NATIONAL

NATIONAL INSTITUTE OF TRANSPORT

NATIONAL TECHNICAL AWARDS LEVEL 7I TEACHING MANUAL

PROGRAMME: BACHELOR DEGREE IN LOGISTICS AND

TRANSPORT MANAGEMENT

LTU 07209: LOGISTICS AND SUPPLY CHAIN MANAGEMENT

BY DR. BENITHA MYAMBA

APRIL, 2025
 LEGAL DISCLAIMER

This training manual is intended for students pursuing a Bachelor’s degree in Logistics and
Transport Management at the National Institute of Transport. It is for educational purposes only.
While every effort has been made to ensure the accuracy and relevance of the information
provided, the authors make no warranties about the completeness and accuracy of the contents.
For official legal, operational, or commercial advice in logistics and supply chain management,
readers should consult certified professionals or legal experts in their jurisdiction.

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 PREFACE

The Logistics and Supply Chain Management module is a critical component of the academic and
professional development of students pursuing careers in logistics, transport, operations, and
business management. In today’s globalized and fast-moving business environment, the ability to
plan, manage, and optimize the flow of goods, services, and information is a strategic capability
that organizations across all sectors depend upon.
This manual provides students with a comprehensive understanding of logistics and supply chain
management concepts, frameworks, and techniques, while developing the analytical, decision-
making, and problem-solving skills necessary to effectively plan and manage supply chain
operations in a dynamic global environment.

By the end of this module, students should be able to:

• Understand the interdependence of various supply chain functions

• Analyze and apply core supply chain strategies
• Evaluate logistics decisions using quantitative and qualitative methods
• Contribute meaningfully to organizational efficiency and customer value creation

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 LIST OF ACRONYMS AND ABBREVIATIONS

ARIMA Autoregressive Integrated Moving Average

DOI Days Of Inventory
EOQ Economic Order Quantity
ERP Enterprise Resource Planning
IoT Internet Of Things
JIT Just In Time
KPI Key Performance Indicators
MAD Mean Absolute Deviation
MAPE Mean Absolute Percentage Error
MSE Mean Squared Error
RFID Radio Frequency Identification
RFP Request For Proposal
RFQ Request For Quote
ROP Reorder Point
SCM Supply Chain Management
SCOR Supply Chain Operations Reference Model
SKU Stock Keeping Unit
SLAs Service Level Agreement
SMA Simple Moving Average
TCO Total Cost of Ownership
TMS Transportation Management System
WMS Warehouse Management Systems

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 TABLE OF CONTENTS

LEGAL DISCLAIMER ................................................................................................................... i

PREFACE ....................................................................................................................................... ii
LIST OF ACRONYMS AND ABBREVIATIONS........................................................................ iii
TABLE OF CONTENTS ............................................................................................................... iv
LIST OF FIGURES ....................................................................................................................... vi
LIST OF TABLES ........................................................................................................................... i

CHAPTER ONE: INTRODUCTION TO SUPPLY CHAIN MANAGEMENT ..................... 1

1.1 Learning Objectives ........................................................................................................ 1
1.2 Overview ......................................................................................................................... 1
1.3 Roles of Supply Chain Management in Organizations ................................................... 1
1.4 Supply Chain Flows ........................................................................................................ 2
1.5 Stages of a Supply Chain ................................................................................................ 3
1.6 Decision Phases in a Supply Chain................................................................................. 4
1.7 Logistics activities .......................................................................................................... 5
1.8 Supply Chain Operations Reference Model (SCOR) ..................................................... 7
1.9 Challenges of Supply Chains .......................................................................................... 8

CHAPTER TWO: DEMAND FORECASTING IN SUPPLY CHAINS.................................. 9

2.1 Learning Objectives ........................................................................................................ 9
2.2 Introduction to Demand Forecasting .............................................................................. 9
2.3 Forecasting levels.......................................................................................................... 10
2.4 Characteristics of Forecasts ...........................................................................................11
2.5 Factors that influence future demand .............................................................................11
2.6 Methods of Demand Forecasting .................................................................................. 12
2.7 Key Quantitative Forecasting Techniques .................................................................... 13
2.8 Forecast Accuracy Metrics ............................................................................................ 14

