Unit 2 SCM
Unit 2 SCM
Unit 2 SCM
Unit-2
Cost = Expenses to
Expenses incurred in producing or
produce/deliver goods or
Cost delivering goods or services. Measure expenses
services.
Amount charged to
Price = Amount charged
Amount charged to customers for customers for goods or
Price for a product or service.
goods or services. services.
inventory
Purchasing inventory: Ready-to-sell goods are purchased
management and delivered to the warehouse or directly to the point of
sale.
1.UPC
2.Code 128
3.QR Code
4.Data Matrix
3. Just-in-Time Inventory Management 4. ABC Analysis
5. Drop-shipping 6. Cross-Docking
8. Bulk Shipment
7. Perpetual Inventory System
9. Periodic Inventory System 10. Material Requirements Planning
System
How to Choose an Inventory Management System?
1.Cost Control:
Effective inventory management helps control carrying costs associated with
storage, insurance, and obsolescence. By optimizing inventory levels, businesses can
reduce holding costs and improve profitability.
3.Customer Satisfaction:
Maintaining the right level of inventory ensures that products are readily available
to meet customer demand. This leads to improved customer satisfaction as
customers can get what they need when they need it.
4.Avoiding Stockouts:
Inventory management helps prevent stockouts, where products are out of stock,
which can lead to lost sales, dissatisfied customers, and damage to the company's
reputation.
5. Demand Forecasting:
Inventory management requires businesses to forecast demand accurately. This
process improves the understanding of customer preferences and market trends,
leading to better decision-making and product development.
6. Supplier Relationships:
Effective inventory management enables businesses to negotiate better terms with
suppliers, such as lower prices or faster delivery times, as they can demonstrate
reliability and consistent demand.
13. Sustainability:
Reducing excess inventory helps reduce waste and environmental impact.
Sustainable inventory practices can align with corporate social responsibility goals.
Two types:-
• Periodic Ordering:-
❖ Inventory systems based on order cycles
❖ Reduces order, billing and shipment cost
❖ amplifies variability and contributes bullwhip
• Push:-
➢ Company experiences regular surges in demand
➢ All customers orders should be spread out evenly
throughout a week or month
PRICE FLUCTUATION
Price fluctuations are upward or downward swings in
the prices of products in an economy.
• Forward buy – items were bought in advance
of requirements.
• Forward buying has a negative effect
• Forward buy is a good idea-If cost of holding
inventory is less than the price differential.
LONG LEAD TIMES
• A lead time is the latency between the initiation and execution
of a process.
MANUFACTURER
DISTRIBUTOR
UNITS
RETAILER
CUSTOMER
0 20 40 60 80 100 120
BULLWHIP EFFECT EXAMPLE
In the above example, the actual demand for customer is 10 units, the retailer
then orders 15 units from the distributor , an extra 5 units in order to ensure they
don’t run out of stock.
Then the supplier orders 40 units from manufacturer so that to buy in bulk to
ensure enough stock to provide timely shipment of goods to retailer
The manufacturer then receives the order and it orders from their supplier in bulk
i.e. 100 units to ensure economy of sale in production to meet demand.
Now 100 units have produced to meet demand of 10 units which means the
retailer has to increase demand by dropping prices or finding more customers that
causes bullwhip effect.
How to counteract Bullwhip effect
2. Decision Making:
•Accurate cost data empowers supply chain
managers to make informed decisions about
sourcing, production, transportation, and inventory
management.
•It helps in selecting the most cost-effective options
and avoiding decisions that could lead to
unnecessary expenses.
3. Performance Measurement:
•Proper costing allows for benchmarking and comparing
the costs and performance of different suppliers,
transportation routes, and distribution channels.
•Metrics such as cost per unit, cost per mile, and total
landed cost enable effective performance measurement
and analysis.
4. Process Optimization:
•Costing analysis highlights processes that are costly or
inefficient. This insight drives the optimization of these
processes to reduce expenses and improve productivity.
•For instance, eliminating bottlenecks, reducing lead times,
and optimizing order quantities can lead to cost savings.
5. Inventory Management:
•Effective costing aids in optimizing inventory
levels. Overstocking ties up capital, while
understocking can lead to missed sales
opportunities.
•By considering holding costs, ordering costs,
and stockout costs, businesses can find the
right balance between inventory levels and
costs.
6. Supplier Relationships:
•Understanding the total cost of ownership (TCO) helps
in evaluating supplier relationships beyond just the
purchase price.
•Businesses can select suppliers based on factors like
quality, lead times, and reliability, which contribute to
overall cost savings.
7. Risk Management:
•Proper costing includes evaluating risks associated
with supply chain disruptions and their potential
financial impact.
•By factoring in risk mitigation strategies in costing
decisions, businesses can enhance supply chain
resilience.
8. Continuous Improvement:
•Regular costing analysis encourages a culture of
continuous improvement within the supply chain.
•As new cost-saving opportunities arise, the supply
chain can adapt to changing market conditions and
customer demands.
• Purchase Price:
✓ The direct cost of acquiring products or materials from suppliers.
✓ Negotiating favorable purchase prices can lead to significant cost savings.
• Supplier Relationship Costs:
✓ Costs related to managing relationships with suppliers, including
communication, collaboration, and maintaining a strong partnership.
✓ Strong supplier relationships can lead to better terms, discounts, and
improved collaboration.
• Sourcing and Supplier Selection Costs:
✓ Costs associated with the process of identifying, evaluating, and selecting
suppliers.
✓ Includes activities such as supplier research, due diligence, and conducting
supplier audits.
