This article constitutes a theoretical-conceptual review related to logistics, purchasing, warehouse, and inventory management, with more emphasis on the latter. It also explains very briefly which are the economic-mathematical models used to define the inventory policy of any organization.
Emergence and evolution of the Logistics concept.
Business activity is characterized by its changing and increasingly dynamic environment, hence the need for companies to seek new management approaches that allow them to be increasingly efficient and competitive. Business Logistics understood as a strategic component to achieve customer satisfaction and work to control and reduce costs without affecting quality and income, allows achieving the required efficiency and competitiveness.
The word Logistics comes from the Greek "logistikos", which means knowing how to calculate. The term Logistics comes from 480 BC when the Athenian officials in charge of the storage and transfer of cargo between Athens and the islands of the League of Delos were called logistics. Whereas, the activities that today are recognized as logistics activities arise in the prehistory of mankind, in the Neolithic period in Egypt about 7000 years ago, associated with the beginning of agricultural activities.
It was not until 1945 that logistics was related to business development from documents written by Lieutenant Colonel of the United States Marine Corps Cyrus G. Thorpe, considered the father of logistics. From the business field some concepts can be cited (Jova, Y nd):
According to the Council of Logistic Management in 1986 states that: “Logistics is the entire process of planning, implementation and efficient control of the effective flow of costs and storage of materials, inventories in progress and finished products, as well as the related information from the point of from origin to the point of consumption in order to meet customer needs ”.
For his part, Ronald H. Ballou (1991) states that “Business logistics encompasses all activities related to the transfer-storage of products that take place between the points of acquisition and the points of consumption”.
Finally, the definition of logistics assumed by Dr. Maritza Ortiz states that: “it addresses the study of a set of activities that are carried out on the material, informational, financial and decision flows from an origin to a destination, with the aim of providing a service that adjusts to the needs and requirements of the organization's internal or external customers, at a reasonable cost, with the required quality and at the right time, allowing it to occupy an advantageous competitive position. ”(Ortiz Torres 2004)
Dr. Maritza Ortiz summarizes the evolution of logistics in four major stages and highlights the elements that identify each one of them.
- Growth stage (1950s and early 1960s). The theoretical bases of the concept of Logistics are developed, which caused an increase in productive capacities, resulting in a marketing policy in order to increase the product lines and the sale of them through multiple distribution channels. Physical distribution arises as a way to develop a logic that would allow controlling and containing the costs associated with new marketing policies, making the concept of total cost a fundamental element for the development of logistics. Maturity stage (End of the decade of the 60 and all the decade of the 70). The role of physical distribution is developed and consolidated, materials management arises,covering the activities related to the movement and storage up to and during the production process and an integration of the activities included in the management of materials and in the physical distribution begins to take place, since both are in charge of providing a certain level of service to the client at the lowest possible cost. They use the system approach as the basis of their integration principle. Development and consolidation stage (1980s and early 1990s). It is characterized by recognizing the need to manage the entire logistics process, the customer becomes the main figure in the process and the information systems reach great prominence. All the elements that make up the logistics chain are integrated. It is the emergence of the so-called Integral Logistics.Contemporary stage (end of the 90's to the present day). Global and International Logistics. The acceleration of the globalization of markets has led logistics processes to develop strategies with a global approach, which has come to be called world-class logistics organizations in charge of managing the flows of products around the world, on the basis of integration of the entire logistics chain.
Logistics systems and logistics activities.
Logistics takes support in all areas of the company, it is an integral process that dynamically links the Supply, Production and Distribution subsystems, being necessary, for its success, to act as a system that goes beyond the traditional borders of the company and that covers the flows of materials, services and information, from the suppliers' market to the product and / or service received by the client. The organization must be observed in an integral way, relating all the functional areas.
To design logistics systems it is necessary to carry out an integrated system of resources and activities that allows serving the target market, with a high level of services, at the lowest possible cost and with the best quality.
The basic resources that make up a logistics system are man, work means and work objects, hence the management of logistics systems from the point of view of resources consists in determining, monitoring and adjusting the variables of the The same that guarantee to efficiently serve the target market with the level of service set. On the other hand, they are formed by a group of activities that are part of logistics and vary from company to company depending on the characteristics of the same, the organizational structure and its functions.
