Brown, Harrison, and Trafton [1995] provide the most
comprehensive deterministic model for supply chain management. The objective
function minimizes a combination of cost and time elements. Examples of cost
elements include purchasing, manufacturing, pipeline inventory, transportation
costs between various sites, duties, and taxes. Time elements include
manufacturing lead times and transit times. Unique to this model was the explicit
consideration of duty and their recovery as the product flowed through different
countries. Implementation of this model at the Digital Equipment Corporation has
produced spectacular results --- savings in the order of $100 million dollars.

Clearly, these network-design based methods add value to the firm in that
they lay down the manufacturing and distribution strategies far into the future. It is
imperative that firms at one time or another make such integrated decisions,
encompassing production, location, inventory, and transportation, and such
models are therefore indispensable. Although the above review shows
considerable potential for these models as strategic determinants in the future,
they are not without their shortcomings. Their very nature forces these problems
to be of a very large scale. They are often difficult to solve to optimality.
Furthermore, most of the models in this category are largely deterministic and
static in nature. Additionally, those that consider stochastic elements are very
restrictive in nature. In sum, there does not seem to yet be a comprehensive
model that is representative of the true nature of material flows in the supply
chain.

ROUGH CUT METHODS:

These models form the bulk of the supply chain literature, and typically deal
with the more operational or tactical decisions. Most of the integrative research
(from a supply chain context) in the literature seems to take on an inventory
management perspective. In fact, the term "Supply Chain" first appears in the
literature as an inventory management approach. The thrust of the rough cut
models is the development of inventory control policies, considering several levels
or echelons together. These models have come to be known as "multi-level" or
"multi-echelon" inventory control models. For a review the reader is directed to
Vollman et al. [1992].

Multi-echelon inventory theory has been very successfully used in industry.

Cohen et al. [1990] describe "OPTIMIZER", one of the most complex models to date
--- to manage IBM's spare parts inventory. They develop efficient algorithms and
sophisticated data structures to achieve large scale systems integration.
 Although current research in multi-echelon based supply chain inventory
problems shows considerable promise in reducing inventories with increased
customer service, the studies have several notable limitations. First, these studies
largely ignore the production side of the supply chain. Their starting point in most
cases is a finished goods stockpile, and policies are given to manage these
effectively. Since production is a natural part of the supply chain, there seems to
be a need with models that include the production component in them. Second,
even on the distribution side, almost all published research assumes an
arborescence structure, i.e. each site receives re-supply from only one higher level
site but can distribute to several lower levels. Third, researchers have largely
focused on the inventory system only. In logistics-system theory, transportation
and inventory are primary components of the order fulfillment process in terms of
cost and service levels. Therefore, companies must consider important
interrelationships among transportation, inventory and customer service in
determining their policies. Fourth, most of the models under the "inventory
theoretic" paradigm are very restrictive in nature, i.e., mostly they restrict
themselves to certain well known forms of demand or lead time or both, often
quite contrary to what is observed.

Role of Supply Chain Management Decisions in

Effective Inventory Control
Journal of the Academy of Business and Economics, March, 2004 by Julius A. Alade,
Dinesh K. Sharma, Hari P. Sharma
ABSTRACT: Supply Chain (SC), which involves the configuration,
coordination, and improvement of sequentially related set of operations in
establishments, integrates technology and human resource capacity for optimal
management of operations to reduce inventory requirements and provide support
to enterprises in pursuance of a competitive advantage in the marketplace. A
coordinated SC integrates procurement, production, and distribution and links
together suppliers, manufacturers, distributors, customers and carriers in a
network system that allows for effective planning, information exchange,
transaction execution, and performance reporting. This paper addresses the
structures of supply chain management (SCM) and the activities involved in SCM
decisions that help promote profound improvement in efficiency and effectiveness
in business operations. In broader context, the paper examines the types of
activities involved in SCM decisions; the dynamics of the traditional SCM, the
complementarities of technology in achieving effective management of operations
through enablers of electronic data interchange (EDI) and quick response (QR)
disciplines to implement Just-in-Time (JIT) management techniques; and integrated
SC and inventory control as it relates to capacity imbalances and transaction costs.