CHAPTER THREE: SOURCING DECISIONS IN SUPPLY CHAINS ............................... 17

3.1 Learning objectives ....................................................................................................... 17
3.2 Introduction to sourcing decisions ................................................................................ 17
3.3 Types of sourcing decisions .......................................................................................... 17
3.4 Stages of outsourcing .................................................................................................... 18
3.5 Risks of outsourcing ..................................................................................................... 19
3.6 Supplier selection process ............................................................................................. 20
3.7 Supplier evaluation methods ......................................................................................... 21
3.8 Key Quantitative KPIs for supplier evaluation ............................................................. 23
3.9 Supplier Relationship Management .............................................................................. 24

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CHAPTER FOUR: TRANSPORTATION IN SUPPLY CHAINS ......................................... 26
4.1 Learning Objectives ...................................................................................................... 26
4.2 Introduction to transportation ....................................................................................... 26
4.3 Transportation Types in Supply Chains ........................................................................ 26
4.4 Transportation Cost Components.................................................................................. 27
4.5 Factors affecting transportation decisions..................................................................... 28
4.6 Key Performance Indicators (KPIs) for Transportation ................................................ 29
4.7 Design options for a transportation network ................................................................. 29
4.8 Sustainability issues in transportation ........................................................................... 31

CHAPTER FIVE: MANAGING WAREHOUSING OPERATIONS .................................... 34

5.1 Learning objectives ....................................................................................................... 34
5.2 Introduction to warehousing ......................................................................................... 34
5.3 Key warehouse operations ............................................................................................ 35
5.4 Types of warehouses ..................................................................................................... 35
5.5 Warehouse layout and planning .................................................................................... 36
5.6 Functional Zones in a Warehouse ................................................................................. 37
5.7 Warehousing Equipment ............................................................................................... 38
5.8 Warehouse Leases ......................................................................................................... 39
5.9 Warehousing costs......................................................................................................... 40
5.10 Technology in warehousing .......................................................................................... 42
5.11 Challenges in warehousing ........................................................................................... 42

CHAPTER SIX: INVENTORY PLANNING AND CONTROL ............................................ 43

6.1 Learning Objectives ...................................................................................................... 43
6.2 The meaning of Inventory ............................................................................................. 43
6.3 Types of Inventory ........................................................................................................ 43
6.4 Inventory planning techniques ...................................................................................... 44
6.5 Inventory Performance Metrics (KPIs) ......................................................................... 49
6.6 Inventory Control Technologies.................................................................................... 49

References .................................................................................................................................... 51

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 LIST OF FIGURES

Figure 1.1: Supply Chain Stages ..................................................................................................... 4

Figure 1.2: Inbound and Outbound logistics................................................................................... 5

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 LIST OF TABLES

Table 2.1: Key differences between time series and causal forecasting models........................... 13
Table 3.1: Stages of Outsourcing .................................................................................................. 19
Table 3.2: Step-By-Step Process of Supplier Selection ................................................................ 20
Table 3.3: Supplier Selection Criteria ........................................................................................... 21
Table 3.4: Common Qualitative Evaluation Criteria .................................................................... 22
Table 3.5: Common Supplier KPIs in Logistics and Transport .................................................... 23
Table 4.1: Transportation Types in Supply Chains ....................................................................... 27
Table 4.2: Modes of Transport and Performance Characteristics ................................................. 27
Table 4.3: Summary of Transport Cost Components .................................................................... 28
Table 4.4: Factors Affecting Transport Decisions ......................................................................... 28
Table 4.5: Key Performance Indicators for Transportation .......................................................... 29
Table 4.6: Design Options for Transport Network........................................................................ 30
Table 4.7: Solutions and Sustainable Practices ............................................................................. 33
Table 5.1: Key Warehouse Operations .......................................................................................... 35
Table 5.2: Warehouse Layout Designs .......................................................................................... 37
Table 5.3: Warehouse Functional Zones ....................................................................................... 37
Table 5.4: Warehousing Equipment and Selection ....................................................................... 38
Table 5.5: Types of Warehouse Leases ......................................................................................... 39
Table 5.6: Types of Warehousing Costs ........................................................................................ 40
Table 6.1: Types of Inventory ....................................................................................................... 43
Table 6.2: Common Inventory Performance Metrics.................................................................... 49
Table 6.3: Key inventory technologies ......................................................................................... 50