• Transaction Costs:
✓ Expenses tied to processing orders, invoices, and payments.
✓ Efficient order processing systems can help reduce transaction costs.
•Strategic Sourcing: Identifying and selecting suppliers based on factors beyond just
purchase price, such as quality, reliability, and long-term benefits.
•Negotiation: Skillful negotiation can lead to favorable terms, volume discounts, and
reduced purchase prices.
•Supplier Collaboration: Close collaboration with suppliers can lead to process
improvements and cost-saving opportunities.
•Technology Adoption: Implementing procurement software and tools can streamline
processes and reduce transaction costs.
•Supply Chain Transparency: Transparency in the supply chain can help identify
inefficiencies and areas for cost reduction.
•Total Cost of Ownership (TCO) Analysis: Considering all costs associated with a
procurement decision, including hidden costs, helps in making informed choices.
2. Transportation costs:
It refer to the expenses associated with moving goods and products
from one location to another within the supply chain. It is a critical
component of supply chain management that directly impacts
overall logistics efficiency and cost structure.
• Labor Costs:
✓ Expenses associated with the wages, salaries, benefits, and training of
transportation personnel, such as drivers, pilots, and crew members.
• Insurance Costs:
✓ Premiums paid for insurance coverage on transported goods and
transportation vehicles to mitigate the risks of loss or damage.
• Storage Costs:
✓ Costs incurred when goods are held at transit points,
such as warehouses or distribution centers, before
reaching their final destination.
• Capital Costs:
✓ The cost of financing inventory, including interest payments on loans used to
acquire or maintain inventory.
• Depreciation Costs:
✓ Reduction in the value of inventory due to factors like wear and tear, changes in
technology, or market trends.
• Taxes:
✓ Taxes levied on inventory, such as property taxes on stored goods or inventory
valuation taxes.
Strategies for Managing Inventory Holding Costs:
• Supplier Consolidation
• Inventory Optimization
• Transportation Optimization
• Process Efficiency Improvement
BREAK EVEN ANALYSIS
⦁ Total Cost:
The sum of the fixed cost and total variable cost for any given level of
production.
(Fixed Cost + Total Variable Cost )
⦁ Profit/ loss
The monetary gain or loss resulting from revenues after
subtracting all associated costs. (Total Revenue - Total Costs)
ASSUMPTIONS
⦁ The break-even point (in terms of Unit Sales (X)) can be directly
computed in terms of Total Revenue (TR) and Total Costs (TC) as:
where:
TFC is Total Fixed Costs,
P is Unit Sale Price, and
V is Unit Variable Cost
⦁ BEP= TFC/P-V
From this we can make out that the company should sell
products at higher price to reach BEP faster.
If the firm
chose to set
Break-Even Analysis price higher
than Rs.2
(say Rs.3)
Costs/Revenue TR (p = Rs.3) TR (p = Rs.2) TC the TR curve
VC would be
steeper –
they would
not have to
sell as many
units to
break even
FC
Q2 Q1 Output/Sales
Break-Even Analysis
If the firm
chose to set
TR (p = Rs.1)
Costs/Revenue prices lower
TR (p = Rs.2)
TC VC (say Rs.1) it
would need
to sell more
units before
covering its
costs
FC
Q1 Q3 Output/Sales
MARGIN OF SAFETY
⦁ Margin of safety represents the strength of the business. It
enables a business to know what is the exact amount it has
gained or lost and whether they are over or below the break
even point.
Margin of Safety
FC
Q3 Q1 Q2 ales
Output/S
USES OF BREAK EVEN POINT
◼ ABC Technique;
◼ HML Technique;
◼ VED Technique;
◼ SED Technique;
◼ FSN Technique; &
◼ EOQ Technique.
K E Y I NV E N TO RY T E R M S
Saf ety Stock:
• Safety stock or the buffer stock is an
ideal quantity of material that has to be
always maintained and it is drawn only
in the emergency situation.
• Safety stock is an extra quantity of a product
which is stored in the warehouse to prevent
an out-of-stock situation. It serves as
insurance against fluctuations in demand.
Le ad Time:
• It is the time lapse between placement of
an order and receipt of items including
their approval by quality control
department.
• This is counted on past experiences.
• Procurement of material has a long lead
time
Reorder Level:
5
REORDER QUANTITY METHOD
7
Reorder quantity systems
9
Definition of EOQ
“ EOQ is essentially an accounting formula that
determines at which the combination of order,
costs and inventory carrying cost are the least.
The result is the most cost effective quality to
order. In purchasing this is known as order
quantity, in manufacturing it is known as the
production lot size.”
- Dave Piasecki
𝗈It is the quantity of the material to be ordered at one time.
𝗈 This quantity is fixed in such a manner as to minimize the
cost of ordering and carrying the stock so that only correct
quantity of the material is to be purchased .
𝗈 There should be no over stock or under stock and balance
should be made between the cost of carrying and the cost of
carry out .
𝗈 EOQ formula is widely used for computing the minimum annual
cost for ordering and stocking each item.
EOQ depends upon the two type of
costs:
A. Procurement cost -
➢ Receiving quotations.
➢ Processing purchase requisition.
➢ Follow up and expending the purchase order .
➢ Receiving the items and inspecting the items .
➢ Processing vendors invoice .
B. Carrying cost -
➢ Interest on the capital investment .
➢ Cost of the storage facility.
➢ Cost involved in deterioration .
➢ Cost of insurance property tax .
EOQ = Square Root of 2AP/S
Where as ,