Managing Supply Chains
receive goods and services
Supply chain management
• As a concept is a relatively straightforward
one to understand: regardless of the industry,
context, and output, the ultimate goals are the
same.
• Enables an organization to provide its
products or services to its customers.
• Is all about managing the relationships
between these organizations – ensuring the
smooth and efficient flow of goods,
information, and finance – to deliver these
goods to the end customers.
Hospitality Supply Chain Management
With hospitality being so global in its nature, an extra
dimension of complexity is typically present: items
are produced internationally, from many
manufacturers, and then must be carefully supplied
to locations worldwide. The complexity and length
of global supply chains means the risk of delays and
general disruptions are more common.
Without supply chain management trying to
coordinate all of these aspects, chaos and
inefficiency abound.
The objectives sought around quality, speed,
dependability, flexibility, and cost would be
unachievable.
Supply Chain Risk and Disruption
Supply chain resilience - the ability of a chain to
survive, adapt, and grow during difficult times.
1. Safety stock
2. Reshoring
3. The adoption of new technologies, such as
3D printing, robots, and artificial intelligence
(AI)
Sourcing
What Is Procurement and Sourcing?
• Procurement is focused on the upstream part
of the supply chain, specifically on the
interaction with suppliers to source and
The procurement process should start with the
identification of needs.
Selecting Suppliers
Managing Suppliers
Managing Inventory
Inventory
• is a term used to describe the accumulation of
resources as they flow through processes,
operations, or supply networks.
• These resources may include materials,
customers, and information
The most common consideration is physical
inventory.
• Inventory exists in all processes, operations,
and supply networks and helps maintain the
smooth running of an organization.
• The role of inventory in the hospitality
industry is an important foundation that
provides the ability to service customers.
➢ Inventory mitigates uncertainty in
operations: inventory can act as a buffer
against fluctuations in supply and demand,
such as transportation delays in the supply
network, or supply shocks due to natural
disasters.
➢ Inventory can enhance operational
flexibility: operations may not be able to
make all products or deliver all services
simultaneously. By holding inventory of a
product, companies can fulfill customer
demand while making other products. This
allows different stages of processing to
operate at different speeds and schedules.
➢ Inventory can be used for demand forecasting
and to support operational planning: based on
the fluctuations in previous years’ inventories
data (inventory levels, consumption speeds,
holding patterns, etc.), companies can predict
demand and make plans for future capacity
and inventory levels.
➢ Inventory can reduce costs: via economies of
scale, holding relatively large inventories
 may bring savings (lower prices, cheaper
order costs, etc.) that are greater than the
holding costs.
➢ Inventory can increase in value: products
such as fine wines, specialty cheeses, and the
like can actually appreciate in value over
time. This is not always true, however: most
food, for example, will depreciate rapidly
unless proper steps are taken to refrigerate
and freeze products (and even then,
depreciation will still occur).
➢ Inventory can help to maintain service
quality and customer satisfaction: in the
hospitality industry, many services can only
be provided when there is adequate
inventory.
Challenges of inventory
➢ Cost: inventory ties up working capital and
resources. Costs incurred may include the
cost of placing orders, purchasing, storage,
overhead required for handling and
maintenance, obsolescence, insurance, etc.
Back on the linen example, hotels should
avoid investing in too many pars because
they will spend more cash than necessary to
building excessive inventory that also takes a
lot of space to store – space that could be
more productively utilized in other ways.
➢ Space: to the last point above, inventory
requires storage space and may require
special storage conditions (such as
temperature or full climate control).
➢ Quality: holding inventory increases the risk
of damage, loss, deterioration, and
obsolescence. Think again of the food in a
restaurant: excessive fresh produce held too
long will go to waste; having to throw bad
food away is virtually the same as throwing
away money.
➢ Operations: excess inventory may create
extra work from an operational perspective,
which may make operations more
complicated and hide other problems. This is
especially true of the transportation of
supplies between storage areas and from
storage to final points of use.
- Holding costs include working capital,
storage, and obsolescence (such as disposal
costs).
- Ordering costs are calculated by considering
the cost of placing the order (including
transportation of items from suppliers if
relevant) and price discount costs.
ABC Analysis for Ordering and Prioritizing
- Is an analytic tool that can help inventory
managers to have a clear picture of the whole
range of their items and identify importance
levels for different items in order to
concentrate their efforts on those more
significant ones.
- is based on the theory of the Pareto principle
– also known as 80/20 rule - which can be
summarized as 20% of the inputs accounting
for 80% of the outputs in a given process.
Alternative Methods for Managing Inventory
- manufacturing resource planning (MRP II)
systems
- enterprise resource planning (ERP) systems
Glossary
ABC analysis: An approach for classifying and
prioritizing inventory based on the value items
return.
Downstream: The demand side of the supply chain.
Decision matrix: A rubric with weighted criteria that
is used to compare the relative merits of multiple
options, such as supplier or supply chain
configurations, with the goal of quantifying the
choices and identifying an optimal option.
Economic order quantity (EOQ): The amount of
inventory to be ordered at one time toward
minimizing total annual inventory cost.
Economies of scale: The addition of benefits (such
as lower cost per item) when increasing order
quantities; vice versa, the loss of benefits (such as
fewer discounts) when placing smaller orders.
Enterprise resource planning (ERP) system: The
integration of all significant resource planning
systems in an organization that, in an operations
context, integrates planning and control with the
other functions of the business.
Evaluation scoring and weighting models: A
quantitative method used to assess prospective
suppliers, considering the level of importance