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 1 CHAPTER ONE
INTRODUCTION TO SUPPLY CHAIN MANAGEMENT

1.1 Learning Objectives

By the end of this lesson, students will be able to:
a) Understand the difference between logistics and supply chain management
b) Stages of supply chain
c) Importance of supply chain management
d) Plan logistics and supply chain operations
e) Familiarize with the Supply Chain Operations Reference Model

1.2 Overview
In today’s dynamic business environment, logistics and supply chain management (SCM) have
become critical for business success.
− A supply chain consists of all parties involved, directly or indirectly, in fulfilling a customer
request.
− It includes manufacturers, suppliers, transporters, warehouses, retailers and customers.
− Within each organization, the supply chain includes all functions involved in receiving and
filling a customer request including product development, marketing, operations,
distribution, finance, customer service etc.

CSCMP’s Definition of Supply Chain Management:

“Supply chain management encompasses the planning and management of all activities involved
in sourcing and procurement, conversion, and all logistics management activities. Importantly, it
also includes coordination and collaboration with channel partners, which can be suppliers,
intermediaries, third party service providers, and customers. In essence, supply chain management
integrates supply and demand management within and across companies”.

1.3 Roles of Supply Chain Management in Organizations

SCM plays a vital role in enabling organizational strategies and achieving competitive advantage.
Below are some of the important roles of supply chain management.

a) Enabling Business Strategy

A responsive supply chain supports an innovative product strategy, while an efficient supply chain
suits a cost-leadership strategy. The choice of supply chain structure must match the product and
market characteristics.

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b) Maximizing Profitability
The objective of every supply chain is to maximize the overall value generated through supply
chain surplus.
Supply Chain Surplus = Customer Value - Supply Chain Cost
− Sources of supply chain revenue: the customer
− Sources of supply chain cost: flows of information, products, or funds between stages of the
supply chain
SCM directly impacts revenue and cost. Hence, improved forecasting, inventory management, and
coordination reduce waste, prevent stockouts, and increase customer retention, thereby enhancing
profitability.

c) Enhancing Responsiveness and Agility

In volatile markets, firms must respond quickly to demand shifts and disruptions. SCM enables
agile response through flexible sourcing, scalable production, and reliable distribution.

d) Creating Value for Customers

A well-designed supply chain enhances customer satisfaction by providing timely, accurate, and
cost-effective product delivery.

1.4 Supply Chain Flows

Supply chain flows encompass the movement of physical goods, financial resources, and
information throughout a supply chain. Key flows include product flow, financial flow, and
information flow.

These flows can be either upstream (from suppliers to the company) or downstream (from the
company to customers).

a) Product Flow
This refers to the movement of raw materials, work-in-progress, and finished goods from suppliers
to consumers. It involves processes like raw material procurement, production, transportation, and
distribution.

b) Financial Flow
This encompasses the movement of money for the purchase of raw materials, payment for
transportation, and receipt of payments from customers. It includes all financial transactions
related to the supply chain.

c) Information Flow

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This refers to the sharing of data and information about orders, inventory, production schedules,
and other relevant details between all participants in the supply chain. This flow enables efficient
coordination and decision-making throughout the chain.

d) Other Flows
Some studies also identify value flow (related to the creation and transfer of value) and risk flow
(related to potential disruptions and risks) as important elements of supply chain management.

1.5 Stages of a Supply Chain

A supply chain consists of several interconnected stages that work together to deliver a product or
service to the end customer. Each stage is connected by the flow of products, information, and
funds. The main stages of a typical supply chain are:
a) Supplier Stage
• This is where raw materials or basic components are sourced.
• Suppliers provide the inputs needed for production (e.g., metals, fabrics, electronics).
• Goal: Ensure quality and timely delivery of materials.
b) Manufacturer / Production Stage
• In this stage, raw materials are transformed into finished goods.
• Activities include processing, assembling, testing, and packaging.
• Goal: Produce according to demand, cost, and quality standards.
c) Distributor/Warehousing Stage
• Finished products are stored and moved closer to the market.
• Distribution centers and warehouses play a key role here.
• Goal: Manage inventory efficiently and enable timely delivery.
d) Retailer Stage
• Retailers sell the product to the final consumer.
• This could be in physical stores or through online platforms.
• Goal: Provide product availability and customer service.
e) Customer Stage
• The final stage where the product reaches the end user.
• The supply chain ends here but feedback, returns, and support may flow back.

