JRMC Global

JRMC Global
Center for Human Excellence & Leadership

Research / Strategy / Executive Education / Entrepreneurship

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Profile
JRMC Global

Jayanta Roy
Jayanta brings more than 27yrs of experience across diverse markets, segments and categories. He has
served leading multinationals like Unilever, IFFCO, Chr-Hansen, Pall, DSM, ICL in various leadership roles in
India & South Asia, Middle East & Africa regions in Food, Nutrition & Health, Performance Chemical sectors.

Jayanta is B.Tech., MBA (Marketing) and PG specialization program (General Management & Strategy) from
IIM Calcutta. He has participated in many Leadership & Management Development Programs in Europe,
Dubai, Singapore, China, Thailand, India including Advanced Strategy Programs from IIM Bangalore, IIM
Ahmedabad, IIM Calcutta, ISB Hyderabad. He has extensively travelled in Asia, Europe, Africa and other
International countries for overseas employments/ strategic projects/ training programs & conferences.

He has been working as Strategist, Leadership Coach, Author, Adjunct Professor(MBA) since June 2014 at his
own firm JRMC Global and has been conducting sessions on various Research based Leadership &
Entrepreneurship Development Programs. Approx. 11000+ people participated in his various Programs from
Academia, Trade Associations, Corporate, NGOs, Govt/PSUs, Politicians, Entrepreneurs, MSMEs etc.

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 JRMC Global

Supply Chain Management

Prof. Jayanta Roy

Oct-Dec 2020

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Semester : IV - Class of 2021
IBS Powai JRMC Global
Students must attend all classroom sessions and must refer
standard reference books/journals for all
concepts/definitions/text & cases.

Note: This PPT file contains Course Guideline & highlights a few
salient points of Classroom sessions.

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 JRMC Global
Supply Chain Management - Sem IV Batch 2021
11-11-2020 / 12-11-2020/17-11-2020

Inventory Management and Risk Pooling : ( 3 sessions)

Introduction - Single Warehouse Entry - The Economic Lot Size Model -The
Effect of Demand Uncertainty - Supply Contracts - Multiple Order
Opportunities - Continuous Review Policy - Variable Lead Times - Periodic
Review Policy - Risk Pooling-Centralized Versus Decentralized Systems -
Managing Inventory in the Supply Chain -Practical Issues - Forecasting -
Judgment Methods - Market Research Methods - Time-Series Methods -
Causal Methods - Selecting the Appropriate Forecasting Technique.
Value of Information (1 session)

Introduction - The Bullwhip Effect - The Impact of Centralized

Information on the Bullwhip Effect - Methods for Coping
with the Bullwhip Effect - Information and Supply Chain Trade-offs -
Conflicting Objectives in the Supply Chain - Designing the Supply
Chain for Conflicting Goals
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global
Inventory Management JRMC Global

Prof Jayanta Roy – Confidential

 Independent vs. Dependent Demand JRMC Global

• Independent demand items are finished goods or other items sold to

someone outside the company
• Dependent demand items are materials or component parts used in the
production of another item (e.g., finished product)
Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain.
Prof Jayanta Roy – Confidential
Order Penetration Point
JRMC Global

Prof Jayanta Roy – Confidential

 The order decoupling point concept JRMC Global

Supplier IG EP EP Customer
Components WIP Assembly Installation
Manufacturing

Production Sales/marketing Examples

Make and send to stock (MSS) OP1 Kitchen

appliances

Make to stock (MTS) OP2 Computer

systems

OP3 Assemble to order (ATO) High-end

furniture

OP4
Make to order (MTO) Ship propelling
diesel engines

OP5
Engineer and make to order (ETO) Shipbuilding
IG= Incoming goods
EP= End products
= Inventory
WIP= Work in Progress
OP= Order pentration point =Order driven
=forecast driven (Hoekstra and Romme, 1985)
 Objectives of Inventory Management JRMC Global

• Provide acceptable level of customer service (on-

time delivery) and smoothen the logistics operations:

Line fill rate

Order fill rate

• Allow cost-efficient operations

• Minimize inventory investment

Prof Jayanta Roy – Confidential

 Inventory Turnover JRMC Global

A measure of the number of times merchandise

inventory is sold and replaced during the year.