(weighting) of a set of criterion in the process.
Holding costs: Costs associated with holding
inventory, such as the tie-up of working capital and
the usage of storage facilities.
Inventory: The accumulations of resources as they
flow through processes, operations, or supply
networks.
Inventory profile: A visual representation of
inventory levels over time.
Material requirements planning (MRP) system:
A operations management system with elementary
data on inventory needs.
Manufacturing resource planning (MRP II)
system: An advanced operations management
system with strong inventory planning capabilities
and some integration with other operating system.
Offshoring: The movement of businesses from a
“home” country to others – often far away – due
usually to cheaper production in those areas.
Ordering cost: A cost associated with placing an
order, such as shipping and handling, and potentially
factoring any price discounts.
Par: A level of stock held in reserve, typically
proportionate to the overall capacity of an
organization as a means of safety stock.
Pareto principle: Also known as the “80/20 rule,”
which refers to 20% of a process’ input accounting
for 80% of the output.
Physical inventory: Also called “stock,” the
accumulation of physical materials such as raw
materials, components, finished goods, or physical
(paper) information records.
Procurement: The organizational function that is
responsible for identifying and acquiring goods and
materials to ensure that a business can operate
without disruption and serve its customers.
Purchasing cost: The annual demand for a product
multiplied by the per-unit purchase price (excluding
ordering and holding costs).
Reshoring: The return of businesses to a “home”
country after having been operated in far-away
nations, usually due to remediated production costs
and a desire to improve local supply capabilities.
Safety stock: Extra inventory held in case of
emergency.
Supplier assessment: The process by which the
procurement function evaluates prospective
suppliers’ ability and fit for providing required goods
and materials.
Supplier chain management: The efficient
management and coordination of relationships
between organizations that collaborate to produce a
product or service.
Supply chain resilience: A supply chain’s strength,
in terms of mitigation and control of risks that might
otherwise disrupt the supply chain.
Supplier management: The process of measuring
and collaborating with current suppliers to maintain
and improve performance.
Supply chain resilience: The capacity for an
enterprise to survive, adapt, and grow in the face of
turbulent change.
Supply shock: A sudden change in the availability
of supplies, typically involving a supply shortage
caused by a natural disaster, an economic crisis, or a
humanitarian issue in some or all parts of a region or
the whole world.
Sustainability: The ability to meet the needs of
current generations without impacting future
generations.
Total annual inventory cost: The cumulative cost
of ordering, purchasing, and holding inventory.
Total relative cost: The costs of ordering and
holding inventory, relative to – but not including –
the additional costs of the goods themselves (i.e.,
purchasing costs).
Upstream: The supply side of the supply chain.
Inventory Control
Inventory
• is a term we use to describe the
accumulations of materials, customers or
information as they flow through processes
or networks.
• Occasionally the term is also used to describe
transforming resources, such as rooms in
hotels or automobiles in a vehicle hire firm,
but here we use the term for the accumulation
of resources that flow through processes,
operations or supply networks.
• Physical inventory (sometimes called
‘stock’) is the accumulation of physical
materials such as components, parts, finished
goods or physical (paper) information
records.
• Queues are accumulations of customers,
physical as in a queuing line or people in an
 airport departure lounge, or waiting for
service at the end of phone lines.
• Databases are stores for accumulations of
digital information, such as medical records
or insurance details.
WHY SHOULD THERE BE ANY
INVENTORY?
1. Physical inventory is an insurance against
uncertainty - Inventory can act as a buffer against
unexpected fluctuations in supply and demand.
Some reasons to avoid inventories:
2. Physical inventory can counteract a lack of
flexibility - Where a wide range of customer options
is offered, unless the operation is perfectly flexible,
stock will be needed to ensure supply when it is
engaged on other activities.
3. Physical inventory allows operations to
take advantage of short-term opportunities -
Sometimes opportunities arise that necessitate
accumulating inventory, even when there is no
immediate demand for it.
4. Physical inventory can be used to
anticipate future demands - Medium-term capacity
management may use inventory to cope with
demand. Rather than trying to make a product (such
as chocolate) only when it is needed, it is produced
throughout the year ahead of demand and put into
inventory until it is needed. This type of inventory is
called anticipation inventory and is most commonly
used when demand fluctuations are large but
relatively predictable.
5. Physical inventory can reduce overall costs
- Holding relatively large inventories may bring
savings that are greater than the cost of holding the
inventory. This may be when bulk-buying gets the
lowest possible cost of inputs, or when large order
quantities reduce both the number of orders placed
and the associated costs of administration and
material handling.
6. Physical inventory can increase in value -
Sometimes the items held as inventory can increase
in value and so become an investment.
7. Physical inventory fills the processing
‘pipeline’ - ‘Pipeline’ inventory exists because
transformed resources cannot be moved
instantaneously between the point of supply and the
point of demand.
8. Queues of customers help balance capacity
and demand - This is especially useful if the main
service resource is expensive.
9. Queues of customers enable prioritization
- In cases where resources are fixed and customers
are entering the system with different levels of
priority, the formation of a queue allows the
organization to serve urgent customers while
keeping other less urgent ones waiting.
10. Queuing gives customers time to choose -
Time spent in a queue gives customers time to decide
what products/services they require.
11. Queues enable efficient use of resources -
By allowing queues to form customers can be
batched together to make efficient use of operational
resources.
12. Databases provide efficient multi-level
access - Databases are relatively cheap ways of
storing information and providing many people with
access, although there may be restrictions or different
levels of access.

