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Analyzing time and inventory

To help understand the relationship of time and inventory it is useful to be aware of the concept of activities that add value to the supply chain and those that do not add value. An activity that adds value is one that provides a positive benefit to the product or service being offered. This can be assessed in terms of whether the customer is prepared to pay for this activity. An activity that dose not add value is one that can be eliminated from the supply chain process and will not materially affect the finished product as far as the final customer is concerned. The analysis of supply chain activities in terms od the extant to which they add value to a product has thus become an important factor in the assessment of supply chain efficiency. The aim is to identify and eliminate those activities that add cost but do not add value. The holding of inventory within a supply chain is one such activity and many companies are now trying to eliminate unnecessary inventory from their supply chains.

One method of highlighting unnecessary inventory is through the use supply chain mapping. This technique enables a company to map the amount of inventory it is holding in terms of the lengh of time that the stock is held. An example of this technique is provided in Figure 13.3. This is an example from the US clothing industry. It shows:

· Value adding time which is represented along the horizontal axis. This shows the total of the manufacturing and transport time for the whole supply chain process from the initial raw material fiber to the supply of the finished product to the end user. It is value adding because the product is changed either through a production process or through a movement process. It amounts to 60 days.

· Non value adding time which is represented by the vertical lines that rise from the horizontal axis. These show the various occasions when the part prepared or finished product is held as some from of inventory. This is adding no specific value to the product. This amounts to 115 days.

The total time or pipeline time which is the addition of the value adding horizontal time and the non value adding vertical time. This there fore includes all the time that it takes through all the different manufacturing storing and transport processes. This is a total time or volume of 175 days.

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The lead- time gap

One of the major reasons for the build up of finished goods inventory is because of the long time that it takes to manufacture and deliver products. Ideally the customer would be prepared to wait the full amount of time that is required. If this were the case there would be no need to hold any stock at all. This of course happens only rarely for special made to order products. The vast majority of products are required either immediately as for many consumer products at the point of sale in shops or within a short timescale as for industrial product and also for consumer products when the retailer orders them in the first instance from the manufacturer.

The total time it takes to complete the manufacture and supply of a product is often known as the logistics lead time. Customers are generally prepared to wait for a limited period of time before an order is delivered. This is the customer’s order cycle time. The difference between the logistics lead time gap is illustrated in Figure 13.1. It is the existence of this lead time gap that necessitates inventory being held. The extent of the lead time gap measured in length of time determines how much inventory must be held. The greater the lead time gap the greater the amount of inventory that must be held to satisfy customer requirements. Thus the more this gap can be reduced the less inventory will be required. Recently there has been a move towards indemnifying different approaches for reducing this gap. A number of these approaches are described in the next section.

Inventory and time

High levels of inventory are used by many companies to hide a number of problems that occur throughout the supply chain. Companies may have sound and acceptable reasons for holding stock as outlined in the previous chapter but some may also used high levels of inventory to protect themselves from those problems that they are unable or unwilling to solve by more direct means. The implications of this are illustrated in Figure 13.2. This shows that there is significant waste in many logistics systems made up of unnecessary inventory the difference between A and B. This is used to cover up problems such as:

· Unreliable suppliers;

· Inaccurate forecasts;

· Production problems;

· Quality issues;

· Unpredictably high demand.

There is of course a very real cost associated with these high inventory levels.

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Different inventory requirements

There are some important differences in the way inventory requirements are determined that are related to the type of demand for the products in question. The nature of this demand should have an influence on the approach adopted to manage the inventory. One important way of differentiating between demand types is that of dependent or independent demand. The type of demand will have an influence on the nature of the inventory management technique chosen. Independent demand occurs where the demand for one particular product is not related to the demand for any other product.

Consumer demand for a desktop computer is for example independent. Indeed most consumer products are independent of the demand for other finished goods. This is an important distinction because products with an independent demand necessitate the use of forecasting to help determine expected demand levels and associated inventory requirements. The EOQ approach is commonly used for products with independent demand.

Dependent demand occurs where the demand for a particular products is directly related to another product. In the case of the desktop computer for example the demand for the power leads or the connecting cables would be directly dependent on the number of computers stocked as finished goods. Dependent demand can be classified in two ways. It may be vertical eg the chip actually required in the production of the computer or it may be horizontal eg the instructional manual that is packed with the computer as a finished product.

Typically most raw materials components and sub assemblies have their demand dependent on the demand for the finished product. Because of this dependence there is a far more limited requirement for the forecasting of the demand for these elements as the actual needs are directly related to the finished product requirements themselves. MRP and MRP|| systems are used for these elements.

One feature that has become particularly relevant in recent years concerns the nature of the demand requirement. It it a push system or a pull system? A push system is the more traditional approach where inventory replenishment is used to anticipate future demand requirements. A pull system is where the actual demand for a product is used to pull the product through the system. A push approach to inventory planning is usually based on a set plan that is predetermined according to certain rules of inventory reordering. This approach is a proactive one in the sense that it is planned on the basis of estimated or forecast demand for products from customers.

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Co-operative warehouses

These warehouses are owned managed and controlled by co-operative societies. They provide their members with warehousing facilities at cheaper rates. Container freight stations CFS/ inland container depots ICDs.

