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Supply Chain Management

Supply Chain Management

Supply chain management is a system of planning, execution, monitoring, and analysis of logistics processes (Chopra & Meindl, 2013). This management covers both internal and external flows of goods and services during the execution of client orders. It is a complete solution for the automation of business processes managing the entire chain: from the creation of the order to final receipt of goods by the customer. The use of modern software platform, web-based applications, and diverse experience of specialists in the design of economic information systems determine the effectiveness of the whole system. A solution of SCM focuses on the reduction of logistics costs such as transportation, storage, and distribution. It aims to accomplish the following tasks: (1) reduction of costs; (2) increase in cash turnover; (3) increase in labor productivity; (4) monitoring and analysis of the efficiency of the supply chain; (5) operational meeting demand; (6) increase of customer satisfaction; (7) etc.

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The formation of the supply chain and the definition of its structure depend on its basic characteristics such as length, width, and power (Chopra & Meindl, 2013). The supply circuits are classified into short and long. In their turn, long supply chains are divided into narrow, moderate, and wide. The length of the supply chain varies according to the number of levels of suppliers and consumers. It is determined by the number of intermediaries from the beginning of production to the end user. The width of the supply chain is the number of parallel routes by which products can be moved. For example, a case when products can be purchased in many retail outlets indicates a wide supply chain. When most of the companys products are sold through its own stores, the supply chain is narrower. Extension and expansion of the supply chain increase the quality of customer service, but at the same time it is accompanied by rising costs and declining control over the logistics part of the manufacturer.

At present, companies need to obtain and use information about consumer demand for optimization of the supply chain, reduction of unnecessary inventory and obsolescence while maintaining or improving customer service levels.

Order fulfillment is one of the basic conditions, which is a matter of the paramount importance for the company. The delivery of goods depends on the timing verification, production, packaging, and shipment of orders. The smaller is the period of delivery from the supplier, the easier is to organize a more efficient inventory management of the company. Faster delivery guarantees the decrease of the forecast horizon, the increase of supply frequency, the reduction of work and insurance stocks, and the risk of unsaleable and excessive goods (Chopra & Meindl, 2013). The process of the order fulfillment also influences the turnover of invested finances in stocks.

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The order management involves an activity performed in the time period between the time of reception of the order and the moment when the warehouse staff is instructed to ship products in order to fulfill it (Chopra & Meindl, 2013). The purchase order determines necessary products that should be ordered.

It clearly establishes an agreement between a buyer and a supplier. While the purchase order is made on the basis of the application, the order management serves to enhance the automation of business processes related to the planning and execution of plans for the control of such economic activities as sale and supply. It also allows managers to create a balanced system of planning at the enterprise at any predetermined version of the business process.

Such factor as the customer service is the key to successful business, since it aims to build long-term client relationships. Consumer loyalty depends on the level of service that provides positive feedback and engagement of a greater number of people who are potential customers. A slogan of customer service is the customer is always right. To optimize the customer experience and, improve client satisfaction and customer loyalty to the product, the company should invest heavily in the client management, providing the best service continuously.

The need and costs of inventory are determined by internal changes and external contradictions that encourage an organization to provide a scientific approach to inventory management. The companys owner is forced to create reserves in order to decrease costs and increase profits. Furthermore, stocks and financial resources may also be considered as interchangeable factors. As a result, the reserves are created to provide a higher potential return.

The fixed order quantity determines the level of inventory, which is continuously monitored to maintain fixed quantity when the stock falls to the reorder point (Chopra & Meindl, 2013). In other words, the inventory control system determines the minimum and maximum inventory levels. Costs of inventories include the content of interest in the funds invested in stocks, taxes, insurance, losses from obsolescence, wear and damage, and the cost of storage. The optimum size of orders is determined by comparing the costs of maintaining inventories and the orders of expenses. The fixed order quantity determines how many goods should be distributed for each order as well as the time of the replenishment order at each position.

A fixed order interval is strictly controlled and it does not change throughout the short time period. Therefore, determination of the value of the order is the main task while working with this system. The fixed order interval allows setting a further extension of the production program of new products. In addition to this, a fixed order point system helps entrepreneurs monitor stock levels and order new goods to replenish inventory. For example, if the optimum stock level is 200 units, every time it falls to a lower level, a new order should be generated to replenish stocks.

Economic order quantity (EOQ) expresses the power of material flow directed by the supplier and customer orders (Chopra & Meindl, 2013). The optimum size of the order should be such that the total annual cost of submitting orders and the maintenance of stocks are the least of this consumption. To avoid shortages, managers can estimate the optimum size of the order.

The economic order quantity model is the best indicator for determining supplies used in the procurement logistics. This indicator expresses the power of material flow according to the customer requirements, providing the value of the sum of two logistics components such as the transport and procurement costs and the formation and storage of inventory costs (Chopra & Meindl, 2013). To determine the economic order quantity, it is necessary to compare the costs of the maintenance of stocks and supply costs orders. Since the average volume of reserves equals to half the size of the order, the order consolidation of the party will lead to an increase in the average volume of stocks. The optimum size of the order should reach such level that the total annual costs of supply orders and inventories were the least content for a given volume of consumption. Calculation of the most economical order quantity is performed in the framework of the inventory management system with a fixed size of the order, which should be equal to its most economical size. To calculate the economic order quantity, a Wilsons formula is used (Chopra & Meindl, 2013).


Where EOQ is economic order quantity,

Co- the cost of the order,

Ci – the purchase price per unit of goods,

S the annual sales,

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U – the proportion of storage costs in the unit price of the goods.

In practice, determining the economic order quantity, it is necessary to consider a great number of factors rather than the base formula due to the special conditions of supply and the characteristics of the product. Generally, the larger the supply batch, the lower is the cargo unit transportation cost. Thus, businesses benefit from such delivery sizes that provide savings in transport costs. However, these dimensions may exceed the economic order quantity calculated according to Wilsons formula. To make an informed decision, it is necessary to do the calculation of total costs taking into account the savings of transport costs and compare the results.

The basic warehouses are being built as well as a variety of devices for receiving, distribution, storage of goods, and preparing them for consumption and supply to the consumers (Chopra & Meindl, 2013). They are one of the most important elements of logistics systems. The specially equipped places for keeping inventory exist at all stages of the flow of materials, ranging from the primary source of raw materials to the end consumer. This explains a large number of different types of warehouses. Their dimensions vary widely from small rooms to giant warehouses covering an area of hundreds of thousands of square meters. The stock can maintain a certain temperature and humidity. Warehouses differ in the degree of mechanization such as automated, non-motorized, and complex-mechanized. The essential feature of warehouses is the ability to classify them in relation to the shipping cargo via rail, water, road, or air. In accordance with this feature, there are near-station, port warehouses, a railroad, and many others.

The main factor in choosing the location of the warehouses are the total costs for their construction, operation, and transportation as well as costs for the delivery and dispatch of goods. The initial concept of the organization process in the warehouse is a loading unit, which has a certain weight or volume quantity that is loaded, stored, transported, and unloaded. A cargo unit can be formed by the supplier or producer and at the warehouse itself. To ensure a unified approach to different warehouse equipment, the concept of the basic module is introduced. The cargo unit during the execution of warehouse operations for logistics management should maintain its integrity and permanence. This is achieved by using a consolidated packaging that is linked to the base module.

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