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Brij Mohan Institute of Management and Technology, Gurgaon

Operation and Supply Chain Management

Submitted to: Mr Jaibhagwan Suhag

Submitted by: Naveen Pal

Question 1:- What is the role of inventory in operation and supply chain management?
Answer 1:- Managing your operations to balance inventory in an effort to satisfy customer
demand that is, actual demand in the market for products and services without exposing
the company to unnecessary cost and risk is crucial. But this aspect of operations can be one of
the toughest.
Theres just no way around it for most businesses: If youre going to sell products, you need to
have stuff available for customers to purchase.
The goods that are available for immediate sale make up just one type of inventory; its known
as finished goods inventory (FGI). The other two categories are raw material inventory (RMI),
which are typically items purchased from a supplier and used to create the end product, and work
in process inventory (WIP), or product thats still going through the production process.
Managing customer and vendor relationships is a critical aspect of managing supply chains. In
many cases, the collaborative relationship concept has been considered the essence of supply
chain management. However, a closer examination of supply chain relationships, particularly
those involving product flows, reveals that the heart of these relationships is inventory movement
and storage. Much of the activity involved in managing relationships is based on the purchase,
transfer, or management of inventory. As such, inventory plays a critical role in supply chains
because it is a salient focus of supply chains.

Inventory is a stock or storage of goods.

Different types of Inventory are:
Raw materials and purchased parts.
Work in process (WIP).
Finished goods inventories or merchandise.
Maintenance and repairs (MRO) inventory.
Goods-in-transit to warehouses or customers (pipeline inventory).
Nature and Importance of Inventory
Inventories are necessary for a firm to operate efficiently and almost all business transactions
involve the delivery of a product or service in exchange for currency. For this reason, inventory
management is a very important part of core operations activities. Most retail businesses and
wholesale organizations acquire most of their revenue through the sale of merchandise
(inventory). In order for business and supply chains to run effectively, and efficiently they must
meet all the listed requirements for effective inventory management. Some of the main concerns
are the level of customer service and the cost of ordering, storing, and carrying inventory.

Therefore, in order to be a successful and profitable company, inventory management must be

managed wisely.
There are certain requirements that must be taken into consideration during the inventory
management process. These requirements are: keep track of the inventory, have a reliable
forecast of demand, knowledge of lead times and lead time variability, reliable estimates of
inventory holding costs, ordering costs, and shortage costs, and have a classification system for
inventory items.
Some important Functions of inventories includes 1. To meet anticipated customer demand (to meet the anticipation stocks, average demand)
2. To smooth production requirements (create seasonal inventories to meet seasonal demand)
3. To decouple operations (eliminate sources of disruptions)
4. To protect against stock-outs (hold safety stocks to prevent the risk of shortages)
5. To take advantage of order cycles (buys more quantities than immediate requirements - cycle
stock, periodic orders, or order cycles).
6. To hedge against price increases (purchase large order to hedge future price increase or
implement volume discount)
7. To permit operations (Little's Law: the average amount of inventory in a system is equal to the
product of the average demand rate and the average time a unit is in the system)
8. To take advantage of quantity discounts (supplies may give discount on large orders)
For company's management, the most important reasons for having an inventory
management system is to:
1. track existing inventory.
2. Know what quantity will be needed.
3. Know when these items will be needed.
4. Know how much items will cost.
There are two types of inventory control used- Perpetual and Periodic. In a perpetual
inventory system (usually used in supermarkets or department stores), a continuous flow of
inventory count is tracked using a point of sale (POS) check out system. This system is perfect
for companies to manage what is sold and reorder when a reorder point is reached. Another
advantage of this system is its ability to account for shrinkage (theft) and inventory turnover. The
periodic system (used in smaller retailers) is used to take a physical count of inventory at
periodic intervals to replenish the inventory. This system would be most beneficial for companies
that do not have products with UPC or bar codes, such as nuts and bolts and are purchased in
large quantities at a time. In this case, someone on a line would monitor the level of the bin and
notify a manager when an order would need to be placed.
Economic Order Quantity Models - the order size that minimizes annual costs (3 types)
1) Basic economic order quantity model (EOQ)

Used to identify a fixed order size that will minimize the sum of the annual costs of holding
inventory and ordering inventory.

1. only one product involved
2. Annual demand requirements are known
3. Demand is spread evenly throughout the year so that the demand rate is reasonably constant
4. Lead time does not vary
5. Each order is received in a single delivery
6. There are no quantity discounts

2) Economic production quantity model (EPQ)

