Lecture7 Overviewof

Inventory&NetworkDesign

BM0472InternationalTradeManagement

LessonObjectives
Inventory
Appreciatetheimplicationsofinventoryonbusinesss
profitabilityandcashflow
Explainthemajorreasonsforcarryinginventory

DistributionNetworks
Understandtheroleoffacilitydecisions
Identifythefactorsinfluencingnetworkdesign

Inventory
Appreciatetheimplicationsofinventoryon
businesssprofitabilityandcashflow
Explainthemajorreasonsforcarryinginventory

Profitthroughinventorymanagement

TightLtd

Sales=5million
Employment=85staff

FixedAssets=2.5million

SlackLtd

Sales=5million
Employment=85staff

FixedAssets=2.5million

TightLtd

Independentcompany

Inventory=0.5million

SlackLtd

Apartofamultinationalgroup

Inventory=2.5million

TightLtd

SlackLtd

Inventory=0.5million

Inventory=2.5million

EXTRA COSTS
Costofinventory=2million
Interests=300000
Holdingcosts=23000

Holdingcost

ExtracostsofSlack

ComparehowwellTightandSlackaredoing

Returnon
sales

Returnon
assets

Profit

Sales

Profit

Assetsemployed

TightLtd

SlackLtd

Remarks

250k

5,000 k

(73 k)

5,000k

Slackhas
additionalcosts
of323k

5%

(1.46%)

250k

3,000 k

(73k)

5,000 k

8.3%

(1.46%)

Freeoutcashflowtoo,forinvestment,wagesetc.

Slackhas
additional stock
of2million

Inventoryhidesproblems!
Inventoryhideswastes!

Wheninventoryisreduced,
problemsareexposed

ReasonsforInventory

12

Batchingeconomiesorcyclestocks
Arisesfromthreesources
procurement
production
transportation

Scaleeconomiesareoftenassociatedwithallthree,which
canresultintheaccumulationofinventorythatwillnotbe
usedorsoldimmediately
13

Uncertainty/SafetyStocks
Allorganizationsarefacedwithuncertainty.
Onthedemandside,thereisusuallyuncertaintyinhow
muchcustomerswillbuyandwhentheywillbuyit.
Onthesupplyside,theremightbeuncertaintyabout
obtainingwhatisneededfromsuppliersandhowlongit
willtakeforthefulfillmentoftheorder.

Time/InTransitandWorkinProcess
Stocks
Thetimeassociatedwithtransportationmeansthateven
whilegoodsareinmotion,aninventorycostisassociated
withthetimeperiod.Thelongerthetime,thehigherthe
cost.
WIPinventories,associatedwithmanufacturing,canbe
significantwhilethelengthoftimetheinventorysitsina
manufacturingfacilitywaitingandshouldbecarefully
evaluatedinrelationshiptoschedulingtechniquesandthe
actualmanufacturing/assemblytechnology.
15

SeasonalStocks
Seasonalitycanoccurinthesupplyofrawmaterials,inthe
demandforfinishedproduct,orinboth.
Thosefacedwithseasonalityissuesareconstantly
challengedwhendetermininghowmuchinventoryto
accumulate.
Seasonalitycanimpacttransportation.

16

AnticipatoryStocks
Whenanorganizationanticipatesthatanunusual
eventmightoccurthatwillnegativelyimpactitssource
ofsupplyorproductioncycle.
E.g.politicalunrest,badweather,labour strikes,price
hikes

17

Distribution Networks
Understandtheroleoffacilitydecisions
Identifythefactorsinfluencingnetworkdesign
Describeaframeworkfornetworkdesigndecisions

Response me:1weekRequire:1facility

Customers
Facility

Response me:5daysRequire:2facili es

Customers
Facility

Response me:3daysRequire:5facili es

Customers
Facility

Response me:nextdayRequire:13facili es

Customers
Facility

Response me:samedayRequire:26facili es

Customers
Facility

ServiceandNumberofFacilities
Number
of
Facilities

Response
Time

FactorsAffectingNetworkDesign
Atthehighestlevel,performanceofadistribution
networkisevaluatedalongtwodimensions:
Customersneedsthataremet
Costofmeetingcustomerneeds
Changingthedistributionnetworkaffectsthecostof
inventories,transportation,facilitiesand`information

CostsandNumberofFacilities
Cost

Inventory
Movetothe
lastslide!

