ADDIS ABABA UNIVERSITY

COLLEGE OF BUSINESS AND ECONOMICS

DEPARTMENT OF MANAGEMENT
PROGRAM MSC IN INTERNATIONAL BUSINESS
(EXTENSION)

COURSE CODE MGMT. 6051

GLOBAL VALUE CHAIN MANAGEMENT

SUBMITTED BY
• Osman Shifa GSE/2824/13
• Mahlet Teferi GSE 4285/13
• Nafhire Geremew GSE/7142/13
• Mahlet Habteselassie GSE/7316/13
• Alemnesh Sebsibe GSE/2334/13
• Razika Ali GSE/7698/13

SUBITTEMD TO DR. ZELALEM G.

What Is Safety Stock Inventory? Safety Stock Definition

Safety stock inventory is extra product kept on-hand to account for unexpected delays from
suppliers. Safety stock is always held when there is uncertainty in supply and is an effective
insurance policy against stockouts, AKA running out of raw materials inventory, finished
goods inventory, or packaging.

I. CONCEPT OF SUPPLY CHAIN

A supply chain consists of all stages involved, directly or indirectly, in fulfilling the customer
request. The supply chain not only includes the manufacturer or suppliers, but also
transporters, warehouses, retailers, and customers themselves. Within each organization
such a manufacturer, the supply chain includes all functions involved in fulfilling a customer’s
request. It includes every link in catering the needs of customers right from transformation
up to installation.

II. MANAGEMENT OF SUPPLY CHAIN

OBJECTIVES

• Customer Satisfaction
• Protection against fluctuations in demand
• Better use of men, material, and machines
• Protection against fluctuations in output
• Customer Satisfaction
• Protection against fluctuations in demand
 • Better use of men, material, and machines
• Protection against fluctuations in output

The starting point of the management activity to understand the customer’s demands. It
further extends to better asset utilization due to optimization and tries to eliminate the excess
vendors, high inventories, uncertainties and resulting longer lead time. Thus, it is an attempt
to reduce overall inefficiencies in the supply chain. It considers any constrain that may affect
the supply chain and its smooth working, and remedial action plan is incorporated data is
further utilized for future forecasts. It also rationalizes the vendors and reduces the
uncertainties in planning with vendors and yields better scheduling. It reduces unnecessary
vendor and can have economies-of-scale benefits. The main target of managing the supply
chain is to realize and neutralize the uncertainties in the supply chain.

III. UNCERTAINTY IN SUPPLY CHAIN

Uncertainties in supply, process and demand are recognized to have a major impact on the
manufacturing function. Uncertainty propagates throughout the network and leads to
inefficient processing and non-value adding activities. This uncertainty is expressed in
questions such as: what will my customers order? how many products should we have in
stock? and will the supplier deliver the requested goods on time and according to the
demanded specifications?

The presence of uncertainty stimulates the decision maker to create safety buffers in time,
capacity, or inventory to prevent a bad chain performance. These buffers will restrict
operational performances and suspend competitive advantage. Those companies which cope
best with uncertainty are most likely to produce internationally competitive bottom-line
performances.

Meaning of Uncertainty

Definition of supply chain uncertainty is based on the five requirements for effective system
management by De Leeuw (2000). If one or more of these requirements is not fulfilled,
decision makers in the supply chain will experience uncertainty resulting in ineffectiveness:

1. The managing system should have an objective and corresponding performance

indicator to manage the supply chain in the right direction.
 2. To estimate future system states, one must have information on the environment and
current supply chain state.
3. There should be enough information processing capacities to process information on
the environment and supply chain state.
4. To direct the managed system in the right direction one should be able to estimate
the impact of alternative actions. This requires a model of the system, presenting the
relationships between available redesigns variables and performance indicators.
5. There should be enough potential control actions.

IV. SOURCES OF UNCERTAINTY

These sources of supply chain uncertainty can be categorized as: Inherent characteristics that
cause predictable fluctuations. Uncertainty may take the form of high variability in demand,
process, or supply, which in turn creates problems in planning, scheduling, and control.
Because of the specific product and process characteristics in food supply chains, such as
perish ability of end products, variable harvest and production yields and the huge impact of
weather conditions on consumer demand, these chains are especially vulnerable to this type
of uncertainty.

