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How Inventory Affects Supply Chain


of cost
Influences responsiveness
Impacts material flow time: Time elapsed between
when material enters the supply chain to when it
exits the supply chain
Impacts throughput: Rate at which sales to end
consumers occur
I = RT (Littles Law)
I = inventory; R = throughput; T = flow time

Decisions on Inventory

inventory: Average amount of inventory used to satisfy

demand between shipments
Cost of one time bulk order vs cost of multiple small orders
Safety inventory: Inventory held in case demand exceeds
Cost of carrying too much inventory versus cost of losing sales
Seasonal inventory: Inventory built up to counter predictable
variability in demand
Cost of carrying additional inventory versus cost of flexible
Overall trade-off: Responsiveness versus efficiency
More inventory: greater responsiveness but greater cost
Less inventory: lower cost but lower responsiveness

How Transportation Affects Supply


for moving the product between

different stages in the supply chain
Decides the responsiveness and efficiency of the
Greater responsiveness is achieved by using
faster transportation modes .
Greater efficiency is achieved by minimising
associated cost.
Also has its impact on facilities and inventory.

Decisions on Transportation

Choice of transportation mode

air, truck, rail, ship, pipeline, electronic
difference in cost, speed, size of shipment,

Design of transportation network

Route i.e. path along which a product is
Network i.e. collection of locations and routes

Overall trade-off is between

responsiveness and efficiency

Decisions on Transportation
Average inbound/outbound transportation
Cost of moving product in to/outside
of a facility as a percentage of cost of goods
sold or percentage of sales.
Average incoming/outgoing shipment size:
Average number of units in each
incoming/outgoing shipment.
Average inbound/outgoing transportation cost
per shipment: Average transportation cost of
each incoming/outgoing delivery.
Fraction transported by mode: Fraction of
transportation by using each mode of

How Information Affects Supply

Connection between various stages of
supply chain. Coordination increases
supply chain responsiveness and
Information is crucial to daily operation
of each stage in a supply chain like
production scheduling and maintaining
inventory levels.
Allows supply chain to become more
efficient and more responsive at the
same time (reduces the need for a

Components of Information

Push (MRP) versus pull (demand

information transmitted quickly
throughout the supply chain)
Coordination and information sharing
Forecasting and aggregate planning
Enabling technologies

ERP systems
Supply Chain Management software