1. INTRODUCTION
Supply chain management involves the movement of products, services, and
information between and within businesses, the creation of value, and support of
enterprises in the pursuance of a competitive advantage in the market place (Kilty,
2000). It involves the cooperation and coordination of activities of all parties for
the production and distribution of products to the final consumer with mechanism
in place to optimize inventories across the entire supply chain (Haan, et al., 2003;
Viswanathan and Piplani, 2001). With effective management of products to create
added value and competition among firms move from national to regional and to a
global level, new strategies are being adopted by a number of manufacturers and
retailers, particularly, in the manufacturing industries to gain a competitive
advantage in world markets (Kincade, Casill, and Williamson, 1983). Pressures
from low-cost and the new global competitive environment require companies to
be more productive, react faster to market changes, and maintain smaller
inventories. These developments in the operation of businesses entail significant
changes in the traditional ways of manufacturing system (Park, 1994).

The upstream and downstream coordination engendered by supply chain

management with the goal of minimizing uncertainty and variations along the
supply chain shows that businesses can no longer expect that the objective of
business can be met just by becoming efficient in itself. As indicated by Hameri
and Palsson (2003), process rationalization and measurement system would need
to be implemented to improve the operational efficiency inside a company by
reducing lead times and by partnering with upstream and downstream players of
the supply chain. The situation requires that for value to reach the customers,
efficiency must be evident even in the suppliers, the distribution channel, and all
associated activities and partners. Competition is no longer between individual
businesses, but between groups of companies that are linked together in a chain
for delivering customer value (Chandra, 2000).

The organization of this paper is as follows. In Section 2, we examine the

structure of supply chain management using a model of supply chain network that
illustrates the flow of products from the vendor to until it reaches the final
consumers in the markets. Section 3 looks at the supply chain management
decision with a discussion on the link in the decision making processes. In Section
4, the paper discusses the dynamics of supply chain with a focus on traditional
approach to supply chain and the implication for market disequilibria in demand
and supply. Section 5 examines integration supply chain and inventory
management with a model showing functional integration among procurement,
production and distribution for optimum result. Finally, Section 6 provides
summary and concluding remarks.

2. STRUCTURES OF SUPPLY CHAIN MANAGEMENT

Supply chain is often represented as a network. The nodes in the network
represent facilities, which are connected by links that represent direct
transportation connections permitted by the company in managing its supply chain
(Shapiro, 2001). The network has four levels of facilities. Product flow downstream
from vendors to plants, plants to distribution centers, and distribution centers to
markets. In general, a supply chain network may have an arbitrary number of
levels. In some instances, products may flow upstream when intermediate
products are returned to plants for rework or reusable products are returned from
markets to distribution centers for recycling.

For a broader contest, models could be used to demonstrate supply chain

network for service companies like banks, insurance, airways operation and other
services that operate value chains of networks of facilities for which coordinated
planning is required (Shapiro, 2001). As pointed out by Fine (1999), the supply
chain structure could take different dimensions depending upon the structure of
industry under which it operates. If the industry demonstrates vertical structure
and the product architecture is integral, competitive market forces push the
structure toward a horizontal and modular configuration (Hanna and Newman,
2001). The forces include among others the following:

* The relentless entry of niche competitors hoping to pick up discrete

industry segments.
* The challenge of keeping ahead of the competition across the many
dimensions of technology and markets required by an integral system.
* The bureaucratic and organizational rigidities that often settle upon large,
established companies.

As put by Fine (1999), these forces typically weaken the vertical giant and
create pressure toward a more horizontal, modular structure. On the other hand,
when an industry supply chain has a horizontal structure, a different set of force
pushes the system toward more vertical integration and integral product
architecture. The forces include the following:
* Technical advances in one subsystem the can create opportunity in making
scarce commodity in the chain, giving market power to its owner.
* Market power in one subsystem that encourages bundling with other
subsystems to increase control and more value.
* Market power in one subsystem that encourages engineering integration
with other subsystems to develop integral solutions.

The dynamics of supply chain discussed above demonstrates the

complexities in its management organization. The structure revolves in a cycle
between integral/vertical and horizontal/modular forms. With other uncertainties in
the market, the speed with which the structures complete a cycle is influenced by
the clock-speed of the industry. Significant to the management of supply chain is
the possibility that each product in the system could have a unique set of nodes
and flow paths associated with it. For example, a single product may exhibit
alternative supply chains, thus creating opportunity for cost reduction through
selection of optimal supply chains for each material. Notwithstanding the
possibility of channels of alternative, in general, the supply chain network system
follows path of product movement from vendors to plants, plants to distribution
centers, and distribution centers to markets with transition from each node
recognizing the significance product service and delivery time, cost control, and
inventory management.