Note: It is not necessary to have all stages in a supply chain. The design of the supply chain
depends on both the customer’s needs and the roles played by the stages.

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Figure 1.1: Supply Chain Stages
1.6 Decision Phases in a Supply Chain
Supply chain management involves making decisions at three hierarchical levels. Each level
focuses on different time frames and objectives, but all must align to ensure a well-functioning and
competitive supply chain.
A well-aligned supply chain requires strategic decisions, effective planning, and reliable daily
operations to achieve overall performance and responsiveness.

a) Strategic supply chain decisions – Long-Term Decisions

Time Horizon: Several years
Focus: The overall structure of the supply chain
Key Decisions:
− Facility locations (factories, warehouses, distribution centers)
− Supplier relationships and sourcing strategies
− Transportation modes and information systems
Goal: Build a supply chain that aligns with business goals and is cost-effective and flexible in the
long run.

b) Tactical supply chain decisions – Medium-Term Decisions

Time Horizon: Quarterly to yearly
Focus: Policies and plans to operate within the strategic framework
Key Decisions:
− Demand forecasting and aggregate planning
− Inventory policies and procurement schedules
− Capacity planning and workforce management
Goal: Maximize efficiency and balance supply with demand using the existing supply chain
design.

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c) Operational supply chain decisions – Short-Term Decisions
Time Horizon: Daily to weekly
Focus: Execution of plans and response to real-time demands
Key Decisions:
− Order processing and fulfillment
− Scheduling deliveries and shipments
− Managing day-to-day inventory and customer orders
Goal: Execute effectively, ensuring smooth flow of goods and customer satisfaction.

CSCMP’s Definition of Logistics Management:

“Logistics management is that part of supply chain management that plans, implements, and
controls the efficient, effective forward and reverse flows and storage of goods, services and
related information between the point of origin and the point of consumption in order to meet
customers' requirements”.

Figure 1.2: Inbound and Outbound logistics

1.7 Logistics activities

Logistics activities are divided into key (core) activities and support (secondary) activities. This
classification helps in understanding how logistics functions contribute to the overall supply chain
performance.

Key Logistics Activities

These are essential, value-adding operations directly involved in the movement, storage, and
handling of goods. They are central to fulfilling customer orders and ensuring efficient logistics
performance.
a) Transportation
• The physical movement of goods from one location to another.

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 • Modes include road, rail, air, sea, and pipelines.
• Involves route planning, carrier selection, and freight cost control.
b) Warehousing
• Storage of goods to balance supply and demand.
• Includes receiving, put-away, storage, picking, and dispatching.
c) Inventory Management
• Determining the optimal quantity and timing of inventory to meet customer demand.
• Includes stock control, safety stock, and reorder point calculation.
d) Order Processing
• Activities related to receiving, recording, processing, and fulfilling customer orders.
• Involves order entry, order picking, and order verification.
e) Materials Handling
• Movement of goods within a facility (e.g., warehouse or factory).
• Use of equipment such as forklifts, conveyors, cranes.
f) Packaging
• Protection and presentation of goods for storage, transport, or sale.
• Includes unitization, labeling, and handling requirements.
g) Demand Forecasting
• Predicting future customer demand to guide logistics planning.
• Informs procurement, production, and distribution decisions.

Support Logistics Activities

Support activities enhance the effectiveness of key logistics operations. While not directly
involved in the movement of goods, they are critical for planning, control, and coordination.
a) Information Flow and Technology
• Manages the flow of logistics data (orders, inventory levels, delivery status).
• Tools include ERP, WMS, TMS, RFID, and tracking systems.
b) Procurement / Sourcing
• Acquiring goods and services from suppliers in a timely and cost-effective manner.
• Coordinates with logistics to ensure material availability.
c) Customer Service
• Ensures that customer expectations related to delivery, availability, and quality are met.
• Handles inquiries, complaints, and after-sales support.
d) Reverse Logistics
• Handling product returns, recycling, re-use, or disposal.
• Important for sustainability and customer satisfaction.
e) Facility Location Decisions
• Strategic choice of warehouse, plant, and distribution center locations.
• Affects transportation cost, delivery time, and service levels.

