Inventory

Role in the supply chain

Role in the competitive strategy
Components of inventory decisions

© 2007 Pearson Education 3-1

Inventory: Role in the Supply Chain

 Inventory exists because of a mismatch‫ عدم التطابق‬between supply and
demand
 An important role that inventory plays in the supply chain is to increase the
amount of demand that can be satisfied by having the product ready and
available when the customer wants it.
– material flow time: time elapsed between when material
enters the supply chain to when it exits the supply chain
– Throughput rate ‫معدل االنتاجية‬
» rate at which sales to end consumers occur
» I = RT (Little’s Law)
» I = inventory; R = throughput rate ; T = flow time

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Example,

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 Inventory: Role in Competitive
Strategy
If responsiveness is a strategic competitive priority, a
firm can locate larger amounts of inventory closer to
customers.
If cost is more important, inventory can be reduced to
make the firm more efficient.
Example 3.2 – Amazon
H.W Explain how Amazon company make a balance
of responsiveness and efficiency? Page 48

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Components of Inventory
Decisions
1. Cycle inventory
– Average amount of inventory used to satisfy demand between shipments
– Depends on lot size
2. Safety inventory
– inventory held ‫ محتفظ‬in case demand exceeds expectations; it is held to
counter uncertainty
3. Seasonal inventory
– inventory built up to counter predictable variability in demand

– ‫المخزون المتراكم لمواجهة التقلبات المتوقعة في الطلب‬

© 2007 Pearson Education 3-5

OVERALL TRADE-OFF: RESPONSIVENESS VERSUS

EFFICIENCY

The fundamental trade-off that managers face when

making inventory decisions is between responsiveness
and efficiency. HOW? Explain it?
1- Increasing inventory generally makes the supply
chain more responsive to the customer.
2-A higher level of inventory also facilitates a
reduction in production and transportation costs
because of improved economies of scale in both
functions. This choice, however, increases inventory
holding costs.

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 Overall trade-off: Responsiveness versus
efficiency
– more inventory: greater responsiveness but
greater cost
– less inventory: lower cost but lower
responsiveness

© 2007 Pearson Education 2-7

Transportation
Role in the supply chain
Role in the competitive strategy
Components of transportation decisions

© 2007 Pearson Education 3-8

Transportation: Role in
the Supply Chain
Transportation moves the product between stages in
the supply chain
Impact on responsiveness and efficiency
Faster transportation allows greater responsiveness
but lower efficiency
The type of transportation a company uses also affects
inventory and facilities
 Dell, for example, flies some components from Asia because
doing so allows the company to lower the level of inventory it
holds. Clearly, such a practice also increases responsiveness
but decreases transportation efficiency because it is more costly
than transporting parts by ship.
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 Transportation:
Role in the Competitive Strategy
If responsiveness is a strategic competitive priority,
then faster transportation modes can provide greater
responsiveness to customers who are willing to pay
for it
Can also use slower transportation modes for
customers whose priority is price (cost)
Can also consider both inventory and transportation to
find the right balance
Example 3.3: Blue Nile.
 H.W: Why Blue Nile provides low prices to their customer
comparing to its competitors?
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Components of
Transportation Decisions
1. DESIGN OF TRANSPORTATION NETWORK:
– The transportation network is the collection of
transportation modes, locations, and routes along
which product can be shipped.
– A company must decide whether transportation
from a supply source will be direct to the demand
point or will go through intermediate consolidation
points.
– Design decisions also include whether or not
multiple supply or demand points will be included
in a single run.
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Components of
Transportation Decisions
Mode of transportation:
– air, truck, rail, ship, pipeline, electronic transportation
– Each mode vary in cost, speed, size of shipment, flexibility
Route and network selection
– route: path along which a product is shipped
– network: collection of locations and routes
Inbound transportation decisions impact the cost of
goods sold while outbound transportation costs are
part of the selling, general, and administrative
expenses.
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 Thus, transportation costs affect the profit margin. A
manager should track the following transportation-related
metrics that influence supply chain performance:

 Average inbound transportation cost typically measures the cost of

bringing product into a facility as a percentage of sales or cost of goods sold
(COGS).‫يقيس تكلفة جلب المنتج إلى المنشأة كنسبة مئوية من المبيعات أو تكلفة السلع المباعة‬
 Average incoming shipment size‫ حجم الشحنة الواردة‬measures the average
number of units or dollars in each incoming shipment at a facility.
 Average inbound transportation cost per shipment this metric identifies
opportunities for greater economies of scale in inbound transportation.
 Average outbound transportation cost measures the cost of sending
product out of a facility to the customer.
 Average outbound shipment size measures the average number of units or
dollars on each outbound shipment at a facility.
 Average outbound transportation cost per shipment measures the
average transportation cost of each outgoing delivery.

© 2007 Pearson Education 2-13

OVERALL TRADE-OFF: RESPONSIVENESS

VERSUS EFFICIENCY

The fundamental trade-off for transportation is

between the cost of transporting a given product
(efficiency) and the speed with which that product is
transported (responsiveness).
Using fast modes of transport raises responsiveness
and transportation cost but lowers the inventory
holding cost.

© 2007 Pearson Education 2-14