3. SUPPLY CHAIN MANAGEMENT DECISION

Supply chain management has emerged over the past few years as the key
to success in the global economy, regardless of industry or company size. Its
premise is simple: operational strategies should be designed and managed around
customer needs. Imagine three links in the supply chain--distribution, production,
and procurement/materials (Cloud, 2000). The link in the decision making process
has not been particular. Other studies have used other approaches such as
procurement, production, and distribution, or vendors, plants, distributions, and
markets (Kilty, 2000; Shapiro, 2001). Notwithstanding the approaches, the focus
has been how companies can add value to their products as they pass through
supply chain and deliver the products to geographically dispersed
markets/customers in the correct quantities, with the correct specifications, at the
correct time, and at a competitive cost.

Distribution--It is the closest ring to customer demand, the first link in the
supply chain flow path that ensures that product and service must be available
when the customer wants and needs them. According to Kilty (2000), distribution
has evolved from providing a secondary but necessary role of warehousing and
transporting goods to being a critical link in delivering products to the marketplace
within the supply chain. It is a key factor to achieving the service-level goals set
forth for the various classes of customers of the enterprise. To achieve these goals,
process efficiency and accuracy are required, hence producers must be able to
source materials, produce goods, and deliver the right products to the right
markets on time. This means that distribution networks need to accept shorter
lead times, deliver across the globe, and provide flexible product options at lowest
cost.

Production--As part of the flow-path for supply chain management,

production should be aligned with distribution so that we can have a production
system that is capable of moving small or large quantities and standard or custom
orders. However, most companies produce goods according to forecasts, not
orders. Part of the reason is that traditional costing and decision-making tools can't
accommodate the faster, customer-oriented system. To solve this problem,
companies need to stop using standard costing for internal decision-making, and
develop throughput accounting, a system that focuses on orders filled rather than
goods produced (Cloud, 2000). Standard costing productivity measurements
classify inventory as an asset and thus encourage production regardless of the
number of orders. As a result, standard costing metrics simply do not fit a
production process that emphasizes speed, flexibility, and low inventory.
Throughput accounting, on the other hand, captures conversion speed, i.e. order-
to-delivery cycle time and flexibility, i.e. the number of orders filled on time.

Procurement/Materials--To develop and manage system that support fast,

on-time distribution networks and quick, flexible production processes, companies
must transcend traditional organizational boundaries and include suppliers in the
planning and administration of operations. As the teams develop, key information,
viz., forecasts, product plans, and design information should be shared with
suppliers.

4. DYNAMICS OF TRADITIONAL SCM

Companies operating within a traditional supply chain are likely to have
procurement, production, and distribution all operating generally within a
departmental structure basis and responding from individual unit to conflicting
performance measures. For example, under sub-optimal operating condition
model, where functional units focus on individual performance results,
procurement would be interested in lowest cost if it means buying raw material in
larger volumes than is necessary. Also, production would be interested in
maximizing machine utilization, resulting in buildup of work in process and finished
goods inventory. In the same way, distribution would be focus on high service
levels and preventing stock-outs.

The consequence of pursuing such traditional approach to supply chain is

that activities would not be integrated and inventory would become a disequilibria
factor in demand and supply. For example, in a typical consumer products
company, marketing managers determine sales strategies for the next period
(future). Their plan is passed on to the manufacturing managers who are asked to
develop an appropriate production strategy. The joint marketing and
manufacturing strategy is then passed on to logistics managers who are given the
responsibility of developing appropriate transportation, warehousing, and
inventory strategies to meet it. Thus, although the logistics managers may seek to
minimize total logistics costs, larger issues of integrating strategies for logistics
manufacturing, and even marketing are not addressed (Shapiro, 2001). Also,
comprehensive and rapid information transfer between the sectors of the pipeline
from retail point-of sale back upstream is not in place or implemented. As a result,
the overall supply chain strategy of the consumer products company may be
significantly sub-optimal.

When the flow path of the supply chain is not integrated, the organization
will find it difficult to achieve its goals and objectives, particularly in maintaining
optimum control in its transaction costs and inventory management. Often the
success of an organization depends not only on how well each sector performs but
also on how well the sectors in the organization interface with each other. For
instance, unless logistics, production, and inventory management are well
coordinated and integrated, the marketing segment of procurement may promote
goods or service that operations cannot profitably deliver, or operations may turn
out goods or services for which there is no demand. The consequence of this is
overall slack in the organization resulting into inadequately managed transaction
costs and excess inventory. Thus, new strategies need to be adopted to gain
competitive advantage in world markets. The operation of businesses with
pressures from low-cost, global sources require significant changes in the
traditional ways from which businesses are managed. The new direction requires
companies to be more productive, react faster to market changes, and maintain
smaller inventories with low transaction costs.