13. Databases of information allow single data
capture - There is no need to capture data at every
transaction with a customer or supplier, though
checks may be required.
14. Databases of information speed the
process - Amazon, for example, stores, if you agree,
your delivery address and credit card information so
that purchases can be made with a single click,
making it fast and easy for the customer.
Some ways in which physical inventory may be
reduced
Types of inventories:
Buffer inventory
Buffer inventory is also called safety inventory. Its
purpose is to compensate for the unexpected
fluctuations in supply and demand. For example, a
retail operation can never forecast demand perfectly,
even when it has a good idea of the most likely
demand level.
It will order goods from its suppliers such that there
is always a certain amount of most items in stock.
This minimum level of inventory is there to cover
against the possibility that demand will be greater
than expected during the time taken to deliver the
goods. It can also compensate for the uncertainties in
the process of the supply of goods into the store,
perhaps because of the unreliability of certain
suppliers or transport firms.
Cycle inventory
Cycle inventory occurs because one or more stages
in the process cannot supply all the items it produces
simultaneously. For example, suppose a baker makes
three types of bread, each of which is equally popular
with its customers. Because of the nature of the
mixing and baking process, only one kind of bread
can be produced at any time. The baker would have
to produce each type of bread in batches. The batches
must be large enough to satisfy the demand for each
kind of bread between the times when each batch is
ready for sale. So even when demand is steady and
predictable, there will always be some inventory to
compensate for the intermittent supply of each type
of bread. Cycle inventory only results from the need
to produce products in batches, and the amount of it
depends on volume decisions which are described in
a later section of this chapter.
Anticipation inventory
Rather than trying to make the product (such as
chocolate) only when it was needed, it was produced
throughout the year ahead of demand and put into
inventory until it was needed.
Anticipation inventory is most commonly used when
demand fluctuations are large but relatively
predictable. It might also be used when supply
variations are significant, such as in the canning or
freezing of seasonal foods.
Pipeline inventory
Pipeline inventory exists because material cannot be
transported instantaneously between the point of
supply and the point of demand. If a retail store
orders a consignment of items from one of its
suppliers, the supplier will allocate the stock to the
retail store in its own warehouse, pack it, load it onto
its truck, transport it to its destination, and unload it
into the retailer’s inventory. From the time that stock
is allocated (and therefore it is unavailable to any
other customer) to the time it becomes available for
the retail store, it is pipeline inventory. Pipeline
inventory also exists within processes where the
layout is geographically spread out.
Day-to-day inventory decisions
Wherever inventory accumulates, operations
managers need to manage the day-to-day tasks of
managing inventory. Orders will be received from
internal or external customers; these will be
dispatched and demand will gradually deplete the
inventory. Orders will need to be placed for
replenishment of the stocks; deliveries will arrive
and require storing. In managing the system,
operations managers are involved in three major
types of decision:
How much to order. Every time a replenishment
order is placed, how big should it be (sometimes
called the volume decision)?
When to order. At what point in time, or at what
level of stock, should the replenishment order be
placed (sometimes called the timing decision)?
How to control the system. What procedures and
routines should be installed to help make these
decisions? Should different priorities be allocated to
different stock items? How should stock information
be stored?
HOW MUCH TO ORDER – THE VOLUME
DECISION
In managing this inventory, we implicitly make
decisions on order quantity, which is how much to
purchase at one time. In making this decision we are
balancing two sets of costs: the costs associated with
going out to purchase the food items and the costs
associated with holding the stocks.
Inventory costs
Cost of placing the order. Every time that an order
is placed to replenish stock, a number of transactions
are needed which incur costs to the company. These
include preparing the order, communicating with
suppliers, arranging for delivery, making payment,
and maintaining internal records of the transaction.
Even if we are placing an ‘internal order’ on part of
our own operation, there are still likely to be the same
types of transaction concerned with internal
administration.
Price discount costs. Often suppliers offer discounts
for large quantities and cost penalties for small
orders.
Stock-out costs. If we misjudge the order-quantity
decision and our inventory runs out of stock, there
will be lost revenue (opportunity costs) of failing to
supply customers. External customers may take their
business elsewhere, internal customers will suffer
process inefficiencies.
Working capital costs. After receiving a
replenishment order, the supplier will demand
payment. Of course, eventually, after we supply our
own customers, we in turn will receive payment.
However, there will probably be a lag between
paying our suppliers and receiving payment from our
customers. During this time, we will have to fund the
costs of inventory. This is called the working capital
of inventory. The costs associated with it are the
interest we pay the bank for borrowing it, or the
opportunity costs of not investing it elsewhere.
Storage costs. These are the costs associated with
physically storing the goods. Renting, heating and
lighting the warehouse, as well as ensuring the
inventory, can be expensive, especially when special
conditions are required, such as low temperatures or
high security.
Obsolescence costs. When we order large quantities,
this usually results in stocked items spending a long
time stored in inventory. This increases the risk that
the items might either become obsolete (in the case
of a change in fashion, for example) or deteriorate
with age (in the case of most foodstuffs, for
example).
Operating inefficiency costs. According to just-in-
time philosophies, high inventory levels prevent us
seeing the full extent of problems within the
operation.
Planning and control
Why planning and control?
• Planning and control is concerned with the
reconciliation between what the market requires and
what the operation’s resources can deliver.
• Planning and control activities provide the
systems, procedures and decisions which bring
different aspects of supply and demand together.
• The purpose is always the same – to make a
connection between supply and demand that will
ensure that the operation’s processes run effectively
and efficiently and produce products and services as
required by customers.
The difference between planning and control
• Planning is a formalization of what is
intended to happen at some time in the future. But a
plan does not guarantee that an event will actually
happen. Customers change their minds about what
they want and when they want it. Suppliers may not
always deliver on time, machines may fail, or staff
may be absent through illness.
Control is the process of coping with changes. It
may mean that plans need to be redrawn. It may also
mean that an ‘intervention’ will need to be made in
the operation to bring it back ‘on track’. Control
makes the adjustments which allow the operation to
achieve the objectives that the plan has set, even
when the assumptions on which the plan was based
do not hold true.
Supply and demand effects on planning and
control
1. Uncertainty in supply and demand
2. Dependent and independent demand
a. Dependent demand - is demand which is
relatively predictable because it is dependent upon
some factor which is known.
b. Independent demand - They will supply
demand without having any firm forward visibility
of customer orders.
3. Responding to demand - an operation will
only start the process of producing goods or services
when it needs to.

