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What is logistics? Guide to supply chain management and inventory

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The UAE is ranked as the third-best logistics centre among emerging countries, behind China and India, thanks in part to the outstanding quality of infrastructure and transport.

But what do we mean by logistics? And how is the art of logistics management relevant to your business?

What is logistics?

Logistics describes the practical management of every process involved in bringing a product to consumers. Everything from sourcing raw materials to end distribution.

Although terms such as ‘supply chain management’ and ‘inventory management’ are often used interchangeably, logistics management encompasses both. It is the glue that holds everything together.

Understanding supply chain management

Supply chain management (SCM) is the process of organising everyone in the supply chain – running from macro decisions, like who is supplying what to whom, to granular issues such as coordinating border tax payments.

What is a supply chain?

The supply chain describes every actor involved in getting a product to the consumer.

The chain runs end-to-end, starting with raw materials, terminating with consumer distribution. Each link in the chain must be reached before moving to the next one.

Take a lemonade stand as a simple example. First, you need materials – lemons, sugar and cups. These need to come from somewhere, in this case, a store (supplier A).

Then the materials need to be converted into a product. The lemons and sugar must go to a manufacturer. This is supplier B. Once the product has been made, this has to go to distribution – the lemonade stand.

The supply chain, then, looks something like this:

  • Lemons, sugar and cups (materials) from the store (supplier A)
  • Lemons and sugar to the person making the lemonade (supplier B)
  • Lemonade and cups to the lemonade stand for distribution to customers

What is supply chain management (SCM?)

Supply chain management (SCM) is the active management of supply chain activities to maximise customer value and achieve a sustainable competitive advantage.

If you have multiple lemonade stands, you’ll need to ensure each one has enough lemonade at any given time. How much lemonade is usually sold at each stand on a Wednesday? Is hot weather due next week?

To fulfil that anticipated demand, you need to ensure enough materials (lemons, sugar and cups) have been bought. If one store can’t achieve that, another supplier will need to be found. You’ll also need to ensure the manufacturer has enough capacity to make the lemonade.

SCM is the art of bringing all those factors into harmony, making proactive efforts to maximise efficiency along the way.

How does SCM work?

There are five aspects of SCM:

  1. Planning: Mapping out your supply chain, predicting customer demand, and putting contingency strategies in place.
  2. Procurement: Purchasing raw materials, components etc.
  3. Production: Turning raw materials into products.
  4. Distribution: The logistical flow of goods across the supply chain. Raw materials to production, products to warehouses, warehouses to stores.
  5. Customer interface: Fulfilling orders, interacting with customers.

Effective supply chain management will examine each of these areas and see how they can be made more efficient. Can manufacture be located closer to raw materials to minimise transport distance? Would multiple warehouses be able to respond to changing customer demand better than a central warehouse?

Examples of relevant supply chain management terms

Within the broader issues mentioned above, are more granular logistics considerations. To give you a few examples, some essential supply chain management terms you should be familiar with are:

  • Cumulative Mean
    The total figure indicating how much product to produce in advance, taken as an average from previous orders.
  • Demand Management
    Understanding customer behaviour and past patterns to adjust the supply chain in accordance – producing more for higher demand, reducing material orders for lower.
  • Financial Flows
    Controlling credit terms, payment schedules, and accounts payable and receivable, to ensure everyone in the chain is getting paid – and that you’re making a profit.
  • Information Flows
    How orders flow down the chain, monitoring delivery status and gaining an overview of the supply chain’s responsiveness to demand.

How does supply chain management link to inventory management?

Effective inventory management is essential to effective supply chain management. Simply put, everything else in your supply chain follows from your inventory.

To give two examples:

  • Based on previous data, you know it takes two days to re-supply a lemonade stand. You sell an average of 100 cups of lemonade per day and have enough lemonade for 300 cups. Since lemonade is best served as fresh as possible, the optimum time to order is tomorrow morning.
  • Particularly hot weather is predicted in three days. You have enough lemonade for a usual three days, but demand is usually higher on hot days. Better start the re-supply process.

If you don’t know what you’ve got, you don’t know what you need. The best way to anticipate demand is to evaluate what happened in a similar situation in the past.

All this data is contained in your inventory records – if your business is fastidious about keeping detailed inventory logs.

What is inventory management software?

Inventory management software – like our own Inventory Advisor – helps you keep those fastidious records, and to make data-driven supply chain decisions.

It will automatically tell you what you have too little of – and when the best time to re-supply is, based on previous data – and what you have too much of; preventing you from unnecessary orders.

To do this, it depends on keeping a perpetual inventory system – impossible to maintain without the right software.

What is a perpetual inventory system?

Simply put, a perpetual inventory system keeps a permanent ledger of all inventory. It is continually updated to reflect what items are in stock, what has been sold, and the value of both.

What is a periodic inventory system?

Periodic inventory systems log when items have been procured. What has been sold is derived from the difference between current stock – discovered in periodic physical inventory checks – and acquired stock.

The difference between an inventory management system and a warehouse management system

Many people get confused between inventory management systems and warehouse management systems (WMS).

The critical difference is that inventory management systems track individual products, and WMS systems track units of space – i.e. where products can be put in the warehouse. They are designed to achieve complementary goals.

How can inventory management software help efficiency?

Our IMS, Inventory Advisor, is designed to maximise the efficiency of your inventory management, to help optimise the effectiveness of your supply chain.

Key efficiency features include:

  • Complete view of inventory in one place;
  • Perpetual inventory system drives inventory planning; and
  • Automatic forecasting at macro and micro level.

By basing inventory management on past data, your supply chain can become more agile, and the total ownership of your stock is reduced – freeing up more cash for innovation.

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