Lower inventory compared to sales means less needs

to be financed by debt or equity.
 Types of Inventory: How Inventory is UsJeRdMCGlobal

• Anticipation inventory : speculation or seasonal

• Safety stock: buffer demand fluctuations
• Lot-size or cycle stock: Portion of inventory available (or planned to
be available) for the normal demand during a given period, excluding
excess stock and safety stock taking advantage of quantity discounts
or purchasing efficiencies.
• Pipeline or transportation inventory
• Maintenance, repair, and operating (MRO) inventories
• Decoupling stocks : materials, manufacturing, distribution units
manage their buy, make, deliver functions. It establishes a buffer
between product demand and product supply and is used in work-in-
process inventories.

• Dead stock: Non-moving Inventory

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Relevant Inventory Costs JRMC Global
Inventory Fixed amount incurred for each order placed
Procurement Cost
/ Ordering Cost

Item Cost Cost per item plus any other direct costs associated with
getting the item to the plant

Inventory Carrying Capital (Inventory investment)

Costs Storage space ( warehouse rent, maintenance charges)
Service (Insurance & taxes)
Risk cost (shrinkage, obsolescence, damage & pilferage,
relocation costs)
Shortage Costs/ Loss of customer goodwill, back order handling, and lost
Out-of-stock costs sales
 Factors influencing Inventory Management
JRMC Global

Type of Product : High unit and low unit value / short supply or Govt rationed items/MTO

Type of Manufacture: Continuous process / Intermittent process

Volume of Production : Component & parts and Finished products

Quality of Staff : Training & Experiences of people

Data processing capabilities

Commitment of Management
Benefits of Inventory Management JRMC Global
 Managing Seasonal Stock JRMC Global

• Capacity versus inventory tradeoff in seasonal

demand/supply situation
• Two basic approaches in aggregate planning (Sales
and operations Planning)
– Chase Option : Produce as per demand
– Level Option: produce at the same level
– Mix approaches

Prof Jayanta Roy – Confidential

 Inventory for Short life-cycle Products JRMC Global
Newsvendor model
• Short life cycle products is a special category of items
where demand takes place during a short period of
item, and goods are kept ready in stock to take care
of demand.
• Two kinds of products
– Style goods (fashion goods / news papers )
– Perishable goods (bread / meals)

Prof Jayanta Roy – Confidential

 Centralization Vs Decentralization JRMC Global
Risk Pooling Concept

• Consider these two systems:

1500 products, 10000 accounts

Warehouse One Market One

Supplier
Warehouse Two Market Two

LT = 1 week
Market One
Supplier Warehouse
Market Two

Prof Jayanta Roy – Confidential

 JRMC Global

Risk Pooling
• Demand variability is reduced if
one aggregates demand across
locations.
• More likely that high demand from
one customer will be offset by low
demand from another.
• Reduction in variability allows a
decrease in safety stock and
therefore reduces average
inventory.
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global
IMPACT OF INVENTORY CONSOLIDATION
JRMC Global

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

FINANCIAL IMPACT OF INVENTORY ON ROI
JRMC Global

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Inventory control Techniques JRMC Global
ABC Classification System

Classifying inventory according to

some measure of importance and
allocating control efforts
accordingly.

A - very important
B - mod. important
C - least important

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 ‘A’ ITEMS JRMC Global
Small in number, but consume large amount of resources
Must have:
• Tight control
• Rigid estimate of requirements
• Strict & closer watch
• Low safety stocks
• Managed by top management
‘B’ ITEM
Intermediate
Must have:
• Moderate control
• Purchase based on rigid requirements
• Reasonably strict watch & control
• Moderate safety stocks
• Managed by middle level management

‘C’ ITEMS
Larger in number, but consume lesser amount of resources
Must have:
• Ordinary control measures
• Purchase based on usage estimates
• High safety stocks
ABC analysis does not stress on items those are less costly but may be vital

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Inventory Control Techniques JRMC Global