Part of the strategy for success in supply chain management decision is the
adoption of just-in-time management and lean production. The adoption of this
strategy is to help eliminate wasteful and expensive inventory. Integration allows
for coordinated planning, real time exchange of information, bidding and
negotiation, transaction execution, and performance reporting. Integrated supply
chain will help envelop all of the communications tools available from enablers of
EDI and quick response (QR) to the internet. The discipline will require participants,
both upstream and downstream, to implement new technologies and use the tools
to:
 * Improve service to demanding, inventory-lean stores by providing them
with the goods that consumers actually want in a timely manner;
* Reduce inventory and lower attendant costs; and
* Free up capital for other purposes and projects.

As a result of the conscious effort of businesses to integrate the various units

of business operations, there is more opportunity to coordinate activities across
the supply chain for competitive advantage.

5. INTEGRATED SUPPLY CHAIN AND INVENTORY MANAGEMENT

Integrated supply chain require that each segment of the supply chain i.e.,
procurement, production and distribution as shown in Figure 3 be functionally
integrated for optimum result. Today's technology is the key that allows the supply
chain to become integrated and therefore reduces the inventory requirement.
Some examples are the electronic transmission of advance ship notices (ASN) to
advise customers of the contents of a shipment and its expected delivery date.
The transmission of purchase orders via electronic data interchange (EDI) can
provide more timely and accurate data to suppliers, allowing for more efficient
information in management and production planning (Kilty, 2000). Also, freight
tracking systems now are being used in the management of the movement of
goods, which provides flexibility that can be used to react to rapidly changing
internal and external needs such as changes in production schedule or changes in
customer product delivery requirements.

It is important that companies develop a supply chain management strategy

that is consistent with their overall business strategy. A key tool to achieving this is
to develop a supply chain "diagnostic method" that can be used to improve
operations and reduce inventories (see Kilty, 2000). The first consideration here is
for the company to examine and understand their supply and demand planning.
This is the key to optimizing resources as well as the timing of activities associated
with procuring raw materials and producing and distributing products. The next
step is to begin the process of transitioning from a functional organization to a
process organization. And finally, as companies reorganize to be process driven,
then the performance measures for the various functional departments should be
changed to support the overall supply chain management goals. Some examples
of the measurements would include perfect order fulfillment, customer
satisfaction, product quality, total supply chain cost, inventory days supply, and
cash-to-cash cycle time.

The process described above will not achieve optimum result desired by
supply chain if each subsystem works independently. To eliminate wasteful and
expensive inventory, supply chain needs to be integrated as illustrated in the
integrated model (Figure 3) below. As put by Shapiro (2001), supply chain refers to
integrated planning. First, it is concerned with functional integration of purchasing,
manufacturing, transportation, and warehousing activities. It also refers to spatial
integration of these activities across geographically dispersed vendors, facilities,
and markets. And finally, it refers to inter-temporal integration of these activities
over strategic, tactical, and operational planning horizon. In the study by Porter
(1985), it is pointed out that effective linkage (integration) among activities (or
subsystems) in company's can lead to competitive advantage in two ways: (1)
optimization, and (2) coordination. This proposes that a firm must optimize
linkages in a way to reflect its competitive advantage. It also reinforces that the
ability to coordinate linkages is significant to reducing costs or enhances
differentiation. Advances in information technology (IT) have helped facilitated the
developments in integrated supply chain planning and management.

A major goal of the integrated supply chain is the coordination of the

logistics, distribution and production, and production management in a direction
that will optimize the value chain of the company and help to minimize transaction
costs and inventory sock keeping unit (SKU) level. Conventionally, we know that a
company may hold inventories of raw materials, parts, work-in-progress, or
finished products either to hedge against the uncertainties of supply and demand
or to take advantage of economies of scale associated with manufacturing or
acquiring products in large batches. Similarly, inventories are considered essential
to build up reserve for seasonal demands or promotional sales (Shapiro, 2001).
However, with the new reengineering in management and companies not just
adopting just-in-time inventory practices but engaging in more integrated supply
chain management, attention has recently been more focused on creating
processes that reduce or eliminate inventories, mainly by reducing or eliminating
uncertainties that make them necessary. These efforts have been motivated in
part by the recognition that metrics describing the performance of a company's
inventory management practices can be important signals to shareholders
regarding the efficiency of the company's operations and hence its profitability.

