Page 151 - DMGT523_LOGISTICS_AND_SUPPLY_CHAIN_MANAGEMENT

Logistics and Supply Chain Management

Notes Geographical separation permits economic specialization between the manufacturing and
distribution units of an enterprise. When geographical specialization is utilized, inventory in
the form of materials, semi-finished goods or components, and finished goods is introduced to
the logistical system. Each location requires a basic inventory. In addition, in-transit inventories
are necessary to link manufacturing and distribution. Although difficult to measure, the
economies gained through geographical specialization are expected to more than offset increased
inventory and transportation cost.

7.1.2 Decoupling

A second inventory function, decoupling, provides maximum operating efficiency within a
single manufacturing facility by stockpiling work-in process between production operations.
Decoupling processes permit each product to be manufactured and distributed in economical lot
sizes that are greater than market demands. Warehouse inventory produced in advance of need
permits distribution to customers in large quantity shipments with minimum freight cost. In
terms of marketing, decoupling permits products manufactured over time to be sold as an
assortment. Thus decoupling tends to “buffer,” or cushion, the operations of the enterprise from
uncertainty.

Did u know? Decoupling differs from geographical specialization: the former enables
increased operating efficiency at a single location, while the latter includes multiple
locations.

7.1.3 Balancing Supply and Demand

A third inventory function, balancing, is concerned with elapsed time between consumption
and manufacturing. Balancing inventory reconciles supply availability with demand.

Example: The most notable examples of balancing are seasonal production and year-
round consumption. Orange juice is one such product. Another example of year-round production
with seasonal consumption is antifreeze. Balancing inventories link the economies of
manufacturing with variations of consumption.

7.1.4 Buffer Uncertainties

The safety stock or buffer stock function concerns short-range variation in either demand or
replenishment. Considerable inventory planning is devoted to determining the size of safety
stocks. In fact, most overstocks are the result of improper planning.
The safety stock requirement results from uncertainty concerning future sales and inventory
replenishment. If uncertainty exists, it is necessary to protect inventory position. In a sense,
safety stock planning is similar to purchasing insurance.

Safety stock protects against two types of uncertainty. The first type concerns demand in excess
of forecast during the performance cycle. The second type of uncertainty involves delays in the
performance-cycle length itself. An example of demand uncertainty is a customer request of
more or less units than planned. Performance-cycle length uncertainty results from a delay in
order receipt, order processing, or transportation.

Thus we can say that or rather we can conclude that:
1. The four functions of inventory are geographical specialization, decoupling, balancing
supply and demand, and buffering uncertainties with safety stock.

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