VED ANALYSIS
Based on critical value & shortage cost of an item . It is a subjective
analysis.
Items are classified into:
• Vital: Shortage cannot be tolerated.
• Essential: Shortage can be tolerated for a short period.
• Desirable: Shortage will not adversely affect, but may be using more
resources. These must be strictly Scrutinized
FSN ANALYSIS
– Based on utilization.
– Fast moving.
– Slow moving.
– Non-moving.
– Non-moving items must be periodically reviewed to prevent expiry
& obsolescence
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global
 Vendor Managed Inventory (VMI)
JRMC Global
VMI is essentially an integrated approach whereby the
inventory at the distributor/retailer (downstream) is
monitored and managed by the manufacturer/vendor
(upstream)
Prerequisites
• Key customers/ large buyers
VMI Success Factors
• Standardized products / frequently purchased • Top management commitment
• Uniform & stable demand pattern • Focus on effort
• Higher transaction costs • Trust and partnership between
supply chain stakeholders
Benefits to Manufacturers
• Highly effective
Lower inventory investments (raw and finished) computer/information systems
Better scheduling and planning (EDI, Bar coding, Scanning)
• Competent manufacturers and
Better market information the ability to forecast
Closer customer ties and preferred status • Willing stakeholders partners and
Benefits to Retailers patience
Fewer stock-out with higher inventory turnover
Better market information
More optimal product mix
Less inventory in channels (transfer costs)
Lower administraCtiOveNrFeIDpEleNnTisIAhmL–enMtrc.oJastysanta Roy/JRMC Global
 Just-in-time management (JIT) JRMC Global
JIT is an inventory strategy companies employ to increase efficiency and decrease
waste by receiving goods only as they are needed in the production process,
thereby reducing inventory costs. This method requires producers to forecast
demand accurately.

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 JRMC Global

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 EOQ: Total Cost Equation JRMC Global
Minimize the TC by ordering the EOQ
D  Q
TC EOQ =  S  +  H  2DS
Q   2  EOQ =
H
Where H = IC :
TC = total annual cost I = Inventory carrying cost per unit value of inventory
C = Value of Inventory carried INR / unit
D = annual demand (Demand & Lead time both are certain)
When to Order: The Reorder Point (ROP)
Q = quantity to be ordered
Without safety stock
H = annual holding cost/unit R = dL
S = ordering or setup cost where R = reorder point in units
ROP with uncertain demand
d = daily/weeklydemand in units
ROP with uncertain demand & lead time
Standard deviation L = lead time in days/weeks

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 A Multi-Echelon Inventory System JRMC Global

DRP : Distribution Resource Planning

• Integrative logistics information & planning systems
• Full visibility at all nodes of a distribution chain
• Enable make & ship just the current demand requirements
• Information replaces Inventory

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 JRMC Global

Prof Jayanta Roy - Confidential

 JRMC Global

Prof Jayanta Roy - Confidential

 Forecasting JRMC Global

RULES OF FORECASTING
• The forecast is always wrong.
• The longer the forecast horizon, the worse the
forecast.
• Aggregate forecasts are more accurate.

Prof Jayanta Roy – Confidential

 Utility of Forecasting JRMC Global

• Part of the available tools for a manager

• Despite difficulties with forecasts, it can be
used for a variety of decisions
• Number of techniques allow prudent use of
forecasts as needed

Prof Jayanta Roy – Confidential

 Techniques JRMC Global

• Judgment Methods
– Sales-force composite
– Experts panel
– Delphi method
• Market research/survey
• Time Series
– Moving Averages
– Exponential Smoothing
• Trends
– Regression
– Holt’s method
• Seasonal patterns – Seasonal decomposition
• Trend + Seasonality – Winter’s Method
• Causal Methods

Prof Jayanta Roy – Confidential

 Popular methods in forecasting
JRMC Global

Qualitative methods

Sales force Delphi

Expert opinion Survey of buyer’s
composite technique
expectation

History analogy

Quantitative methods

Naïve method Trend method

Test marketing

Exponential
Moving average Regression method smoothening

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Qualitative forecasting methods
JRMC Global
Grass Roots: deriving future demand by asking the person closest to the customer.

Market Research: trying to identify customer habits; new product ideas.

Panel Consensus: deriving future estimations from the synergy of a panel of

experts in the area.

Historical Analogy: identifying another similar market.

Delphi Method: similar to the panel consensus but with concealed identities.
Sales force composite—forecasting based on internal insights concerning short-
term future sales.
Survey of buyer intentions—gathering input to determine the purchasing
intentions of a representative group of present and potential customers.

Delphi method is a forecasting process framework based on the results of multiple rounds
of questionnaires sent to a panel of experts. Several rounds of questionnaires are sent out to
the group of experts, and the anonymous responses are aggregated and shared with the
group after each round.
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global
Factors affecting selection of a forecasting JRMC Global
method

Data availability
Development and Execution Cost
Variability
Consistency of data
Degree of detail necessary
Time horizon
Technical sophistication
Level of risk and variability
Level of accuracy
Fundamental change indicators

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 The Old Paradigm: JRMC Global
Push Strategies
• Production decisions based on long-term forecasts
• Ordering decisions based on inventory & forecasts

• What are the problems with push strategies?

