Unit 4: Logistics & inventory management

Logistics is the part of supply chain management that plans, implements and controls the efficient forward and reverse flow and storage of goods, services and related information between the point of origin and point of consumption to meet customer requirements (CSCMP).

Objectives (the 7 Rs)

Deliver the right product, in the right quantity, in the right condition, at the right place, at the right time, to the right customer, at the right cost.

• Rapid response to customer needs.
• Minimum variance — few unexpected disruptions.
• Minimum inventory consistent with service.
• Consolidation of shipments to cut transport cost.
• Quality and life-cycle support (reverse logistics, after-sales).

• Logistics costs in India are estimated at around 13–14% of GDP (older estimates) compared with about 8–9% in developed countries; the National Logistics Policy (2022) aims to bring this down.
• Connects producers with national and global markets; supports trade and exports.
• Creates time and place utility.
• Large employer — transport, warehousing, courier.
• Initiatives: PM Gati Shakti, Dedicated Freight Corridors, Bharatmala and Sagarmala, GST (removing check-posts), e-way bill.

Inventory is the stock of goods held for future production or sale.

Objectives of holding inventory

• Meet expected demand and maintain customer service levels.
• Smooth production despite demand fluctuations.
• Protect against stock-outs and supply uncertainty (safety stock).
• Take advantage of quantity discounts and economic order sizes.
• Hedge against price increases.

Functional types: cycle stock (regular replenishment), safety (buffer) stock, pipeline (in-transit) stock, seasonal/anticipation stock, speculative stock, dead stock (obsolete).

• Avoids stock-outs that lose sales and customers.
• Avoids overstocking that ties up capital and leads to markdowns, obsolescence and spoilage.
• Improves cash flow and working capital.
• Reduces storage and handling costs.
• Supports accurate merchandise planning and better supplier relations.

• Ordering (set-up) cost: cost of placing an order — paperwork, transport, receiving, inspection.
• Carrying (holding) cost: cost of keeping stock — storage, insurance, interest on capital, obsolescence, shrinkage; usually 20–30% of inventory value per year.
• Shortage (stock-out) cost: lost sales, lost goodwill, emergency orders.
• Purchase cost: price paid for the items.

• ABC analysis: A items (about 10–20% of items, 70–80% of value) — tight control; B items moderate; C items (about 50% of items, 5–10% of value) — simple control.

• Higher turnover = faster-moving stock, less capital tied up; too high may mean stock-outs.
• Shrinkage % = (Book inventory − Physical inventory) ÷ Sales × 100.