Module V OSCM

1. ROLE OF INFORMATION TECHNOLOGY IN INVENTORY MANAGEMENT,

➢ It is no exaggeration to state that the use of IT systems to improve inventory management

has contributed much of the cost savings achieved so far in most supply chains. Until the
1980s, inventory was generally managed using rules of thumb such as holding three
months of demand in the warehouse. These levels were often (although not always) far
from appropriate, resulting in too much of the wrong items and too little of the right ones.
The errors were often very large when products had high demand variability or varying
levels of criticality. A second major contributor to excess inventories was the fact that
each location managed its inventories independently, ignoring inventories at other
facilities. The end result was a bloated inventory system with relatively poor service
levels.
➢ The first contribution of IT systems was to move inventory management from rules of
thumb to setting inventories based on historical demand and desired service levels. IT
systems allowed this analysis for potentially millions of SKUs and for the inventory
levels to be recalculated as demand changed. The ability to analyze and change
inventories in response to changes in demand often results in significantly
➢ lower inventories and improved service levels at the same time. Over time, IT inventory
management systems have evolved to incorporate more sophisticated techniques for
managing inventory. They include different types of demand distributions beyond the
normal distribution to better model demand.
➢ One of the major improvements since the mid-1990s has been the incorporation of
multiechelon modeling that allows the analysis of inventories across the supply chain
network rather than at each separate location. Local analysis often leads to duplication of
inventories because each location sets its inventory levels independently.
➢ Multiechelon analysis, in contrast, attempts to reduce total network inventories by
positioning inventories appropriately. More advanced companies have linked their
inventory systems to those of their suppliers and customers. This is important, as the
amount of inventory you want to hold depends on how much your customer holds and
how much your suppliers have or what they are producing. IT systems also allow
 inventory management applications to be linked to production planning so that inventory
decisions are taken in conjunction with production decisions.
➢ With the growth in product variety, decrease in product life cycles, and rapid fluctuations
in demand, it is almost impossible to manage inventories today without the use of IT
systems. ITsystems improve inventory management through their ability to act on a large
number of products, to be frequently updated, and finally, to coordinate with other
demand and supply planning systems both within the enterprise and across the supply
chain.
➢ There is, however, plenty of room for improvement in inventory management systems.
One area for improvement is the modeling of demand in different circumstances. The use
of oversimplified demand distributions is often inaccurate and can even lead to inventory
levels that are worse than the use of rules of thumb. As an example, consider stocking
demand for spare parts in a production facility. The mean demand for a part might be
quite low, but when it is needed, not only is it critical, but perhaps a specific set of other
parts are also needed. Modeling the demand as normal and independent across parts is
likely to give poor results.
➢ Another area for improvement in inventory management systems is the integration with
other IT systems across the supply chain. Inventory buffers the variation of demand and
supply within the supply chain. Thus, if inventory management systems do not
communicate seamlessly with other planning and execution systems, inventory levels are
unlikely to be optimal. In particular, it is important that inventory management systems
communicate with demand planning systems to incorporate the impact of seasonality and
promotions. The inability of inventory management systems to provide visibility and
communicate effectively with other IT systems is often the biggest hurdle to their
success. Given the importance of inventories, vendors of inventory management systems
are the core supply chain management software providers.

➢ Thus, inventory management systems have played a central role in improving supply
chain performance. The significance of IT is likely to grow in the future as more supply
chain partners are beginning to set their inventory levels based on their partners'
inventory and capabilities.
2. TRANSPORTATION IN SUPPLY CHAIN.

• Transportation refers to the movement of product from one location to another as it

makes its way from the beginning of a supply chain to the customer.
• Transportation is an important supply chain driver because products are rarely produced
and consumed in the same l9cation.
• Transportation is a significant component of the costs incurred by most supply chains.
• The role of transportation is even more significant in global supply chains.

• Transportation network is a collection of nodes and links.

• Transportation originates and ends at nodes and travels on links.

• For most modes of transportation, infrastructure such as ports, roads, waterways, and
airports is required
• both at the nodes and links.
• Most transportation infrastructure is owned and managed as a public good throughout the
world. It is very important that infrastructure be managed in such a way that monies are
available for maintenance and investment in further capacity as needed.
• Transportation policy sets direction for the amount of national resources that go into
improving transportation infrastructure.
• Transportation policy also aims to prevent abuse of monopoly power, promote fair
competition, and balance environmental, energy, and social concerns in transportation.
MODES OF TRANSPORTATION AND THEIR PERFORMANCE
CHARACTERISTICS
Mode
• Air (includes truck and air)
• Truck
• Rail
• Water
• Pipeline
• Multimodal

Supply chains use a combination of the following modes of transportation:

• Air • Package carriers • Truck • Rail • Water • Pipeline • Intermodal
TRADE-OFFS IN TRANSPORTATION DESIGN
All transportation decisions made by shippers in a supply chain network must take
into account their impact on inventory costs, facility and processing costs, the cost of
coordinating operations, as well as the level of responsiveness provided to customers.
For example, Dell's use of package carriers to deliver PCs to customers increases transportation
cost but allows Dell to centralize its facilities and reduce inventory costs. If
Dell wants to reduce its transportation costs, the company must either sacrifice responsiveness
to customers or increase the number of facilities and resulting inventories to
move closer to customers.
The cost of coordinating operations is generally hard to quantify. Shippers should
evaluate different transportation options in terms of various costs as well as revenues
and then rank them according to coordination complexity. A manager can then make
the appropriate transportation decision. Managers must consider the following tradeoffs
when making transportation decisions:
• Transportation and inventory cost trade-off
• Transportation cost and customer responsiveness trade-off
TRANSPORTATION AND INVENTORY COST TRADE-OFF
The trade-off between transportation and inventory costs is significant when designing
a supply chain network. Two fundamental supply chain decisions involving this tradeoff
are
• Choice of transportation mode
• Inventory aggregation

Choice of Transportation Mode

Selecting a transportation mode is both a planning and an operational decision in a supply chain.
The decision regarding carriers with which a company contracts is a planning decision, whereas
the choice of transportation mode for a particular shipment is an operational decision. For both
decisions, a shipper must balance transportation and inventory costs. The mode of transportation
that results in the lowest transportation cost does not necessarily lower total costs for a supply
chain. Cheaper modes of transport typically have longer lead times and larger minimum
shipment quantities, both of which result in higher levels of inventory in the supply chain. Modes
that allow for shipping in small quantities lower inventory levels but tend to be more expensive.

Inventory aggregation
Transportation cost, however, generally increases when inventory is aggregated. If inventories
are highly disaggregated, some aggregation can also lower transportation costs. Beyond a point,
however, aggregation of inventories raises total transportation costs. Consider a bookstore chain
such as Borders. The inbound transportation cost to Borders is due to the replenishment of
bookstores with new books. There is no outbound cost because customers transport their own
books home. If Borders decides to
close all its bookstores and sell only online, it will have to incur both inbound and outbound
transportation costs. The inbound transportation cost to warehouses will be lower than to all
bookstores. On the outbound side, however, transportation cost will increase significantly
because the outbound shipment to each customer will be small and will require an expensive
mode such as a package carrier. The total transportation cost will increase on aggregation
because each book travels the same distance as when it was sold through a bookstore, except that
a large fraction of the distance is on the outbound side using an expensive mode of
transportation. As the degree of inventory aggregation increases, total transportation cost goes
up. Thus, all firms planning inventory aggregation must consider the trade-offs among
transportation, inventory, and facility costs when making this decision.

Inventory aggregation is a good idea when inventory and facility costs form a largefraction of a
supply chain's total costs. Inventory aggregation is useful for products with a large value-to-
weight ratio and for products with high demand uncertainty. For example, inventory aggregation
is very valuable for new products in the PC industry, because PCs have a large value-to-weight
ratio and demand for new products is uncertain. Inventory aggregation is also a good idea if
customer orders are large enough to ensure sufficient economies of scale on outbound
transportation. When products have a low value-to-weight ratio and customer orders are small,
however, inventory aggregation may hurt a supply chain's performance because of high
transportation costs. Compared to PCs, the value of inventory aggregation is smaller for best-
selling books that have a lower value-to-weight ratio and more predictable demand.

MAKING TRANSPORTATION DECISIONS IN PRACTICE

1. Align transportation strategy with competitive strategy. Managers should ensure that a firm's
transportation strategy supports its competitive strategy. They should design functional
incentives that help achieve this goal. Historically, the transportation function within firms has
been evaluated based on the extent to which it can lower transportation costs. Such a focus leads
to decisions that lower transportation costs but hurt the level of responsiveness provided to
customers and may raise the firm's total cost. If the dispatcher at a DC is evaluated based solely
on the extent to which trucks are loaded, he or she is likely to delay shipments and hurt customer
responsiveness to achieve a larger load. Firms should evaluate the transportation function based
on a combination of transportation cost, inventory cost, and the level of responsiveness
achieved with customers.
2. Consider both in-house and outsourced transportation. Managers should consider an
appropriate combination of company-owned and outsourced transportation to meet their needs.
This decision should be based on a firm's ability to handle transportation profitably as well as the
strategic importance of transportation to the success of the firm. In general, outsourcing is a
better option when shipment sizes are small, whereas
owning the transportation fleet is better when shipment sizes are large and responsiveness is
important. For example, Wal-Mart uses responsive transportation to reduce inventories in its
supply chain. Given the importance of transportation to the success of its strategy, it owns its
transportation fleet and manages it itself. This is made easier by the fact that it achieves good
utilization from its transportation assets because most of
its shipments are large.
3. Use technology to improve transportation performance. Managers must use information
technology to decrease costs and improve responsiveness in their transportation networks.
Software helps managers do transportation planning, modal selection, and build delivery routes
and schedules. Available technology allows carriers to identify the precise location of each
vehicle as well as the shipments the vehicle carries. Satellite based
communication systems allow carriers to communicate with each vehicle in their fleet. These
technologies help carriers lower costs and become more responsive to changes.
4. Design flexibility into the transportation network. When designing transportation networks,
managers should take into account uncertainty in demand as well as availability of
transportation. Ignoring uncertainty encourages a greater use of inexpensive and inflexible
transportation modes that perform well when everything goes as planned. Such networks,
however, perform very poorly when plans change. When managers account for uncertainty, they
are more likely to include flexible, though more expensive, modes of transportation within their
network. Although these modes may be more expensive for a particular shipment, including
them in the transportation option.