Regarding the concept of logistics system there are numerous criteria. One of them is the definition given by Dr. Martha I. Gómez Acosta and Dr. José Acevedo Suárez, recognizing it as “the network of autonomous and coordinated units that guarantee the satisfaction of end customers in time, quality, quantity and costs demanded ”. (Gomez & Acevedo 2002)
The logistics systems are divided into four subsystems:
Supply Logistics: It is related to the first phase of the flow of goods. It has traditionally been seen as the process of purchasing and storing products. It can also be explained as the transfer from the suppliers, in the supplier market, to the company's entry warehouse of raw materials, parts, pieces, materials, etc., although it may be the case that flows of goods occur directly from the supplier to the production process. It is important to point out that procurement is also present in commercial or service companies, but in these cases it is related to the acquisition of finished products to satisfy the demands of the end customer.
Production logistics : It is related to the second phase of the flow of goods. It includes the transformation of raw materials and materials into finished products until they are placed at the points of sale where final customers purchase them. It also includes activities such as transportation, storage, handling, quality control, inventory management, among others. Everything related to the storage of products in processes is present.
Distribution Logistics : Through this phase, the flows of finished products are managed, that is, from the sales warehouse to the end customer in the suppliers market. It relies on the use of warehouses that serve as intermediaries between the producer and the end customer.
Return Logistics : In this phase, the new use that will be given to the final products and waste is established, once their life cycle is over. It is very important to take into account the containers that can be reused, as well as the returns.
Logistics activities.
Logistics in a global way addresses a set of interdependent activities. These activities can be divided, according to Ronald Ballou (Ballou 1991), into key activities and support activities.
Key activities:
- Customer service: It can represent the success of the company, so all its functional areas must be prepared to achieve this objective. From the perspective of the seller or the service provider, the factors of time, availability, quality, reliability, convenience and communication, are those that will be in the image that the client takes of a product, supplier or distributor, therefore, they constitute a factor of competitiveness when the client has several options of choice. The tastes and wishes of the client towards the logistics service must be determined, as well as their level of satisfaction with the product or service.Transport: Depending on the type of merchandise, the most appropriate means of transport is selected to guarantee supply, the mode is selected and the means of transport,The most convenient routes are established and the vehicles are organized and planned. Inventory Management: Since it is not possible to produce and sell in unison, these aim to maintain the availability of the product when the customer requests it, so According to the type of product and client, inventory management policies will be established to make these decisions. It is necessary to take into account that there are several types of inventories and some do not correspond to this definition, as is the case of inventories of raw materials and materials and production in process.Order processing: Interaction procedure between order management and that of inventories. It includes the selection of the order and the shipment, the invoice and the receipt of the payment.The distribution is made from the customer's order and it is essential to minimize the time between placing an order and paying for it.
Support activities:
- Storage: It is the conservation of the products object of inventories. It is conditioned to the shape, size, weight, quality, resistance and packaging of the goods. The storage places must guarantee an optimal protection of these so that they maintain their physical characteristics and quality. Its efficiency is in storing in optimal conditions the maximum amount of merchandise with the minimum space. Handling of merchandise: It is composed of all those processes that are carried out on the product and that facilitate its arrival at the final destination in optimal conditions. It is necessary to carry out the selection of equipment, the order preparation procedures and the storage and recovery of the merchandise. Purchases: It is closely related to the inventory management policy established by the entity.It includes the selection of suppliers and the time of purchase, the calculation of the quantities to be purchased and requires rigorous monitoring. This decision must also take into account the characteristics or requirements of the warehouse.Information management: It involves capturing, registering, storing, processing data, being attentive to the external and internal requirements of the organization, exchanging with the environment and receiving feedback. Information collection, storage and manipulation, data analysis and control procedures are employed.be attentive to the external and internal requirements of the organization, exchange with the environment and get feedback. Information collection, storage and manipulation, data analysis and control procedures are employed.be attentive to the external and internal requirements of the organization, exchange with the environment and get feedback. Information collection, storage and manipulation, data analysis and control procedures are employed.
Supply Management.