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1.8 Supply Chain Operations Reference Model (SCOR)
The SCOR Model is a powerful framework developed by the Supply Chain Council to help
organizations understand, structure, and improve their supply chain operations.
It identifies five core supply chain processes, and each of these is further broken down into
subprocesses and performance metrics.

The SCOR model divides the supply chain into five key management processes:
A. Plan
B. Source
C. Make
D. Deliver
E. Return

A. Plan
Processes related to planning all aspects of supply chain operations, including balancing supply
and demand, aligning resources, and developing strategies. The purpose is to create a roadmap that
enables the supply chain to operate efficiently and effectively. Activities include:
• Demand forecasting
• Supply planning
• Inventory planning
• Capacity planning
• Aligning financial and supply chain plans

B. Source
Processes involved in procuring goods and services to meet planned or actual demand. Helps to
ensure reliable and cost-effective access to raw materials and components. Activities include:
• Selecting suppliers
• Scheduling deliveries
• Receiving goods
• Verifying and transferring payments
• Managing supplier performance

C. Make
Processes involved in transforming raw materials into finished products or services. The purpose
is to produce products efficiently, according to quality and customer specifications. Activities
include:
• Production scheduling
• Manufacturing or assembling
• Quality testing
• Packaging

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 • Releasing products to inventory

D. Deliver
Processes for order management, transportation, and distribution of products to customers to
ensure the right products reach the right customer, at the right time and cost. Activities include:
• Order processing
• Warehousing and picking
• Shipping and transportation
• Invoicing
• Customer communication and service

E. Return
Processes associated with returning products for any reason (defective, excess, or end-of-life). The
purpose is to manage reverse logistics efficiently and enhance customer satisfaction. Activities
include:
• Authorizing returns
• Scheduling pickup
• Receiving returned items
• Processing refunds or replacements
• Disposing or recycling of products

1.9 Challenges of Supply Chains

There are several emerging challenges of supply chains:
• Supply chain disruptions: natural disasters, pandemics, political instability.
• Cybersecurity risks: increased use of digital platforms creates data vulnerabilities.
• Sustainability demands: balancing economic goals with environmental and social
responsibility.
• Talent shortages: need for skilled professionals in data analytics, operations, and global
logistics.
• Cost-responsiveness trade-off: balancing efficiency with the ability to respond quickly to
market needs.

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 2 CHAPTER TWO
DEMAND FORECASTING IN SUPPLY CHAINS

2.1 Learning Objectives

By the end of this lesson, students will be able to:
a) Understand the role of demand forecasting in supply chains.
b) Identify different methods of demand forecasting.
c) Apply quantitative techniques such as moving average and exponential smoothing.
d) Evaluate forecast accuracy using error measurement methods.
e) Use demand forecasting to support supply chain decisions.

2.2 Introduction to Demand Forecasting

What is demand?
Demand reflects what and how much products customers want.

Types of Demand
• Independent Demand
• Dependent Demand

Independent demand
− Is the demand for finished products.
− It does not depend on the demand for other products.
− Finished products include any item sold directly to a consumer.
− The company in a supply chain that directly serves the customer experiences the independent
demand.
− It is forecasted.

Dependent demand
− It is based on the number of end items being produced.
− Dependent demand is derived from finished products.
− Demand for assemblies, components, or ingredients necessary to make an end item represent
dependent demand.
− It is calculated based upon independent demand.

What is a forecast?
A forecast is a statement about the uncertain future (such as weather forecast). In business,
forecasts are mainly used to predict customer demands.

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What is demand forecasting?
The process of making predictions of the future demand based on past and present data and analysis
of trends for a product or service.