V. DEALING WITH UNCERTAINTY

Uncertainties in supply, process and demand are recognized to have a major impact on the
optimistic functioning of a company. This barrier in the efficient working of the supply chain
should be better t6aken care of. This task is handled by the supply chain planning tools.

VI. SUPPLY CHAIN PLANNING TOOLS

• Demand planning: - It provides for advanced forecasting and demand planning tool to
keep pace with volatile changes in demand and produce accurate forecasts.
• Supply network planning: -It synchronizes the market demand dynamically with
sourcing and production activities and plan material flow through the entire supply
chain to optimize the logistic network.
• Production planning: -This gives a smooth and optimal flow of the resources by
promoting optimized production schedules to maximize the returns on the assets,
 minimize delays, improved resource utilization and reduce the work in process
inventory.
• Availability planning: -This provides a global, multilevel, rule based strategic planning
facility to match the supply chain with customer demands and to upkeep the precise
delivery commitment for customer orders, and thereby fulfilling the promise made to
the customer. All the above functions are now-a-days possible by an intuitive and
configurable graphical user interface to manage and optimize the supply chain.

VII. SOLUTIONS TO UNCERTAINTY

A. Managing Supply

A firm can vary supply of product by controlling a combination of the following factors

✓ Managing Production Capacity When managing capacity firms use a combination of

the following approaches:
✓ Time flexibility from workforce in this approach, a firm uses flexible work hours from
the workforce to better match the production with demand. In many instances, plants
do not operate continually & are left idle during portions of the day & week. Therefore,
spare plant capacity exists in the form of hours when the plant is not operational. For
example, many plants do not run three shifts, so existing workforce could work
overtime during peak periods to produce more to meet demand. The overtime used
is varied to match the variation in demand. This system would allow production from
the plant to match the demand more closely from customers. Telemarketing centers
and banks use part time workers extensively to match supply & demand better.
✓ Use of seasonal workforce in this approach, a firm uses a temporary workforce during
the peak season to increase capacity to match the demand. The tourism industry often
employs this approach, in which a base of full-time employees exists & the rest is hired
only for the peak season. Agriculture also uses this approach for both harvesting &
processing. This approach may be hard to sustain if the labor market is tight.
✓ Use of subcontracting in this approach, a firm subcontracts peak production so that
internal production remains level & can be done cheaply. With the subcontractor
handling the peaks, the company can build a relatively inflexible but low-cost facility
where the production rates are kept relatively constant. A key here is the availability
 of relatively flexible subcontractor capacity. For example, most of power companies
do not have the capacity to supply their customers with all the electricity demanded
on the peak days. They instead rely on being able to purchase that power from
suppliers & subcontractors who have excess electricity. This allows power companies
to maintain a level supply and a lower cost.
✓ Use of dual facilities – dedicated and flexible in this approach, a firm builds both
dedicated & flexible facilities. Dedicated facilities produce a relatively stable output of
products over time in a very efficient manner. Flexible facilities produce a widely
varying volume & variety of products but at higher unit costs.
✓ Designing product flexibility into the production processes In this approach, a firm has
the market adaptive, flexible production system whose production rate can easily be
varied. This system senses the fluctuation in the market demand and the Production
system is then changed to match the demand. The production lines are designed such
that changing the number of workers on a line can vary the production rate. If
variation of demand across different product lines is complementary the capacity on
each line can be varied by moving the workforce from one line to other. This requires
multi skilled workforce.