Supply management is a fundamental function within a company since it is the one that provides it with the goods and services it requires for its operation. Procurement is a basic function in any company, be it production or services.
The term provisioning is repeatedly confused with purchase, while purchases play an elementary role but only occupy a part within it.
The general objective of this function is based on achieving the efficiency and effectiveness of the company through the logistics chain.
Efficacy: consists of the product or service being available when needed, with the appropriate quality, the necessary quantity and in a timely manner.
Efficiency: from the efficiency point of view, the supplies try to ensure that the cost of the resources used to carry out the different activities is optimal.
There are different opinions or concepts about the provisioning among which they find:
Jordi Pau i Cos says that “procurement is the set of operations carried out by a company in order to dispose and maintain the appropriate materials and articles in the correct quantity, at the right time and at the lowest possible cost.” (Pau i Cos & Gasca 1998)
According to Fusté Dukarte, the function of procurement is “to guarantee that supplies are available, in the right place at the right time, in the necessary quantity, with the right quality and at the lowest possible cost to satisfy the intended consumer.” (Fusté et al. 1999)
On the other hand, Dr. Maritza Ortiz defines supply as "The logistics function that manages the entire process of provision of the necessary resources for the successful operation of the company, through the logistics chain." (Ortiz Torres 2004)
Supply logistics must comply with the following activities (Ortiz Torres 2004):
- Anticipate the needs of the company Plan them over time Express them in appropriate terms from a descriptive point of view in a quantitative and qualitative way Search the market for products that satisfy it Acquire the products Make sure they are received in the conditions demanded Pay for the products purchased.
Procurement management comprises three basic activities:
- Purchasing management: Acquiring the necessary materials for the production or marketing of products Storage management: Manage the storage of products, maintaining minimum stocks of each material Inventory management: Control inventories and associated costs to them.
Inventory management
Purchasing, storage and inventory functions are closely related because, in order to achieve proper purchasing management, it is necessary to know the available storage capacity, since, once the products are purchased, they must be transferred to the warehouse for their conservation and custody until the client's demand is presented. But when and how much to buy?
Precisely, it is the inventory manager who is in charge of making these calculations, taking into account demand forecasts already made, together with the determination of the maximum, minimum and average levels of the inventories. These figures should be complemented with the determination of the space that these products will occupy in the warehouse.
Now, what is meant by inventory? In this regard there are dissimilar opinions.
According to Shroeder “an inventory is a stored quantity of materials that are used to facilitate production or to satisfy consumer demand” (Shroeder, 1993, p. 325) and for Rafael Ramos Díaz, “inventory is an accumulation of materials in space and time ”(Ramos Díaz, 1995, p. 6).
For Dr. Maritza Ortiz Torres, inventory is nothing more than "the set of resources that are capable of satisfying a need and are stored, waiting for the demand to be produced to satisfy it" (Ortiz Torres, 2004, p. 37).
Currently this term has been used as a synonym for the word stocks and vice versa, due to the translations made of texts in English. Other Spanish-speaking authors agree that a good translation of both terms would be stocks. Taking into account the above, all these words referring to the same phenomenon will be used interchangeably in this work.
There are various classifications of inventories taking into account different criteria. According to their nature there are the so-called inventories of raw materials and materials, of production in process and of finished production; Taking into account the speed of rotation, they are divided into those with frequent or slow movement and those that are idle or obsolete; and according to the position in the logistics process are those called in stock and called in transit.
Taking into account the opinion of some experts, it could be suggested that inventories fulfill at least five functions in the company (Cespón Castro & Amador, page 58):
- They allow the use of economies of scale They balance supply and demand They allow specialization in production They allow protection from the insecurity of demand and the supply cycle They act as a cushion at the different levels of the logistics chain.
Adequate inventory management is extremely important for the proper functioning of the entity if the impact they have on the daily operation of companies is appealed to, the amount of money that a stock represents and the costs of maintaining them for a unit of time additional; hence, managing inventory efficiently and effectively is vital to the performance of any organization.
Regarding inventory management, Jordi Pau stated: “inventory management means organizing, planning and controlling the set of stocks belonging to a company” (Pau & Gasca, 1998, p. 161), and to achieve the above, it mentions a set of tasks, among which are:
- Establish policies and criteria for the regulation of inventories. Define the techniques to be used. Establish methods for forecasting needs. Determine replacement times and quantities. Control entry and exit movements.