The role of demand forecasting in supply chains

• Helps with inventory planning
• Streamlines inventory by reducing stockouts and overstocking
• Supports procurement, production, and logistics decisions
• Ensures better supplier and purchase terms
• Better allocation of resources and capacity planning
• Aids in planning sales strategies
• Improves customer satisfaction

2.3 Forecasting levels

There are three levels of forecasting demand:
A. Macro-level forecasting
B. Meso-level forecasting
C. Micro-level forecasting

A. Macro-Level Forecasting
Scope: Industry-wide or national demand
Time Horizon: Long-term (1–5+ years)
Purpose in Logistics:
• Strategic planning for national distribution networks.
• Infrastructure investment (ports, highways, rail).
• Policy formulation by governments or trade bodies.
Example:
• The Ministry of Transport in Tanzania forecasts a rise in container traffic at ports over the
next 10 years to plan port expansions and inland container depots.
• Maersk shipping line uses macroeconomic data and trade forecasts to predict global
shipping container volumes. These forecasts help them decide where to deploy mega-ships
and where to invest in new terminal capacity.

B. Meso-Level Forecasting
Scope: Company-wide or product family level
Time Horizon: Medium-term (3–12 months)
Purpose in Logistics:
• Planning warehouse capacity.
• Hiring transport capacity (trucks, drivers).
• Deciding production & sourcing volumes.
Example:

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 • Unilever forecasts the demand for all personal care products across Southeast Africa to
decide how much to produce at its plant in South Africa and how many trucks to schedule
weekly for each distribution center.
• Bhakresa uses mid-level demand forecasting by region to drive supply from factories to
central warehouses and down to stores. These forecasts help them plan truck shipments and
inventory allocation across Tanzania and neighbouring countries every week.

C. Micro-Level Forecasting
Scope: SKU, store, or customer-level
Time Horizon: Short-term (days to weeks)
Purpose in Logistics:
• Daily replenishment and picking in warehouses.
• Route and delivery scheduling.
• Avoiding stockouts or overstocks at store level.
Example:
• Amazon uses item-level forecasts to determine how much of a specific product (e.g.,
iPhone cases) should be stocked in each fulfillment center, reducing delivery times.
• Walmart tracks real-time sales at the SKU-store level. Its micro-level forecasting model
allows for just-in-time replenishment, automatically triggering truckloads from distribution
centers to stores every night.

2.4 Characteristics of Forecasts

Logistics and supply chain managers should be aware of the following characteristics of forecasts:
− Forecasts are always inaccurate and should thus include both the expected value of the
forecast and a measure of forecast error
− Long-term forecasts are usually less accurate than short-term forecasts, postpone final
customization
− Aggregate forecasts are usually more accurate than disaggregate forecasts, aggregate by SKU
(stock keeping unit), time, location etc.
− The farther up the supply chain a company is, the greater the distortion of information it
receives.

2.5 Factors that influence future demand

Principally, price is considered the main factor that influences demand in a perfect competition
environment. However, in most cases, the assumptions for perfect competition do not hold,
attracting the effect of other factors such as:
− Past demand
− Lead time of product replenishment
− Planned advertising or marketing efforts

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− Planned price discounts
− State of the economy
− Actions that competitors have taken

2.6 Methods of Demand Forecasting

Mainly two types:
A. Qualitative methods
B. Quantitative methods

A. Qualitative Methods
− Qualitative forecasting methods use subjective inputs and rely on human judgment
− Most appropriate when little historical data are available
− Or when experts have market intelligence that may affect the forecast.
− Or when the industry is new.

Common types of qualitative forecasting methods

a) Grass Roots: Deriving future demand by asking end-user or an organization closest to the end-
user
b) Market Research: Attempting to identify end-user patterns, emerging trends, and new products
for support
c) Panel Consensus: Deriving future estimations from the synergy of a panel of experts in subject
area
d) Delphi Method: Similar to Panel Consensus but with anonymity
e) Historical Analogy: Identify another similar commodity to the one being forecasted.

B. Quantitative Methods
− Quantitative methods predict future demand based on historical data
− They use mathematical models

Mainly two types

i. Time series models
ii. Causal models

Time Series Models

− Moving Average
− Weighted Moving Average
− Exponential Smoothing
− Trend Analysis

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Causal Models
− Regression Analysis
− Econometric Models

Table 2.1: Key differences between time series and causal forecasting models

Feature Time Series Models Causal Models

Definition Use only historical demand data to Use both historical demand and
predict future demand. external (causal) variables.
Focus Patterns in the demand data (trend, Cause-and-effect relationships (e.g.,
seasonality, cycles). sales vs. price, GDP).
Data Required Past demand figures (e.g., weekly Past demand + external variables
sales). (e.g., marketing spend, fuel prices).
Examples Moving Average, Exponential Linear Regression, Econometric
Smoothing, ARIMA. Models.
Assumptions Future demand will follow similar External variables significantly
historical patterns. influence demand.
Use in Logistics Warehouse stock planning, route Forecasting demand based on
frequency scheduling. promotions, fuel cost, economic
factors.
Pros Simple, quick to implement, good for More accurate when external drivers
stable patterns. strongly affect demand.
Cons Doesn’t explain why demand More complex; requires high-
changes; poor in dynamic markets. quality external data.