Long-, medium- and short-term planning and Planning and control activities
control

• Long Term – operations managers make

plans concerning what they intend to do, what
resources they need, and what objectives they hope
to achieve.
o the emphasis is on planning rather than
control, because there is little to control as such.
They will use forecasts of likely demand which are
described in aggregated terms.
• Medium-term planning and control is more
detailed. It looks ahead to assess the overall demand
Monitoring and controlling the operation
which the operation must meet in a partially
disaggregated manner.
• In short-term planning and control, many of
the resources will have been set and it will be
difficult to make large changes. However, short-term
interventions are possible if things are not going to
plan.

Summary

What is planning and control?

■ Planning and control is the reconciliation of the

potential of the operation to supply services and
products, with the demands of its customers on the
operation. It is the set of day-to-day activities that run
the operation.
■ A plan is a formalization of what is intended to
happen at some time in the future. Control is the
process of coping with changes to the plan and the
operation to which it relates. Although planning and
control are theoretically separable, they are usually
treated together.
■ The balance between planning and control changes
over time. Planning dominates in the long term and
is usually done on an aggregated basis. At the other
extreme, in the short term, control usually operates
within the resource constraints of the operation but
makes interventions into the operation in order to
cope with short-term changes in circumstances.

How do supply and demand affect planning and

control?

■ The degree of uncertainty in demand affects the

balance between planning and control. The greater
the uncertainty, the more difficult it is to plan, and
greater emphasis must be placed on control.
■ This idea of uncertainty is linked with the concepts
of dependent and independent demand. Dependent
demand is relatively predictable because it is
dependent on some known factor. Independent
demand is less predictable because it depends on the
chances of the market or customer behaviour.