The maintenance of lower transaction costs and optimum inventory control

management is not without some costs and tradeoff. Past experiences have shown
that managing inventory effectively in our economy and the business environment
is often difficult. For example, in 1993, Dell Computer's stock plunged after the
company predicted a loss. Dell acknowledged that the company was sharply off in
its forecast of demand, resulting in inventory write-downs. Also, in 1993, Liz
Claiborne experiences an unexpected earnings decline as a consequence of
higher-than-anticipated excess inventories. And in 1994, IBM struggled with
shortages in the ThinkPad line due to ineffective inventory management (Simchi-
Levi et al., 2000). In recognition of these difficulties and the urgency to pursue
effective integrated supply chain management, Barsky and Ellinger (2001) pointed
out that to generate lower levels of inventory and fewer stock-outs for customers,
suppliers and manufacturers may have to hold significantly more inventory and
expend considerably more staff time to administer the program effectively.

6. CONCLUSION
In this paper, we have examined the structures of supply chain management
(SCM) and the activities involved in supply chain decisions that help promote
profound improvement in efficiency and effectiveness in business operations. The
paper has discussed critical issues regarding how the pressures from low-cost and
the new global competitive environment require companies to be more productive,
react faster to market changes, and maintain smaller inventories.
 The issue of supply chain management is discussed with the implications of
the vertical and horizontal structure of industry and its relationship to
procurement, production and distribution in the supply chain process. In the
discussion of supply chain management decision, the study points out that
operational strategy should be designed and managed around customer needs
with a focus on how companies can add value to their products as they pass
through supply chain and deliver the products to geographically dispersed
markets/customers. With inventory management as a major factor in operational
efficiency, the implications of supply chain integration and non-integration were
discussed. The study shows that through integration, and by partnering with
upstream and downstream players of supply chain, companies have demonstrated
improved ability to manage and deliver products to customers in the correct
quantities, with the correct specifications, at the correct time, and at a competitive
cost. Also, a major lesson for entrepreneurs from the implementation of supply
chain is that businesses that focus only on cost containment will miss out on
revenue-generating opportunities. Similarly, it is observed that efficient operations
will not lead to superior profits if companies' products are being manufactured in
plants with outdated technologies that are poorly located relative to companies'
vendors and their markets.

Considering a Third Party for Supply Chain

Management
Anna Albright

Third-party logistics companies can allow an organization to focus energy on

its core competencies and speed the process of getting a final product to market
while saving production costs.
Turning the logistics of procurement, manufacturing, and the distribution of goods
over to a third-party allows your business to take advantage of already established
processes. A logistics company has the advantage of an established vendor list, a
manufacturing plant, a storage facility, and a distribution center, so it is well-
equipped to provide the manufacturing support that may save an organization
time and money. They are services that can help an organization with order
fulfillment:

• Demand forecasting: A logistics company can compile data to forecast

demand in order to determine an appropriate rate of replenishment. Solid
demand forecasting reduces waste and minimizes inventory that remains in the
warehouse. Smart spending on inventory replenishment preserves cash flow.
• Supplier management: Logistics companies often employ experienced
individuals who have the negotiating expertise and established vendor
relationships to secure favorable pricing on the raw goods that go into
manufacturing. Once the item is manufactured, the product is then inspected
and checked for quality assurance.
• Warehousing: Although warehousing includes the storage of the product in a
clean, dry facility until the merchandise is ready for distribution, other services
 such as picking and packing, assembly, receiving, shipping, and inventory
management are often available.
• Administrative: A logistics company not only deals with the production and
distribution of the goods, but also the paperwork involved, such as coding the
product to keep track of what is moving in and out of the plant; invoicing;
documentation of product orders, up sales, and product issues; export
management, which involves screening, documenting, and recording
transactions within the limits of the law; Web tracking of inventory and status of
merchandise transactions; and project management services.

Comparison shopping is always important and highly recommended when

looking for a logistics company. Price is not necessarily the only consideration to
take into account:
• Make sure the company has experience in manufacturing and distribution in
your particular industry and product line as well as a positive reputation.
• Find out the length of time the company has been in business.
• If your organization plans to export overseas, does the company have
international export experience?
• What is the turnover and training provided for telephone representatives
because those individuals will be interacting with your customers?
• Can it provide a temperature-controlled environment for the storage of your
particular merchandise if needed?
• What is its on-time delivery history and rate of distribution?

Compare the expenditures involved in producing and distributing your

product vs. the cost of using a third-party logistics company. The outlay can
sometimes be offset by the savings from not having to hire additional personnel,
purchase additional technology, or make capital investments in a manufacturing
facility, warehouse, and transportation. Logistics companies can typically provide
this service at a more cost-effective rate because of the volume with which they
work.