– Inability to meet changing demand patterns
– Obsolescence
– The bullwhip effect:
• Excessive inventory
• Excessive production variability
• Poor service levels

Prof Jayanta Roy – Confidential

 Bullwhip Effect
JRMC Global
The bullwhip effect is a distribution channel phenomenon in which forecasts yield supply chain
inefficiencies. It refers to increasing swings in inventory in response to shifts in customer demand as one
moves further up the supply chain.

Consequences: Coping with the Bullwhip Effect

• Increased safety stock
Reduce Variability and Uncertainty
• Reduced service level - POS
• Inefficient allocation of resources - Sharing Information
• Increased transportation costs - Year-round low pricing
Reduce Lead Times
- EDI
- Cross Docking
Alliance Arrangements
Vendor managed inventory
On-site vendor representatives
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global
 Effective Forecasts
JRMC Global
• Retailer forecasts
– Typically based on an analysis of previous sales at the retailer.
– Future customer demand influenced by pricing, promotions, and
release of new products.
– Including such information will make forecasts more accurate.
• Distributor and manufacturer forecasts
– Influenced by factors under retailer control.
– Promotions or pricing.
– Retailer may introduce new products into the stores
– Closer to actual sales – may have more information
• Cooperative forecasting systems
– Sophisticated information systems
– iterative forecasting process
– all participants in the supply chain collaborate to arrive at an
agreed-upon forecast
– All parties share and use the same forecasting tool

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 What is a JRMC Global
Marketing Decision Support System (MDSS)?

A marketing decision support system is a

coordinated collection of data, systems, tools,
and techniques with supporting hardware and
software by which an organization gathers and
interprets relevant information from business
and environment and turns it into a basis for
marketing action.
Example : CALL PLAN model at United Airlines

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Collaborative Planning, Forecasting andJRMCGlobal
Replenishment - CPFR

CPFR seeks cooperative management of inventory through joint visibility and

replenishment of products throughout the supply chain.

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Lead-Time Reduction
JRMC Global
• Numerous benefits:
– The ability to quickly fill customer orders that can’t be filled from
stock.
– Reduction in the bullwhip effect.
– More accurate forecasts due to a decreased forecast horizon.
– Reduction in finished goods inventory levels
• Many firms actively look for suppliers with shorter lead
times
• Many potential customers consider lead time a very
important criterion for vendor selection.
• Much of the manufacturing revolution of the past 20 years
led to reduced lead times
• Other methods:
– Distribution network designs
– Effective information systems (e.g., EDI)
– Strategic partnering (Sharing point-of-sale (POS) data with supplier)
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global
 Information and Supply Chain Trade-OffJsRMC Global
Designing the supply chain with conflicting goals

Trade-Offs: Inventory-Lot Size:

• Manufacturers would like to have large lot sizes
• Modern practices [Setup time reduction, Kanban and CONWIP] : Reduce inventories and
improve system responsiveness.
• Distributors/retailers can have factory status and manufacturer inventory data: Accurate
lead times to customers, develops an understanding of, and confidence in, the
manufacturers’ ability, allows reduction in inventory

Trade-offs Inventory-Transportation Costs

• Company operates its own fleet of trucks.
– Carrying full truckloads minimizes transportation costs.
• Outside firm is used for shipping: quantity discounts / TL shipping cheaper than LTL
– Use advanced information technology to reduce waiting time
– Distribution control systems allow combining shipments of different products from
warehouses to stores
– Cross-docking
– Decision-support systems allow appropriate balance between transportation and
inventory costs

CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global

 Information and Supply Chain Trade-Offs JRMC Global
• Trade-offs Lead Time-Transportation Costs
Transportation costs lowest when large quantities of items are transported between stages of
the supply chain
Lead times can be reduced if items are transported immediately after they are manufactured
or arrive from suppliers.
Strategy : Improved forecasting techniques and information systems
• Trade-Offs Product Variety-Inventory
Higher product variety makes supply chain decisions more complex and leads to high inventory
Strategy : Delayed Differentiation
• Trade-Offs Cost-Customer Service
Strategies:
– Transshipping
– Direct shipping from warehouses to customers
– Charging price premiums for customized products
Many interconnected systems (Information for the Coordination of Systems)
– manufacturing, storage, transportation, and retail systems
– the outputs from one system within the supply chain are the inputs to the next system
– trying to find the best set of trade-offs for any one stage isn’t sufficient.
– need to consider the entire system and coordinate decisions
CONFIDENTIAL – Mr. Jayanta Roy/JRMC Global