Another well-correct definition is the one offered by Dr. Maritza Ortiz Torres when stating that inventory management is nothing more than “a decision-making process, the objective of which is to achieve customer satisfaction at the lowest possible cost or at an economic cost. reasonable for the organization. For which, the following decision problems must be answered:
- What items should be included in the warehouse stock. How many items should be ordered each time. When the order should be requested. What type of inventory review system should be used ”(Ortiz Torres, 2004, p. 40).
For several decades dissimilar students of the subject have dedicated their time to develop different quantitative inventory models that allow efficient management of stocks in organizations, based on establishing optimal or economically advantageous policies for managing them. These policies try to answer basically three questions:
- When to order? How much to order? At what cost?
In deciding which inventory model to use, a distinction must be made in relation to the level of dependence on demand. Based on this section, the models can be grouped into two broad categories:
- Non-Scheduled Replenishment Models: They are used to manage inventories with independent demand. Scheduled Replenishment Models: They are used to manage inventories with dependent demand, that is, goods are managed through requirements policies.
The unscheduled replenishment models are classified into:
- Fixed Quantity Reorder Models or Continuous Review System, according to which an order is placed when inventories decrease to a certain magnitude or "order point". The quantity to be ordered will be the "economic lot or optimal lot", and the demand for the good or service can be deterministic or random. Models with a Fixed Period of Reorder or Periodic Review System, according to which an order is made from time to time previously settled down. The quantity to order will be the one that restores a certain “maximum level of stocks” or “target level”. Likewise, the demand for the good or service may present a deterministic or random behavior.
Next, the particularities of each of the inventory management models with independent and random demand are exposed.
Fixed Quantity Reorder Model or Continuous Review System with random demand.
Model assumptions:
- The demand for the product is known for a given planning horizon, usually one year, with the demand rate being constant and continuous. The product is purchased in batches of the same size and received and placed in inventory all at once. delivery is known and constant. Non-existents (missing) are not allowed. The relevant costs in this situation are considered to be the conservation cost and the cost of ordering an order. We want to determine the size of the lot or order to be made. minimum total annual inventory cost.
In this type of model, demand (D) is satisfied from the existing inventory. When inventory falls to a set reorder point (R), a replenishment order is always placed for the same quantity, hence the model is called a fixed reorder quantity.
Fixed Reorder Quantity Model or Continuous Review System with Random Demand
Source: Ortiz Torres, Maritza (2004): “Inventory management system through the use of quantitative models in commercial and service companies”. P. 44.
In this model, the optimal order size or lot size (Q), is calculated by applying the Economic Lot formula or Fixed Quantity Reorder model with deterministic demand (EOQ), also known as Wilson's Formula.
The order point is calculated by adding to the demand during the delivery time (d * L), the safety inventory (B), which is nothing more than an additional quantity that is required to protect against the randomness of the demand and / or the supplier's delivery time. The calculation of the safety inventory is linked to the determination of the probability that an item is in stock when it is demanded, this probability can be determined, comparing the cost of conservation of the items (Ch) in the warehouse and the cost of stock break or stock depletion; or it may be related to the level of service set by the organization. Also, for the calculation of the safety inventory, the following are taken into account:the standard deviations of demand and / or delivery time as appropriate in each case.
The notation and form of calculation of the variables associated with this model are presented below:
| Notation | |
| D | Demand in units per year |
| d | Projected average daily demand |
| Q | Lot size or order to request |
| K | Unit cost of product acquisition |
| Ch | Conservation cost per unit of product per year |
| Co | Cost of ordering an order ($ / order) |
| L | Delivery time (days) |
| R | Reorder point (units) |
| Ct | Total cost of inventory |
| Z | Reliability factor associated with the level of service.
It is calculated using probability distribution tables |
| σd | Standard deviation of average daily demand |
| σL | Standard deviation of delivery time |
| B | Security inventory |
Source: self made.
Mathematical expressions:
Fixed Period Reorder Model or Periodic Review System with random demand.