2.7 Key Quantitative Forecasting Techniques

Various techniques may assist managers in demand forecasting. In this chapter, only the most
commonly used forecasting techniques are presented.

A. Simple Moving Average (SMA)

Forecasts the next period’s demand as the average of the last “n” periods.
Assumptions
• Demand is relatively stable.
• No significant trend or seasonal component.
Advantages
• Easy to calculate.
• Good for short-term forecasts with stable demand.
Disadvantages
• Lags behind trends.
• Assigns equal weight to all periods.

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Formula:
The moving average mt over the last L periods ending in period t is calculated by taking the average
of the values for the periods 𝑡 − 𝐿 + 1, 𝑡 − 𝐿 + 2, 𝑡 − 𝐿 + 3, … , 𝑡 − 1, 𝑡 so that:

𝒀𝒕−𝑳+𝟏 + 𝒀𝒕−𝑳+𝟐 + 𝒀𝒕−𝑳+𝟑 + ⋯ + 𝒀𝒕−𝟏 + 𝒀𝒕

𝒎𝒕 =
𝑳
To forecast using the moving average, the forecast for all periods beyond t is just mt (although we
usually only forecast for one period ahead, updating the moving average as the actual observation
for that period becomes available).

B. Exponential Smoothing
Applies exponentially decreasing weights over time; latest demand has the most impact.
Assumptions
• No strong trend or seasonality.
• Recent observations are more relevant.
Advantages
• Simple and efficient.
• Requires minimal historical data.
Disadvantages
• Not suitable for trends or seasonality unless modified.
• Accuracy depends heavily on the choice of smoothing constant (α).

Formula:
𝜶𝑫𝒕−𝟏 + 𝑫𝒕−𝟐 + ⋯ + 𝑫𝒕−𝒏 + 𝒀𝒕
𝑭𝒕 =
𝒏

Where:
• 𝑭𝒕 is forecast for current period
• 𝑫𝒕−𝟏 is actual demand for last period
• 𝜶 is smoothing constant (0 < α < 1)

2.8 Forecast Accuracy Metrics

Forecast Accuracy Metrics are essential tools in demand forecasting, especially in logistics and
supply chain management, because they help to evaluate how close demand forecasts are to actual
demand.

Uses of Forecast Accuracy Metrics

a) Evaluate Forecast Performance: To measure how accurate your forecasting method is, and
determine if it's reliable enough for supply chain decisions.

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b) Compare Forecasting Models: Helps select the best forecasting technique (e.g., SMA vs.
Exponential Smoothing) by comparing their error levels.
c) Improve Supply Chain Efficiency: Accurate forecasts reduce stockouts (Lost sales, poor
service levels) and overstocks (Increased holding costs and waste).
d) Regularly checking forecast accuracy allows businesses to adjust models or parameters,
respond faster to demand changes, and avoid costly disruptions.
e) Informs decisions in Inventory control, Procurement planning, Transport scheduling, and
Capacity planning

Common Forecast Accuracy Metrics

A. Mean Absolute Deviation (MAD)

∑ |𝑫𝒕 − 𝑭𝒕 |
𝑴𝑨𝑫 =
𝒏
B. Mean Squared Error (MSE)

∑(𝑫𝒕 − 𝑭𝒕 )𝟐
𝑴𝑺𝑬 =
𝒏

C. Mean Absolute Percentage Error (MAPE)

𝟏 𝑫𝒕 − 𝑭𝒕
𝑴𝑨𝑷𝑬 = ∑| | 𝒙 𝟏𝟎𝟎%
𝒏 𝑫𝒕

Examples
Example 1. Simple Moving Average (Calculation)
You are given past demand data for the last 4 months. Calculate the 3-month moving average
forecast for May.