Supply chain - from Sea to Store

By,JoanneEllul
Publication:RetailWeek
Date: Friday, July 9 2010

Within six months, Sainsbury's will manage its complex global supply chain
of about 4,000 suppliers by trading on a single platform, consolidating several
legacy systems. This is just one example of why organised and well-functioning
supply chains are crucial to retailers with overseas suppliers and international
locations. And electronic systems - like the single trading platform to be used by
Sainsbury's - are providing the answer to the growing complexity of global supply
chains. It's a common problem. 85% of companies expect the complexity of their
supply chains to grow significantly by 2012, according to a recent report by
management consultancy PRTM.
 A primary concern for retailers is to gauge customer demand in order to
manage inventory effectively. "The main challenge for retailers is the uncertainty
and volatility of customer demand. Retailers have been and will structure the
supply chain to forecast customer demand and there will be more emphasis on
building customer retention and loyalty," says PRTM UK supply chain innovation
practice director Gordon Colborn. After all, retaining customers is cheaper than
acquiring them. For its report, Global Supply Chain Trends 2010 to 2012, PRTM
surveyed 350 manufacturing and services companies across various industries,
including retail, and discovered that 74% of companies found the major challenge
to supply chain flexibility is demand volatility and/or poor forecast accuracy.

Harnessing data: Technology that harnesses data from store level can help
solve the problem of accurate forecasting to reduce waste in supply chains.
Software provider RedPrairie's flowcasting and inventory planning systems forecast
and react to customer demand by analysing each store's point-of-sale and
inventory data. "Traditional supply chains' demand planning systems have tackled
the retail supply chain from the angle of forecasting down from manufacturing to
distribution, not gauging whether the right amount of product is in the distribution
centre to ration to stores," says RedPrairie senior vice-president and executive
director Andrew Kirkwood.

The inventory planning system means stock levels can be changed up until
stock is allocated to a store in a lorry, Kirkwood says. Using store-level data means
demand is more consistent at each stage of the supply chain, as businesses,
including manufacturers and suppliers, are working from the same forecast
numbers. One retailer that sells groceries and general merchandise, which has
inventory travelling huge distances, is using this system. "Accurate forecasting
reduces stock excesses and shortages are reduced," Kirkwood explains. He adds
that data is coming from multiple sources along the supply chain: "In the past year
or two, a more pool-based model has been used where data is being pulled from
manufacturer as well as distribution centre."

Harnessing store-level data means the system can be refreshed daily based
on store results. The need for up-to-date data is crucial in inventory planning and is
a challenge retailers must overcome. This is where technology can only go so far in
optimising the supply chain. "Technology has a place in reducing response-time in
the supply chain and accurately forecasting sales. However, the business
processes the system sits on have to be sound," Colborn says. Retailers must
make sure technology optimises sound business processes. Sainsbury's plans to
introduce monitoring of food sales on a minute-by-minute basis, allowing delivery
schedules to be updated where necessary, early next year. "This will allow it to
react to any changes in buying patterns on the same day rather than overnight. It
will be able to make better decisions on where to send stock," says David
Grosvenor, managing director at supply chain technology supplier Wesupply.

Collecting data is traditionally a batch process, where there are periods

during the trading day when information is collected from stores. "Distribution
centres break down the store data based on information that is four to five hours
old," Grosvenor adds. Sainsbury's will go live with Wesupply's single electronic
trading platform in October this year and this will be rolled out over the next six
months across Sainsbury's complex supply chain of about 4,000 suppliers. The
platform handles, stores and analyses trading data, providing services like order
compliance, invoice matching and supplier performance data.

Automated checks - like whether the quantities specified in the order are
being met or are being delivered at the right time - means fewer errors in goods
arriving and advanced notice if there are problems or shortfalls. Greater visibility
into trading data heightens stock control and takes inventory waste out of the
supply chain, Grosvenor says. Sainsbury's will replace its three to four systems
with this single solution to monitor the status of orders across its entire network
and manage the availability of products.

Outsourcing is another way to reduce costs and can be used to simplify

supply chain management. "We're seeing a growing demand in outsourcing a fully
managed service. This means retailers don't have to manage a massive
infrastructure and bespoke their software. It lowers their costs," Grosvenor says.
So Sainsbury's will optimise technology by harnessing real-time data from stores
and this emphasis on the logistics processes that underlie technological systems is
integral to supply chain success.