When inventory is managed using a periodic review system, the stock position is checked at fixed time intervals and an order is placed for the difference between the maximum replenishment level M or target level, and the inventory level that is held. at review time, therefore, a variable quantity is always ordered.
As random demand is now assumed and the period between reviews is fixed, shortages can occur at any time within the period between reviews T. As a result of the above, in this type of model, the safety inventory has to be higher if desired. provide the same level of service.
The maximum level of stocks or target level is calculated, taking into account the demand during the review period, plus the demand during the delivery time, as well as the safety inventory that, as in the previous case, takes into account the service level set and the standard deviation of demand and / or delivery time as appropriate.
Fixed-period reorder model or Periodic review system with random demand
Source: Ortiz Torres, Maritza (2004): “Inventory management system through the use of quantitative models in commercial and service companies”. P. 46.
The notation and form of calculation of the variables associated with this model are presented below:
| Notation | |
| D | Demand in units per year |
| d | Projected average daily demand |
| Q | Lot size or order to request |
| K | Unit cost of product acquisition |
| Ch | Conservation cost per unit of product per year |
| Co | Cost of ordering an order ($ / order) |
| L | Delivery time (days) |
| R | Reorder point (units) |
| Ct | Total cost of inventory |
| Z | Reliability factor associated with the level of service.
It is calculated using probability distribution tables |
| σd | Standard deviation of average daily demand |
| σD (T + L) | Standard deviation of demand during the period of
restocking and delivery time |
| B | Security inventory |
| M | Maximum level to which it is ordered or target level |
Source: self made.
Mathematical expressions:
σD (T + L)
σD (T + L) =
Min-Max Inventory System.
The Min-Max systems are a variant of the Continuous Review system. They arise because on repeated occasions the fluctuations in demand are such that inventory levels will fall below the reorder point without equaling it, which can imply depletion or stock-outs.
In this system, the inventory is reviewed continuously, and the inventory policy establishes that the order will be made when the available quantity reaches or falls below the reorder point, with the particularity that the quantity to be ordered is not fixed, but is the difference between the maximum level set and the quantity available at the time of review. The following graphic shows such a procedure:
Source: Ortiz Torres, Maritza (2004): “Inventory management system through the use of quantitative models in commercial and service companies”. P. 47.
The notation and form of calculation of the variables associated with this model are presented below:
| Notation | |
| D | Demand in units per year |
| d | Projected average daily demand |
| Q | Lot size or order to request |
| K | Unit cost of product acquisition |
| Ch | Conservation cost per unit of product per year |
| Co | Cost of ordering an order ($ / order) |
| L | Delivery time (days) |
| R | Reorder point (units) |
| Ct | Total cost of inventory |
| Z | Reliability factor associated with the level of service.
It is calculated using probability distribution tables |
| σd | Standard deviation of average daily demand |
| σL | Standard deviation of delivery time |
| B | Security inventory |
| what | Quantity of products available at the moment
when the reorder point is reached. |
Source: self made.
Mathematical expressions:
Yes:
I Max: Maximum inventory level.
Q: Lot size.
A: Reorder point.
Q´ ´: Order size.
A good management of stocks guarantees, among other elements, that the cycle of operations of the company is fulfilled, since one of the causes that could delay or interrupt it due to insufficient cash generation is, precisely, the excess of inventories in any of its manifestations. This results in an inadequate structure of current assets, hence if the time required by the company to convert said stocks into money is too long, it will not be able to meet its payment obligations due to lack of the necessary cash.
Conclusions
Once the present investigation is completed, it can be concluded that supply management, and specifically inventory management, significantly influences the economic-financial situation of companies due to its contribution to reducing total costs.
Having large levels of inventories will decrease the average profit the company will obtain for each peso of capital invested, which translates into a decrease in business efficiency levels. On the contrary, a low amount of inventories (which in fact implies a low amount of working capital) favors a higher profitability, but increases the risk of interruption of the operation. Hence the need to establish stock management policies that maintain the balance between profitability and risk for the entity.
Bibliography
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Deterministic models can be consulted in Stevenson, W.; Hojati, M. (2001): "Production Operation Managemen". Mc Graw-Hill. Ryerson Limited. Canada. Page 423.