B. Managing Inventory

• Using common components across multiple products in this approach, a firm designs
common components across multiple products, each with a predictably variable
demand but with a relatively constant overall demand. Using common components
across these products will result in the demand for the components being relatively
constant. Therefore, a part of supply chain producing components can easily
synchronize supply with demand & a relatively low inventory of parts will have to be
built up.
• Build inventory of high demand or predictable demand products When most of the
products a firm produces have the same peak demand season, the previous approach
is no longer feasible. A firm must then decide which inventory to build during the off
season. The answer is to build products with the more predictable demand during the
off season because there is less to be learned about their demand by waiting. As more
 is known about demand closer to selling season, production of more uncertain items
should take place.
C. Managing demand
To manage demand with the goal of maximizing profit, companies must use pricing &
production decisions. The timing of the tools can have a tremendous impact on
demand. Therefore, using pricing to shape demand can help synchronize the supply
chain.
D. Information Centralization

In many of the cases the company has many distribution centers from where the needs of the
customers can be catered. This can be better managed if the demand details and inventory
status updates are readily available online instantaneously. This can be easily achieved by
centralizing the information. The benefit of information centralization derives from the fact
that most orders are filled from the warehouse closest to the customer, keeping
transportation costs low.

E. Specialization

Most supply chains provide a variety of products to the customers. When inventory is carried
at multiple locations; a key decision for a supply chain manager is whether all products should
be stocked at every location. Clearly, a product that does not sell in a geographical region
should not be carried in inventory by the warehouse or retail store located there.

A study at Harvard found that over 40% of shoppers go to another store when a product is
out of stock instead of looking for a substitution. This is how customers behave today. Call it
impatience or savviness, but stockouts are every business’s problem. And they are a big,
expensive problem.

It is estimated that they cause retailers almost one trillion dollars in lost sales worldwide. One
reason for this is the ubiquity of online shopping (looking at you, Amazon). Most modern
consumers do not wait for inventory to be replenished. They head somewhere else.

But predicting erratic supply and demand is tough. No one has any idea what is coming next.
In 1950, a guy invented something called the Magic 8-Ball, but it did not work. Nothing
worked.
That is, until modern inventory forecasting. Today’s manufacturers, suppliers, and retailers
rely on software to smooth the edges of uncertainty. Safety stock, buffer inventory, and
anticipation inventory are all ways they do it (see what is inventory). This is true in both B2B
vs. B2C businesses.

FACTORS AFFECTING THE LEVEL OF SAFETY INVENTORY

The appropriate level of safety inventory is determined by the following two factors:

• The uncertainty of both demand and supply

• The desired level of product availability

As the uncertainty of supply or demand grows, the required level of safety inventories
increases. Demand for milk at a supermarket is quite predictable. As a result, supermarkets
can operate with low levels of safety inventory relative to demand. In contrast, demand for
spices at the same supermarket is much harder to predict. Thus, the supermarket needs to
carry high levels of safety inventory for spices relative to demand. Whereas most of the milk
inventory at a supermarket is cycle inventory (with very little being safety inventory), most of
the spice inventory is safety inventory carried to deal with uncertainty of demand.

As the desired level of product availability increases, the required level of safety inventory
also increases. If the supermarket targets a higher level of product availability for a certain
spice, it must carry a higher level of safety inventory for that spice.

Recommended further readings.

1. Managing Supply Chain Operations (Lei Lei, Leonardo DeCandia, Rosa Oppenheim, and
Yao Zhao) (Lei Lei, Leonardo DeCandia, Rosa Oppenheim, and Yao Zhao).
2. Barnes, Jim. “The Myths and Truths About Inventory Optimization.
3. Trent, Robert J. “Managing Inventory Investment Effectively.
 Reference

• Website: https://www.ijetae.com (ISSN 2250-2459, Volume 2, Issue 5, May 2012)304

• Website: https://www.bluecart.com/blog/safety-stock
• Sunil Chopra & Peter Meindl, Supply chain management, Publisher Prentice Hall, Edition 2001
• Dr.Seth, Global management solutions demystified, Publisher Thomas education publication,
Edition 2006
• P. Mohanchandra, Wal-Mart supply chain management practice, Online research paper2003
• S.Shiva Ramu Twntieth century management tools& techniques; Wheeler
publishingEdition2001
• Supply chain management: strategy, planning, and operation, by Chopra, Sunil and Meindl,
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