Urban efficiency: Urban Outfitters paid similar attention to its logistics

when implementing a warehouse management system from Manhattan Associates
within its UK business in September last year. The system receives advance
shipment notices from vendors, which allows the retailer to better plan distribution
of incoming shipments.

Logistics processes, like cross docking, where items are transferred directly
from an incoming vehicle to an outbound vehicle, and cycle counting, where a
small subset of inventory is counted on any given day, feed into the system. Urban
Outfitters can fulfil orders more quickly and accurately, decreasing handling time
and inventory levels, and sending stores accurate information on shipments. Urban
Outfitters chose the technology to deal with high volumes of small orders and it
has seen an improvement in the speed of supply chain delivery. Manifesting and
invoicing time dropped 80% and turnaround on orders went from three days to
less than 24 hours.

Supply chain systems can help manage complex and differing processes.
Retailers will manage their costs more effectively and there will be an ethical focus
when selecting transport methods, Kirkwood says. "All companies are moving off-
road and investing in multi-modal transportation. Such a complex process of
organising different schedules needs systemising," he adds.

As for the future, Colborn sees retailers focusing on design of the supply
chain and moving away from UK-centricity. "Regional hubs in other countries are
needed to optimise global supply chains. Retailers will find their product offerings
in international locations shouldn't be the same. Tesco has been good at
differentiating its product offering in different countries," he adds. Global growth is
on the agenda, with three-quarters of companies in the PRTM survey expecting an
increase in the number of international customer locations. "For any UK-based
retailer to secure growth they must build a global supply chain network," Colborn
says.

So whatever system they choose, retailers will need to optimise their supply
chain to ensure success.
Global supply chains,
• 85% of companies expect the complexity of their supply chains to grow
significantly by 2012
• 47% of companies plan to develop processes for improved demand sensing -
the market rate of demand in real-time - rather than having to wait for after-
the-fact reporting
• 74% of companies found the major challenge to supply chain flexibility is
demand volatility and/or poor forecast accuracy
• 66% expect a higher number of products or variants will be required to fulfill
customer expectations and counter shrinking revenues
Source: Global Supply Chain Trends 2010 to 2012, PRTM.

Make the Most of Supply Chain Analytics

By Andrew Hines
July 25th, 2007

Dell, Apple, your local grocery store — all these companies share a common
concern: supply chain management. From the initial forecast to final delivery,
coordinating activities in a supply chain is a big challenge. But if you do it right, the
ROI is huge. Usually the challenge boils down to building the right capability in
your organization, which means having the right people and the right tools.
Investing in a new software package and a team of supply chain analysts,
however, is a serious undertaking, and there’s no one-off solution. Should you
focus on forecasting, inventory optimization, logistics, and supply chain
simulation? An article by Sridhar Tayur in Supply & Demand Chain Executive points
out that inventory optimization is probably the best place to start, and gives a $1
billion example to back it up:

Given the enormous benefits at stake [by optimizing inventory], it’s no

surprise that a recent survey by Aberdeen Group places inventory management
software at the top of the list for supply chain technology investments. Within that
category, the highest priority is clearly multi-stage inventory optimization, which
generates optimal inventory levels for each item across each of the stages or tiers
within an organization’s supply chain network. More than 80 percent of
respondents cited multi-stage inventory optimization as a top priority, nearly twice
the number who named any other type of inventory management technology. [...]

A case in point is Deere & Company’s Commercial & Consumer Equipment

Division, which implemented a solution to optimize inventory levels for more than
300 commercial and consumer equipment products held at 2,500 North American
dealer locations, plants and warehouses. To do so, the software considers 52
million variables and 26 million constraints. In four hours each week, the system
generates optimal targets [target inventory levels] that have enabled Deere to
reduce inventory by more than $1 billion, while significantly improving on-time
shipments from factories and maintaining customer service levels at 90 percent or
better.

The $1 billion in reduced inventory means that Deere is now free to invest
that much cash elsewhere in the business. With that in mind, a few million dollars
doesn’t seem like too much to invest in optimization software and supply chain
analysis team.

Planning for Disaster: Keeping Your Supply

Chain Safe
ABSTRACT: September 11th sounded a wake-up call for global enterprises
caught with kinks in their supply chain. There may be no sure way to plan for a
disaster of that magnitude, but for business continuity, companies need to work on
the things they can control. Now, a year later, companies around the world are re-
examining and making adjustments to the way they do business. Some are
rethinking decisions to concentrate operations and large numbers of employees in
single locations. Others that relied on just-in-time inventory management practices
are considering stockpiling "just in case" inventories of parts, materials and
finished goods. But just avoiding disruption in the supply chain is not about crisis
management. Read the paper to let yourself known about what crisis management
propose in supply chain.