The batch mode of production is widely used in production; the reason for this is that capacity to
produce a part exceeds the parts usage or demand rate ( the larger the run size, the fewer the
number of runs needed and, hence, the lower the annual setup cost; as long as production
continues, inventory will continue to grow.
1. only one item is involved
2. Annual demand is known
3. Has a constant usage rate
4. Usage occurs continually, but production occurs periodically
5. The production rate is constant
6. Lead time does not vary
7. There are no quantity discounts
3) Quantity discount model
Price reductions for large orders offered to customers to induce them to buy in large quantities; If
quantity discounts are offered, the buyer must weigh the potential benefits of reduced purchase
price and fewer orders that will result from buying in large quantities against the increase in
carrying costs caused by higher average inventories; The buyers goal is to select the order
quantity that will minimize total cost.
Equations to know:
Annual carrying cost = (Q/2)*H [Q = Order quantity in units, H = Holding (carrying) cost per
Annual ordering cost = (D/Q)*S [ D = Demand, S = Ordering cost]
Total cost (TC) =(Q/2)*H + (D/Q)*S
Total cost curve is U-Shape
Length of order cycle = Q/D
EPQ= square root[(2DS)/H]*square root[p/(p-u)]
p=production or delivery rate
u=usage rate
Reorder Point: ROP=d*LT
d=demand rate(units per period/day/week)

LT=lead time(same units as d)

EOQ=square root of (2DS)/H
Inventory point-of-sale (POS) systems, which record items at time of sale electronically, can help
make forecasting more accurate. Knowing the lead time of a product, which is the time interval
between ordering and receiving the order, is crucial to the success of a business. Long lead times
impair the ability of a supply chain to quickly respond to changing conditions, such as changes in
the quantity demanded, product or service design, and logistics.
The Purpose of Inventory in Operations Management
Here are some of the important functions of inventory in successful operations:

Meeting customer demand: Maintaining finished goods inventory allows a company to

immediately fill customer demand for product. Failing to maintain an adequate supply of
FGI can lead to disappointed potential customers and lost revenue.

Protecting against supply shortages and delivery delays: A supply chain is only as strong
as its weakest link, and accessibility to raw materials is sometimes disrupted. Thats why
some companies stockpile certain raw materials to protect themselves from disruptions in
the supply chain and avoid idling their plants and other facilities.

Separating operations in a process: Inventory of subassemblies or partially processed raw

material is often held in various stages throughout a process. Work in process inventory (or
WIP) protects an organization when interruptions or breakdowns occur within the process.
Maintaining WIP allows other operations to continue even when a failure exists in another
part of the process.

Smoothing production requirements and reducing peak period capacity needs: Businesses
that produce nonperishable products and experience seasonal customer demand often try to
build up inventory during slow periods in anticipation of the high-demand period. This
allows the company to maintain throughput levels during peak periods and still meet higher
customer demand.

Taking advantage of quantity discounts: Many suppliers offer discounts based on certain
quantity breaks because large orders tend to reduce total processing and shipping costs
while also allowing suppliers to take advantage of economies of scale in their own
production processes.

Inventory is necessary to your business. It supplies your operations processes and meets
customer demand.

Question 2:- What is Supply chain Network Design and Why it is Important?
Answer 2:- A firms supply chain allows it to move product from the source to the final point of
consumption. Leading firms around the world, from large retailers to high-tech electronics
manufacturers, have learned to use their supply chain as a strategic weapon. A supply chain is
defined by the suppliers, plants, warehouses, and flows of products from each products origin to
the final customer. The number and locations of these facilities is a critical factor in the success
of any supply chain. In fact, some experts suggest that 80% of the costs of the supply chain are
locked in with the location of the facilities and the determination of optimal flows of product
between them. (This is similar to the notion from manufacturing that you lock in 80% of the cost
to make a product with its design.) The most successful companies recognize this and place
significant emphasis on strategic planning by determining the best facility locations and product
flows. The discipline used to determine the optimal location and size of facilities and the flow
through the facilities is called supply chain network design.
This book covers the discipline of supply chain network design. Sometimes it is referred to as
network modeling because you need to build a mathematical model of the supply chain. This
model is then solved using optimization techniques and then analyzed to pick the best solution.
Specifically, we will focus on modeling the supply chain to determine the optimal location of
facilities (warehouses, plants, lines within the plants, and suppliers) and the best flow of products
through this facility network structure.
Here are four examples to illustrate the value of supply chain network design.
Example #1
Often, we hear about firms acquiring or merging with another firm in the same industry to reduce
the overall costs to operate both firms. That is, they justify the new combined company by
determining that they can deliver the same or more products to the market at an overall lower
cost. In firms that make or ship a lot of products, a large portion of the savings comes from the
merger of the two supply chains. In such mergers, the savings often come from closing redundant
plant and warehouse locations, opening new plants and warehouses, or deciding to use existing
facilities to make or distribute different mixes of product. We have heard firms claim resultant
supply chain savings from $40 million to $350 million over a period of a couple of years. With