CFSs/ ICD are custom- bonded facility with public authority status for the handling and storage for containers. These depots equipped with warehousing space adequate handling equipment and IT infrastructure. Services of CFS/ICDs include the following:

· Loading/ unloading

· Receipt/ dispatch of goods

· Transit operations by road/ rail to and from the port

· Stuffing/ de- stuffing of containers

· Customs clearance

· Consolidation and desegregation of less than container load LCL cargo

· Temporary storage of cargo and containers

· Repair and maintenance of containers

· Refrigerated warehousing

· Hub- and- spoke services

CFS is an off- dock facility located near the service port. ICD on the other hand is located in the hinterland. CFSs/ ICDs act as consolidation points, transit storage locations and ease the compliance procedure with local customs reduce damage/ pilferage optimize container utilization and reduce transport/ inventory cost.

Cold storage

A cold storage is a temperature- controlled storage space and caters to industries such as agriculture horticulture fisheries and aquaculture, dairy and processed food. The highly fragmented cold storage market has 5,386 cold storage units with he total capacity of nearly 23.7 million M.T More than 56% of the capacity is utilized by potato storage while the rest is used for other commodities. Currently the Indian cold storage market is valued at Rs 117 billion and is expected to reach Rs 558 billion by 2015. Sixty- five per cent of the total installed capacity of cold storage in the country is located in Uttar Pradesh and West Bengal. The key activities involved in cold storages are as follows:

· Aggregation

· Sorting

· Pre- cooling

· Packaging from farms to manufacturers

Integrated cold storage warehousing has huge potential in India. The cold storage system when supplemented with temperature- controlled transportation connecting farm- level storage facilities processing units and distribution outlets will not only improve efficiency but will also solve our problem of wastage of agricultural products. The cold chains market is dominated by private players despite the presence of state- owned players. Though the government has pro incentives in tax and duties to ecourage cold chain players the results are yet to be seen. In addition cold chain and container- handling facilities should also be augmented at major sea and airports to target global markets.

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Types of warehouses

Traditionally warehouses in India were broadly classified in to public private bonded government and co- operative warehouses. Lately the concepts of cold chains container freight stations CFS and inland container depots ICD have been gaining importance. Increasing post harvest losses have propelled the development of cold storages to enable the storage of agricultural produce almost throughout the year. Similarly growing international trade and manufacturing activity has led to growing container trade and a greater emphasis on the concept of CFS and ICDs for easy maintenance and reduced pilferage of cargo.

Public warehouses

Warehouses licensed by the government to private entities individual or cooperative societies to store goods of the general public are called public warehouses. Usually these warehouses are set up at transportation points of railways highways and waterways, providing the facilities of receipt, dispatch loading and unloading of goods. They are rented out against a certain fee. The government also regulates the functions and operations of these warehouses used mostly by manufacturers, wholesalers, exporters importers government agencies etc. they are economical and easily available storage facilities for small manufacturers and traders too. Some warehouses provide facilities for the inspection of goods and also permit packaging and grading. The public warehousing receipts serve as goods collateral securities for borrowings.

Private warehouses

These warehouses are owned by private entities or individuals and are used exclusively for the goods owned imported by or on behalf of the licensee. The warehouses are usually constructed at strategic locations to cater various manufacturing business and service units. They are flexible enough to be customized in terms of storage and placement, according to the nature of the products.

Bonded warehouses

The concept of bonded warehouses was developed in order to facilitate the deferred payment of customs duty by entrepreneurs exporters and importers to enable them to carry out their operations with least investment. These warehouses are used to store imported goods under an undertaking or bond which does not allow the release of goods until the custom duties are paid. These are generally owned managed and controlled by both government and private parties and are established near ports. Government and private parties together manage bonded warehouses. Currently the central warehousing corporation operates 75 custom bonded warehouses with a total capacity of nearly 0.5 million MTs located at Ahmadabad, Bangalore, Bhopal, Chandigarh, Chennai, Delhi, Hyderabad, Jaipur, J N port, Kolkata, Kochi, Lucknow and Mumbai.

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Overview of warehousing India

The Indian logistics market has evolved from traditional transport companies to a full-fledged logistics service provider which offers various supply chain services such as transportation warehousing and other value additions. Traditionally there existed only pure transport or warehousing service providers of the in house nature. The trend changed towards providing customized services and started being outsourced to specialized players in the industry. Thus emerged the concept of third party logistics 3PL where companies provide outsourced or third party logistics services to companies for part or sometimes all of their supply chain management functions. Third party logistics providers typically specialize in integrated operation warehousing and transportation services that can be scaled and customized based on market conditions and the demands and delivery service requirements for their products and materials.

Has also led development of improved international trade activities. Increasing market sophistication changing customer choices and global competition are pressurizing manufacturers to provide better goods and services to customers at lower costs. In a way this has put the pressure on managing costs more efficiently. Various industries have taken up initiatives to cut down on direct material costs administrative costs and have tried streamlining internal production processes. Yet in has been observed that the maximum cost savings can be achieved by managing the supply chain efficiently.

The supply chain is a vital component efficient planning of which can bring down costs to a great extent. Manufacturers are working towards leaner supply chins with lesser lead times in order to gain competitiveness in the market. Transportation warehousing and distribution are the critical components of the entire supply chain. With manufacturing activity increasing in the last few years logistics has gained equal importance in order to provide better goods at lesser cost.

The logistics market in India was valued at Rs 5.6 trillion in 2010 and is forecast to grow at CAGR of over eight per cent over the next five years. World bank has ranked India 47^th among 150 countries in terms of logistics performance in 2010 its potential in the future. It is forecast to grow annually at a rate of 15 to 20% to reach Rs 17 trillion by 2015. However logistics costs in India constitute around 13 to 14% of its GDP against seven to eight per cent being spent by developed countries such as the US Japan and other European countries. This is due to market constraints such as highly fragmented structures poor infrastructure and complicated tax structure.

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