Introduction:
Supply chain management is one of the most significant aspects of an organization. It helps the organization to reduce costs and efficiency.
Four important factors in the supply chain are:
- Inventory
- Transportation
- Information
- Facilities
These factors act as determining factors for responsiveness and are the strategic fit.
Inventory:
Inventory is the stock available to the organization in any form and at any stage. Inventory includes raw material, work-in-progress, and finished goods in the supply chain. Inventory levels in the organization depend upon the levels of demand and supply.
Inventory is one of the costly elements in the organization. Organizations need to determine the requirement of the inventory.
Inventory costs are associated with the order the manager makes for goods.
Inventory control helps the organization to analyze and meet the inventory cost and requirements.
Inventory control provides a clear idea of how much stock is needed in the business currently and how much should be the turnover period.
Inventory control could be different for different departments of an organization.
In the same organization, factories need to maintain the stocks of raw materials while the showroom needs to keep the inventory of finished goods produced by the factory.
The decision of order quantity depends on the analysis of four different costs associated with it.
The Four costs are:
Purchase Cost
Carrying Cost
Ordering Cost
Stock-out Cost
Purchase Costs:
The Purchase cost is the amount a manager is willing to spend on the unit of goods is known as purchase cost.
Purchase cost comprises two elements, one being the cost and the other being the number of quantities they want to purchase.
Purchase costs also help to determine the discount the organization can get.
A large amount of orders attracts attractive discounts.
Carrying Costs:
Carrying cost refers to the cost incurred while the stock is in storage.
These costs can also be called storage costs.
There could be two types of carrying costs:
1. The cost incurred to store goods like rent, lighting, staff salary, maintenance costs, insurance, taxes, etc.
2. The opportunity cost organization is leaving to get profits from the stock
For Example, interest in investments and Profits from other productive activities.
Ordering Costs:
Ordering costs are the costs incurred while purchasing the inventory.
These are the costs accompanied by the preparation of the purchase and other miscellaneous expenses like transportation, phone calls, etc.
Setup costs all the cost which occurs when the production of goods occurs within the organization.
Accounting costs are also part of the ordering costs.
Most ordering costs are fixed costs and may not change with the change in order quantity.
Stock-out Costs:
Stock-out costs are also known as penalty costs, as they are associated with the delay in the delivery of the firm’s ability to deliver the product.
Organizations try to avoid stock-out costs. Delay can not only hurt their revenue but can also create a Dent in their goodwill.
Transportation:
Organizations use transportation for easy movement of their products and tools.
Transportation decisions are dependent on the mode of transportation and the route of transportation.
If an organization decides to transport its products through the air, it increases its responsiveness and costs. On the other hand, if the organization chooses the land route, their cost decreases as well as the responsiveness of the transportation.
The organization should also evaluate if they have the infrastructure for transportation or they need to hire these services.
Transportation plays a significant role for every business, and when an organization is operating in two different places, it becomes a crucial part of the business.
Efficient transportation options help the organization to bridge the distance between the two establishments of the same organization.
Information:
Information is one of the key aspects of the supply chain as with the proper flow of information, organizations can predict the quality to produce, when it is needed and where it is needed. This increases the effectiveness and responsiveness of the supply chain.
Facilities:
Facilities are the locations in the supply chain where the raw material and finished goods are stored. Work-in-progress materials are assembled. More Facilities close to the customers can increase the efficiency of the supply chain, but the cost of maintenance of so many facilities is very high.
Visibility of your business is not only good for the sale of your product, but it is also so helpful in creating a relationship with their customer.
The location of a business depends upon various factors like cost, availability, and accessibility by the customers.
Some factors play a significant role In the decision of the location for your business.
Customer satisfaction is one of the primary goals for an organization.
Organizations hold inventory to fulfill the need of the customer.
If the production is stopped for a shorter period, companies can satisfy the customer’s needs.
Organizations Also take care of the product if maintenance is needed to help the customer.
Fewer warehouses can reduce the cost but adversely affects the responsiveness.