these kinds of savings, you can only imagine the pressure placed on the supply chain team to
determine the new optimal supply chain structure after an acquisition or merger is announced.
Example #2
Often, a large firm will find that its supply chain no longer serves its business needs. In situations
like this, the firm will have to transform its supply chain. It may have to close many facilities,
open many new ones, and use facilities in a completely different way. For example, a retail firm
may have to redesign their supply chain to serve their stores as well as their new online customer
base in a more integrated approach. Or a large retailer may find that some of their product lines
have grown significantly and the retailer needs new warehouses to manage this growth. If done
right, this type of supply chain transformation can help reduce logistics and inventory costs,
better respond to different competitive landscapes, and increase sales and profitability. We have
even seen firms highlight this work in their annual reports, therefore showing the importance of
this analysis to the firm as a whole.
Example #3
In the spring of 2011, we were working on a project for a global chemical company to help
develop their long-term plan for their supply chain. This study was analyzing where they should
locate new plants to serve a global customer base. The long-term project suddenly became
extremely short-term when the CEO called the project team to inform them that within six hours
they were closing their plant in Egypt due to political unrest. He also indicated there was no
timeline for reopening the plant. The CEO immediately needed to know which of the existing
plants should produce the products that were currently being manufactured in Egypt and how
customer demand was going to be impacted. The team was quickly able to deliver the answers
and minimize this supply chain disruption. As seen in this example, supply chain network design
models can also be a great tool for identifying risks and creating contingency plans in both the
short and long term.
Example #4
As consumer behavior and buying patterns change, firms often want to bring their product to the
market through different channels. For example, we worked with a consumer products company
that wanted to analyze different channels such as selling through big-box retailers, selling
through smaller retailers, selling direct online, and selling through distributors. This firm wanted
to analyze different ways to bring their product to market and understand what the supply chain
would need to look like for each of these cases. That is, they wanted to determine the optimal
number and location of plants and warehouses. This would then be a key piece of information to
help them determine their overall strategy.

Of course, the details of these studies can be a bit more complicated. As an example, take a
minute to think through the possible supply chain for a tablet computer and compare that to the
supply chain you envision for a candy bar.
The tablet supply chain faces specific challenges surrounding a time-sensitive delivery of the
device for a very demanding high-tech customer market. The tablet maker must also determine
how to best balance its partnerships with many contract manufacturers worldwide while still
ensuring the highest quality end products. Finally, this supply chain must deal with the high costs
for insurance, transport, and storage of these high-priced finished goods
Conversely, when we shift our thoughts to the supply chain related to the candy bar, we must
consider an entirely different set of challenges and objectives that the candy maker must face:
government regulations that mandate different requirements for all stages of production paired
with a strict shelf life of each unit produced. In addition, raw material costs, as well as costs tied
to temperature control during transit and storage, add up. Major swings in demand due to
seasonality or promotions also add the need for flexibility within their supply chain.
Despite their differences, both the tablet maker and candy bar maker must determine the best
number and location of their suppliers, plants, and warehouses and how to best flow product
through the facilities. And building a model using optimization is still the best way for both of
them to determine their network design.
As the previous examples highlight, many different types of firms could benefit from network
design and many factors go into the good design of the supply chain. Along with ever-growing
complexity, the need to truly understand how all these requirements affect a companys costs and
performance is now a requirement. Using all these variables to prove out the optimal design
configuration commonly saves companies millions of dollars each year.
As you would expect, a network design project can answer many types of questions such as
How many warehouses should we have, where should they be, how large should they be, what
products will they distribute and how will we serve our different types of customers?
How many plants or manufacturing sites should we have, where should they be, how large
should they be, how many production lines should we have and what products should they make,
and which warehouses should they service?
Which products should we make internally and which should we source from outside firms?
If we source from outside firms, which suppliers should we use?
What is the trade-off between the number of facilities and overall costs?

What is the trade-off between the number of facilities and the service level? How much does it
cost to improve the service level?
What is the impact of changes in demand, labor cost, and commodity pricing on the network?
When should we make product to best manage and plan for seasonality in the business?
How do we ensure the proper capacity and flexibility within the network? To meet demand
growth, do we need to expand our existing plants or build new plants? When do we need to add
this capacity?
How can we reduce the overall supply chain costs?
Being able to answer these questions in the optimal manner is important to the overall efficiency
and effectiveness of any firm. Companies that have not evaluated their supply chain in several
years or those that have a new supply chain through acquisitions can expect to reduce long-term
transportation, warehousing, and other supply chain costs from 5% to 15%. Many of these firms
also see an improvement in their service level and ability to meet the strategic direction of their
Although firms are happy to find 5% to 15% reduction in cost, it does highlight that your supply
chain might have already missed out on significant savings you may have realized had you done
the study a year ago (or two or more years ago). Some firms have realized this and now run this
type of analysis on a more frequent basis (say, quarterly). This allows them to readjust their
supply chain over time and keeps their supply chain continually running in an optimal state while
preventing costs from drifting upward although firms are happy to find 5% to 15% reduction in
the frequency of these studies depends on several factors. Historically, it has been customary to
complete these analyses once every several years per business unit, because it was usual for
business demographics and characteristics to change over this period of time. For some
industries such as high-tech, the frequency was even higher because there may be higher
volatility in customer demand, thereby requiring periodic reevaluation of the network. Any major
events, such as mergers, acquisitions, or divestitures, should also trigger a network reevaluation
study. As noted before, the savings from the optimization of the revised network typically
represent a significant part of the savings that justify the merger or divestiture. A current trend we
are seeing, however, is to do these studies even more frequently. Business demographics and
characteristics are changing faster. In addition, the growth of the global supply chain is driving
firms to cycle through studies as they go from region to region around the world. Also, firms are
running the same models more frequently to stay on top of changes in their business by adjusting
the supply chain. Some firms update these models several times throughout the year.