Supply Chain Management (SCM)

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Inventory Control Systems

Inventory control usually becomes one of the problems that bother small business managers. There are many inventory control systems and control techniques discussed in books and journal articles. Most of them deal with some complicated mathematical models which already beyond the reach of the small business (Lin, 1980). In the following content, some inventory control systems will be introduced. ABC Analysis According to Bloomberg et al. (2002), inventory classification systems help allocate time and money in inventory management and allow firms to deal with multiple product lines and multitude of stock-keeping units (SKU). The most widely used classification model is ABC analysis. ABC analysis is an inventory classification technique in which the items in inventory are classified according to the dollar volume (value) generated in annual sales (Fuerst, 1981). According to Onwubolu and Dube (2006), when ABC analysis is applied to an inventory situation, it determines the importance of items and the level of control placed on the items. The result of importance ranking is determined by two factors, the usage rate for an item and its unit value. These two factors can be multiplied to give the annual usage value (AUV), which is the total value of the annual usage. The bigger each factor, the more top ranking is the item. Therefore, close control is more important for fast moving items with a high unit value. To the contrary, for slow moving, low unit value items the cost of the stock control system may exceed the benefits to be gained and simple methods of control should be substituted.

Alternative Order Quantity Approach

For small business, the inventory control systems should be inexpensive, easy to understand, easy to use, and not too time-consuming. From the managers’ aspects, the ideal systems are those that allow them to set policies, rules, and procedures easily, and have them implemented by the subordinate without any difficulty (Lin, 1980). The application of the EOQ formula for a small business is much more difficult than that for a large corporation. Some estimating parameters, like order cost and inventory carrying cost for EOQ are not easy when records of various costs are inadequate or nonexistent. EOQ might have to be re-calculated each time there is a change in interest rate, price, or demand. This will increase the order cost, and is not suitable for a small business (Lin, 1980). Lin (1980) suggests the following two methods can be easily adapted for small business use. The first method is called maximum inventory. The manager sets the maximum stock level for each item based upon his/her experiences or analysis of company’s financial situation and desirable return on inventory investment. The formula is: OQ=Maximum Inventory level – Reorder Point+ DDLT (2.3) OQ: order quantity DDLT: demand during lead time The second method that he proposed is called desired covering period. Based on sales forecast, the manager can set the order quantity that will cover the period he/she likes. The outcome number might have to be modified to meet business requirements. For instance, the supplier probably sells certain products at the multiple of batch quantity or sets a minimum order quantity for a product.


‘The warehouse is a point in the logistics system where a firm stores or holds raw materials, semi-finished goods, or finished goods for varying periods of time.’ (Coyle et al., 2003, p.285). Three Basic Functions of Warehouse According to Lambert & Stock (1993), there are three basic functions of warehouse: ¨ Movement is necessary to store a product properly. It can be divided into three activities: i. Receiving inbound goods from transportation carriers and performing quality and quantity checks. ii. Transferring goods from the receiving docks and moving them to specific storage locations throughout the warehouse. iii. Shipping the goods outbound to customers by some forms of transportation. ¨ Storage is the second function of warehousing. It can be performed in two different ways: i. Temporary storage means that storing a product, which is necessary for inventory replenishment. ii. Semi-permanent storage is used for inventory in excess of immediate needs. It is the safety or buffer stock ¨ The last function of warehouse is the information transfer. When the product is moved and stored, this function occurs at the same time. It is important for the management to have timely and accurate information in order to administer the warehouse activity. The information can cover a lot of things like inventory levels, throughput levels, and data of the customer, facility space utilization and also about the personnel (Lambert, et al., 1993).

Supplier relationship management

The most important purchasing activity is to select and keep close relationships with several reliable and high-quality suppliers, in order to reduce product costs, maintain good product quality and customer services (Aissaoui et al., 2007). Relations between suppliers and buyers in industrial markets have been found to be long term and characterized by stability (Gadde & Mattsson, 1987). Partnership should be established because if the buyer is to be best served, then the parties to a deal must work together for the win-win situation and both parties have an interest in each other’s success (Quayle, 2000). Figure 2.8 shows that a company is better off remaining in transactional relationships if it is not ready to develop relationships properly. Poor partnership is, instead, more costly than staying in a transactional relationship with suppliers (Goldsby et al., 2005). But it also shows in case of trust existence, good partnership is less costly than a transactional relationship.

IT goals in SCM

Simchi-Levi et al. (2004) classify IT goals for SCM into four groups: l Collect information. The information availability in regard to the status of material is the foundation on which intelligent supply chain decisions can be made. In addition, it is not sufficient just to track the status of material across the supply chain; there is also a need to alert diverse systems to the implications of this movement. This goal calls for standardization of product identification, e.g. bar coding, across companies (Simchi-Levi et al., 2004). l Access data. The single-point-of-contact concept is important for effective IT. The aim is that all the available information can be accessed in one stop regardless of the mode used or who is making the inquiry. In many companies, information systems are isolated, standing alone in light of their functions within the company. It will be ideal that everyone who needs certain data actually has access to the same real-time data through any interface device (Simchi-Levi et al., 2004).

Table of content :

  • Acknowledgement
  • 1 Introduction
    • 1.1 Background
    • 1.2 Problem Discussion
    • 1.3 Research Questions
    • 1.4 Purpose
    • 1.5 Delimitation
    • 1.6 Disposition
  • 2 Theoretical Framework
    • 2.1 Supply Chain Management (SCM)
      • 2.1.1 Inventory Management
      • Challenge of Inventory Management
      • Demand Management
      • Inventory Turns
      • Tradeoffs of Inventory
      • Inventory Carrying Costs
      • Classification of Inventory
      • Inventory Control Systems
        • ABC Analysis
        • When to Order?
        • How much to order?
      • Warehousing
        • Three Basic Functions of Warehouse
        • Types of Warehouse
        • Warehouse Layout
        • Warehouse Management System (WMS)
      • 2.1.2 Purchasing Management
      • The major purchasing decision processes
      • Supplier relationship management
      • 2.1.3 IT Application in SCM
      • The Role of IT in SCM
      • IT goals in SCM
      • Integrating Supply Chain IT
      • ERP Information System in Organizations
    • 2.2 Small Business and SCM
      • 2.2.1 Definitions
      • 2.2.2 Characteristics, Strengths and Weaknesses of SMEs
      • 2.2.3 Small Business Embracing SCM:Pros and Cons
  • 3 Methodology
    • 3.1 Generating the Research Topic
    • 3.2 Deciding the Research Approach
    • 3.3 Choosing the Appropriate Research Strategies
      • 3.3.1 Case Study Strategy
      • 3.3.2 Cross-Sectional Studies
      • 3.3.3 Exploratory, Descriptive and Explanatory Studies
    • 3.4 Qualitative or Quantitative Research
  • 4 Empirical findings
    • 4.1 Company Profile
    • 4.2 Organizational structure
    • 4.3 Supplier
    • 4.4 Business Operation Process
      • 4.4.1 In-house business operations
      • 4.4.2 Outsourced business functions
      • Inbound Logistics
      • Out-bound logistics
    • 4.5 Information System
    • 4.6 Perceived Problems
  • 5 Analysis
  • 6 Conclusion
    • 6.1 Theoretical Conclusions
    • 6.2 Practical Conclusions
    • 6.3 Criticism to the Study
  • 7 Reference


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