Supply chain management
Chapter 2
2.1 inventory and supply chains
Inventory can be defined as the quantity of goods that is available on hand or in stock. There
are 3 main formats of inventory:
1. Raw material
2. Work in progress
3. Finished goods
Why is there inventory?
- To protect against uncertainty. This can be caused by variations in demand or restrictions in
supply.
- Cost reduction through inventory is achieved when stock is held close to the customer.
- Protect against quality defects. A product that is faulty can be substituted quickly when
inventory is held.
- Stabilize manufacturing.
- Anticipation shock is similar to stabilizing manufacturing
Managing inventory is about balancing supply and demand.
There are several different types of inventories:
- Cycle or replenishment stock: this stock keeps the supply chain moving. Cycle stock is
the inventory necessary to meet the normal daily demand.
- Safety stock: this stock buffers against forecast error and the supplier’s unreliability.
- In-transit stock: this stock is in the process of being transported to a stocking of delivery
point.
- Seasonal stock: this stock is built up in advance to meet increased sales volumes during a
particular time of the year.
- Promotional stock: this stock feeds into marketing campaigns and advertising.
- Speculative stock: this stock is held to protect against price increases or periods of limited
availability.
- Dead or obsolete stock: this stock is no longer usable or saleable in the market.
Cycle stock
The average stock holding calculation is based on the order quantity. The average stock is defined as:
AS= Q/2
Where AS= average stockholding and Q= order quantity
, Safety stock
There are 2 parts of the equation to account for in the safety stock calculation:
a. Safety stock supply that covers unplanned production and delivery delays
b. Safety stock demand that covers unplanned changes in demand
Safety stock= (a) + (b)
(a)= safety stock supply
(b)= safety stock demand
(a)Safety stock supply= average demand x supplier uncertainty
(b) safety stock demand= standard deviation of demand x service level factor x √LT + SU
Example part b:
Forecast error = 50
service level factor= 1.64
lead-time= 4 days
supplier uncertainty= 2 days
50 x 1.64 x √2+4 = 200.85 = 201
To get the total safety stock part a = 1000 units and part b = 201 units must be summed up. The final
approximate safety stock calculation would be 1201 units.
Green inventory management: when the focus is not just on the cost and service but also the carbon
footprint of the inventory.
There are 4 ways in which you can positively influence your safety stock position:
1. Reduce lead-time: reducing it from 4 days to 1 day, less safety stock is needed to safeguard
supply.
2. Reduce supplier uncertainty: as suppliers become more reliable, a considerably lower safety
stock can be held.
3. Reduce forecast error: demand uncertainty can be reduced and thus less safety stock will be
needed.
4. Reduce service level: will improve the overall safety stock position but this should be
discussed and agreed together with your customer.
2.2 demand and supply planning
Demand can be segregated into various categories:
- Level of demand
demand for a certain item can be classified as high or low.
- Frequency of demand
There is fast demand and slow demand.
- Patterns of demand
It can be described as stable, trend or seasonal.
- Product life cycle positioning
There are 5 distinct phases in a product life cycle, launch, emerging, established, decline, withdrawal.
Chapter 2
2.1 inventory and supply chains
Inventory can be defined as the quantity of goods that is available on hand or in stock. There
are 3 main formats of inventory:
1. Raw material
2. Work in progress
3. Finished goods
Why is there inventory?
- To protect against uncertainty. This can be caused by variations in demand or restrictions in
supply.
- Cost reduction through inventory is achieved when stock is held close to the customer.
- Protect against quality defects. A product that is faulty can be substituted quickly when
inventory is held.
- Stabilize manufacturing.
- Anticipation shock is similar to stabilizing manufacturing
Managing inventory is about balancing supply and demand.
There are several different types of inventories:
- Cycle or replenishment stock: this stock keeps the supply chain moving. Cycle stock is
the inventory necessary to meet the normal daily demand.
- Safety stock: this stock buffers against forecast error and the supplier’s unreliability.
- In-transit stock: this stock is in the process of being transported to a stocking of delivery
point.
- Seasonal stock: this stock is built up in advance to meet increased sales volumes during a
particular time of the year.
- Promotional stock: this stock feeds into marketing campaigns and advertising.
- Speculative stock: this stock is held to protect against price increases or periods of limited
availability.
- Dead or obsolete stock: this stock is no longer usable or saleable in the market.
Cycle stock
The average stock holding calculation is based on the order quantity. The average stock is defined as:
AS= Q/2
Where AS= average stockholding and Q= order quantity
, Safety stock
There are 2 parts of the equation to account for in the safety stock calculation:
a. Safety stock supply that covers unplanned production and delivery delays
b. Safety stock demand that covers unplanned changes in demand
Safety stock= (a) + (b)
(a)= safety stock supply
(b)= safety stock demand
(a)Safety stock supply= average demand x supplier uncertainty
(b) safety stock demand= standard deviation of demand x service level factor x √LT + SU
Example part b:
Forecast error = 50
service level factor= 1.64
lead-time= 4 days
supplier uncertainty= 2 days
50 x 1.64 x √2+4 = 200.85 = 201
To get the total safety stock part a = 1000 units and part b = 201 units must be summed up. The final
approximate safety stock calculation would be 1201 units.
Green inventory management: when the focus is not just on the cost and service but also the carbon
footprint of the inventory.
There are 4 ways in which you can positively influence your safety stock position:
1. Reduce lead-time: reducing it from 4 days to 1 day, less safety stock is needed to safeguard
supply.
2. Reduce supplier uncertainty: as suppliers become more reliable, a considerably lower safety
stock can be held.
3. Reduce forecast error: demand uncertainty can be reduced and thus less safety stock will be
needed.
4. Reduce service level: will improve the overall safety stock position but this should be
discussed and agreed together with your customer.
2.2 demand and supply planning
Demand can be segregated into various categories:
- Level of demand
demand for a certain item can be classified as high or low.
- Frequency of demand
There is fast demand and slow demand.
- Patterns of demand
It can be described as stable, trend or seasonal.
- Product life cycle positioning
There are 5 distinct phases in a product life cycle, launch, emerging, established, decline, withdrawal.