Facility

Transportation

Numberoffacilities
5-27

FactorsInfluencingNetworkDesign
Decisions
Strategic
Competitive
Technological
Macroeconomic
Political
Infrastructure
Logisticsandfacilitycost

StrategicFactor
CompetitiveStrategy
Efficiencyvs Responsiveness
Efficiency
Lowestcostlocationformanufacturingfacilities,evenif
locationisveryfarfrommarketsserved
Responsiveness
Locatefacilitiesclosertothemarketandmayselectahigh
costlocationifthechoiceallowsthefirmtoreactquickly
tochangingmarketneeds
Conveniencevs Discountstores
Manysmallconveniencestoresinthesamearea
Onelargediscountstorestoservethewholearea

StrategicFactor
StrategicRolesofFacilities

Offshorefacility Lowcostfacilityforexportproduction
Sourcefacility Lowcostfacilityforglobalproduction
Serverfacility Regionalproductionfacilitytomeetspecificrequirement
Contributorfacility Regionalproductionfacilitywithdevelopmentskills
(e.g.localcustomisation)

Outpostfacility Regionalproductionfacilitybuilttogainlocalskills
Leadfacility Facilitythatleadsindevelopmentandprocesstechnologies

CompetitiveFactors
Positiveexternalitiesbetweenfirms
Locatefacilitiesclosetocompetitorstoreapbenefitsforall

Locatingtosplitthemarket
Whenfirmsdonotcontrolprice,theylocatecloseto
competitorstogainlargermarketshare

Customerresponsetimeandlocalpresence
Shortresponsetime nearercustomer

TechnologicalFactors
Characteristicsofavailableproductiontechnologies
Highfixedcost
o Fewhighcapacitylocations
Significanteconomiesofscale

Lowfixedcost
o Manylocalfacilities
Lowertransportationcosts

Flexibilityofproductiontechnology
Inflexibleproductiontechnology
o Manylocalfacilitiestoservelocalmarkets

Flexibleproductiontechnology
o Consolidatemanufacturinginafewlargefacilities

MacroeconomicFactors
TariffsandTaxIncentives
Stronginfluenceonlocationdecisions
o Hightariffs
o Taxincentivesforareaoflowereconomicdevelopment
o FTZ(FreeTradeZone)

ExchangeRateandDemandRisk
Fluctuationsinexchangerate
o Significantimpactonprofits

Fluctuationsindemand
o Excesscapacityinfactoryservingthatmarket,whichneedsto
bedivertedtoanothermarket

PoliticalFactors
Politicalstability
Includinggovernmentstability,corruptionlevel,
relationshipwithothercountries,policiestowards
foreigninvestors

Legalsystems
Businesslawsmustbeclearandindependentofthe
governingparty
o Firmsfeelthattheyhaverecoursewhenthereisaproblem
o e.g.enforcementofIPlaws

InfrastructureFactors
Availabilityofgoodinfrastructure
Prerequisitetofacilitydecisions

Keyinfrastructureelements
Availabilityofsites
Availabilityofskilledlabour
Proximitytotransportationterminals
o Railstations
o Airports
o Seaports

Highwayaccessandtrafficcongestion
Localutilities

LogisticsandFacilityCosts
Inventorycosts
Decentralizedfacilities higherinventorycosts

Transportationcosts
Inboundtransportationcosts
o Lowerbecauseinboundshipmentsarebigger

Outboundtransportationcosts
o Higherbecauseoutboundshipmentsrequirehighresponsiveness

Facilitycosts
Setupcost
o Fixedcostwhichincreaseswithmorefacilities

Operatingcosts
o Variablecostswhichchangesaccordingtothelevelofproduction

CostsandNumberofFacilities
Cost

Inventory

Facility

Transportation

Numberoffacilities
5-38

Reference
Chapter9 ManagingInventoryintheSupplyChain
ManagingSupplyChains:ALogisticsApproach,International
Edition;9thed,JohnJ.Coyle,C.JohnLangley,Jr.,RobertA.
Novack,BrianJ.Gibson;Cengage Learning;2013
Chapter5 NetworkDesignintheSupplyChain
SupplyChainManagement Strategy,Planning,andOperation,
2ndEdition,SunilChopra&PeterMeindl,PrenticeHall,2004