Supply Chain Inventory Management and the

Value of Shared Information
ABSTRACT: In traditional supply chain inventory management, orders are
the only information firms’ exchange, but information technology now allows firms
to share demand and inventory data quickly and inexpensively. This paper studies
the value of sharing these data in a model with one supplier, N identical retailers,
and stationary stochastic consumer demand. There are inventory holding costs
and back-order penalty costs. It compares a traditional information policy that does
not use shared information with a full information policy that does exploit shared
information.

Dell’s Supply Chain Management Strategy

Published: Jan 2008
 ABSTRACT: The focus of this case study is the supply chain management
practices of Dell. Dell has been following its unique ‘direct build-to-order’ sales
model for more than 20 years. Customers can plan their own configuration and
place orders directly with the company via the phone or its Web site. Over the
years, Dell’s supply chain efficiencies and direct sales gave it a competitive
advantage.

CAN DELL REGAIN ITS MARKET LEADER POSITION FROM HP?

In 2006 however, Dell faced several problems. Many customers complained
about long delays in supplies. Recall of Sony battery cells in its laptops brought
undesirable media hype to the company. Increasing discontent of customers led to
a slowdown in sales. Consequently, Dell lost its market leadership to Hewlett-
Packard Co. (HP). Industry analysts felt that, with Dell’s competitors also improving
their supply chains and matching Dell’s direct model, the company had been losing
its competitive edge. Dell will have to bear additional costs with its foray into retail
distribution thereby minimizing its cost advantage. Besides, profit margins of Dell
will drop further since it will have to offer incentives to compete with HP in retail
stores. Though Dell spruced up its product design and range but Apple is clearly far
ahead of it. Many experts feel that such new initiatives will only distract Dell from
its supply chain operations.

This case study covers the following issues:

• Examine and analyze Dell’s Direct model, its basic working, success and future
challenges
• Typical Working of Dell’s Supply Chain and future supply chain challenges
• Highlights Dell’s evolving Supply Chain practices and strategy and steps being
taken by it to recapture its lost market leader position

Case Snippets/Update

Dell’s market share in U.S. and Worldwide (in Q1 2009) compared to other top PC makers
• In year 2010, PC sales are expected to rise 12.6 percent, according to research
firm Gartner.

ABC INVENTORY CLASSIFICATION (SELECTIVE

INVENTORY
CONTROL-SIC)
This is a popular inventory control technique, which is an adaptation of
Pareto's Law. In a study of the distribution of wealth and income in Italy, Vilfredo
Pareto, an Italian Economist, observed in 1897 that a very large percentage of the
total national income and wealth was concentrated in the hands of a small
percentage of the population. Believing that this reflected a universal principle, he
formulated the axiom that the significant items in a given group normally
constitute a small portion of the total items in the group and that majority of the
items in the total will, in the aggregate, be of minor significance. Pareto expressed
this empirical relationship mathematically. But, the rough pattern is 80 per cent of
the distribution is accounted for by 20 per cent of the group membership.

The 80-20 pattern holds true in most inventory situations, where it can be
shown that approximately 20 per cent of the items account for 80 per cent of total
cost (unit cost times usage quantity). In the typical ABC-Classification, these are
designated as A-items, and the remaining 80 per cent of the items become B's and
C's, representing the 30 per cent that account for 15 per cent of cost, and the
bottom 50 per cent that account for 5 per cent of cost. The idea behind ABC-
Classification is to apply the bulk of the limited planning and control resources to
the A-items, "where the money is", while, the expenses on the other classes that
have demonstrably much less effect on the overall inventory investment, is kept to
a minimum. The ABC control concept is implemented by controlling A-items "more
tightly" than B and C items, in descending order.

Today, the principle of graduated control stringency may be somewhat

difficult to comprehend, But, in pre-computer days the degree of control was
equated with the frequency of
reviews of a given inventory
item's record. Controlling
'tightly' meant reviewing
frequently. The frequency of
review, in turn, tended to
determine the order quantity. A-
items would be reviewed
frequently and ordered in small
quantities, in order to keep
inventory investment low.
A typical ABC-classification, which is an acronym for "Always Better Control", is
graphically represented below.

The rationale of ABC-classification is the impracticality of giving an equally

high degree of attention to the record of every inventory item, due to limited
information-processing capacity. With computers now available, this limitation has
disappeared and the ABC concept tends to become more or less irrelevant.