Unit 3: Inventory, sourcing and transportation
Supply Chain & Logistic Management notes · PTU syllabus (MBA 953-18)
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Unit summary
Inventory, sourcing and transportation decisions balance cost against availability. This unit covers multi-echelon cycle inventory management, safety inventory determination, optimum product availability, the role of sourcing and supplier selection, design collaboration, and the role of transportation and its modes.
After this unit you can
- Manage cycle inventory in single and multi-echelon chains
- Determine safety inventory and optimum product availability
- Explain sourcing, supplier selection and design collaboration
- Explain the role of transportation and choose modes
PTU syllabus topics
- Multi-echelon cycle inventory management
- safety inventory determination
- optimum product availability
- sourcing role and supplier selection
- design collaboration
- role of transportation and modes
Road
Door-to-door, flexible
Costly over long distances
Rail
Cheap for bulk, long distance
Fixed routes
Sea
Lowest cost for heavy cargo
Slow
Air
Fastest
Most expensive
Pipeline
Continuous, low cost for liquids and gas
Very limited use
Topic 1
Cycle inventory and multi-echelon management
- Cycle inventory: average inventory built up because of lot sizes = Q ÷ 2.
- Economies of scale: fixed ordering and transport costs push towards larger lots; aggregation across products (joint ordering) reduces costs; quantity discounts.
- Multi-echelon systems: inventory at several stages (factory, regional warehouse, retailer); coordinating replenishment intervals (integer multiples) reduces total cost; echelon inventory = stock at a stage plus downstream stock.
Topic 2
Safety inventory determination
Safety stock
z × σL, where σL = σD × √L (demand uncertainty over lead time)
Reorder point
Mean demand during lead time + safety stock
Cycle service level
Probability of no stock-out in a replenishment cycle
Example
Weekly demand mean 2,500, standard deviation 500, lead time 2 weeks, cycle service level 95% (z = 1.65): σL = 500 × √2 ≈ 707; safety stock ≈ 1,167 units; reorder point = 5,000 + 1,167 = 6,167.
- Reducing safety stock: shorter and reliable lead times, lower demand uncertainty (better forecasts), aggregation (centralisation, risk pooling), postponement, component commonality.
Topic 3
Optimum product availability
- Newsvendor model: for seasonal or perishable products, order up to the quantity where the probability of selling the last unit equals the critical ratio.
Critical ratio
Cu ÷ (Cu + Co)
Cu
Cost of under-stocking (lost margin)
Co
Cost of over-stocking (cost − salvage)
Example
A jacket costs ₹1,000, sells for ₹2,500 and is cleared for ₹600: Cu = 1,500, Co = 400; optimal service level = 1,500 ÷ 1,900 ≈ 79%.
- Managerial levers: reduce uncertainty, quick response (multiple orders in a season), postponement, tailored sourcing.
Topic 4
Sourcing and supplier selection
- Role of sourcing: decide which activities to perform in-house or outsource and choose suppliers to reduce total cost and risk.
Cost
Price, total cost of ownership
Quality
Defect rates, certifications
Delivery
Lead time, reliability, flexibility
Capability
Technology, capacity, financial health
Risk and sustainability
Location, ESG compliance, ethics
- Tools: weighted scorecards, auctions and reverse auctions, contracts (buy-back, revenue sharing, quantity flexibility) to coordinate incentives.
Topic 5
Design collaboration
- Involving suppliers early in product design (early supplier involvement) to reduce cost and time — design for logistics, design for manufacturability, modular and common components; collaborative product development platforms.
Topic 6
Role of transportation and modes
Road
Door-to-door, flexible, quick for short distances
Costly for long hauls, congestion
Rail
Cheap for bulk over long distances (Dedicated Freight Corridors)
Less flexible, needs road links
Water (sea and inland)
Lowest cost for bulk and international trade
Slow, port dependent
Air
Fastest, high value and perishables
Most expensive, weight limits
Pipeline
Low cost for oil and gas
Fixed routes, high investment
Multimodal
Combines advantages (containers)
Coordination needed
- Indian initiatives: PM Gati Shakti, National Logistics Policy 2022 (target to cut logistics cost), Dedicated Freight Corridors, Sagarmala, ULIP digital platform.
Key terms
- Cycle inventory
- Average inventory due to lot sizes
- Echelon inventory
- Inventory at a stage plus all downstream inventory
- Safety stock
- Inventory held against uncertainty
- Critical ratio
- Cu ÷ (Cu + Co) in the newsvendor model
- Multimodal transport
- Using two or more modes under one contract
Quick revision
- Cycle inventory Q/2; economies of scale; multi-echelon coordination.
- Safety stock = z × σD × √L; ROP; risk pooling.
- Newsvendor critical ratio; quick response; postponement.
- Sourcing role; supplier criteria; contracts; design collaboration.
- Transport modes; Gati Shakti; National Logistics Policy.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.What is cycle inventory?
- Q2.State the safety stock formula.
- Q3.What is risk pooling?
- Q4.State the newsvendor critical ratio.
- Q5.Name four supplier selection criteria.
- Q6.Compare rail and road transport.
Long-answer questions
- Q1.Explain cycle inventory management in single and multi-echelon systems.
- Q2.Explain the determination of safety inventory with an example.
- Q3.Discuss sourcing decisions, supplier selection and design collaboration.
- Q4.Explain the role of transportation and the choice of modes.
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