Month Jan Feb Mar Apr

Demand 200 220 210 230

Answer:
𝟐𝟐𝟎 + 𝟐𝟏𝟎 + 𝟐𝟑𝟎 = 𝟐𝟐𝟎
𝑺𝑴𝑨𝑴𝒂𝒚 =
𝟑

Example 2. Exponential Smoothing (Calculation)

Given:
• Forecast for March = 205

15
 • Actual Demand for March = 210
• α = 0.3

Q: Calculate forecast for April.

Answer:
𝑭𝑨𝒑𝒓 = 𝟎. 𝟑(𝟐𝟏𝟎) + 𝟎. 𝟕(𝟐𝟎𝟓) = 𝟔𝟑 + 𝟏𝟒𝟑. 𝟓 = 𝟐𝟎𝟔. 𝟓

Example 3. MSE (Calculation)

You are given actual and forecasted demand for 4 months. Calculate MSE.
Month 1 2 3 4 5 6

Actual Demand (100’s) 42 41 43 38 35 37

Forecasted demand 41.5 42 40.5 36.5

Error -1.5 4 5.5 -0.5

Answer:
(−𝟏. 𝟓)𝟐 + (𝟒)𝟐 + (𝟓. 𝟓)𝟐 + (−𝟎. 𝟓)𝟐
𝑴𝑺𝑫 = = 𝟏𝟐. 𝟏𝟗
𝟒

Summary
− The key in forecasting is to understand the different forecasting methods and their relative
merits and so be able to choose which method to apply in a particular situation (for example
consider how many time series forecasting methods the package has available).
− All forecasting methods involve tedious repetitive calculations and so are ideally suited to be
done by a computer. Forecasting packages, many of an interactive kind (for use on pc's) are
available to the forecaster.
− Always remember to strike a balance on:

Using a large number of previous periods Using a small number of previous periods
Forecast will be slow to respond to changing Very little smoothing will occur
conditions
Growth and seasonality could result in Nervous forecasts present problems for
shortages of supply production and material planners

16
 3 CHAPTER THREE
SOURCING DECISIONS IN SUPPLY CHAINS

3.1 Learning objectives

By the end of this lesson, students will be able to:
a) Understand the role of sourcing in supply chain management
b) Identify factors influencing in-housing or outsourcing decisions
c) Understand what drives sourcing costs and how to control them
d) Discover, evaluate, and select potential sources of supply
e) Build long-term supplier relationships
3.2 Introduction to sourcing decisions
Sourcing refers to the process of finding and assessing suppliers in order to procure goods and
services. The sourcing process can be very complex and may involve multiple stages, depending
on the nature of the product or service being procured. Suitable suppliers must be identified, vetted,
and qualified before a sourcing contract can be awarded.

Objectives of effective sourcing

The main objective of effective sourcing is to acquire the right materials, in the right quantity, at
the right time, right place, from the right source with the right service (before, during, and after
the purchase) and at the right price.

Benefits of effective sourcing

There are many benefits that an organization can gain from sourcing effectively. A few of these
benefits are:
• Cost Reduction: One of the main benefits of sourcing is that it can help reduce costs by
leveraging the supplier’s economies of scale.
• Access to New Markets and Suppliers: By sourcing from new suppliers in different
markets, an organization can gain access to new products, technologies, and services.
• Improved Quality: Acquiring goods and services from the most suitable supplier can lead
to an improvement in quality.
• Reduced Risks: An effective sourcing strategy can help reduce risks by diversifying the
supplier base and mitigating dependency on a single supplier.
• Improved Customer Satisfaction: Sourcing can help improve customer satisfaction by
ensuring that the right products and services are delivered on time and at the right price.
3.3 Types of sourcing decisions
There are two main types of sourcing decisions:
A. Inhouse sourcing: The In-house sourcing strategy involves performing all sourcing
activities within the organization using in-house staff.
17
 B. Out sourcing: This is the process of contracting with a third-party supplier to provide goods
or services that are typically performed by in-house staff.

Factors influencing in-housing sourcing

a) The needed material can be less expensively obtained within than outside
b) Production and distribution schedules need to be controlled to maintain supply chain flexibility.
c) The organization needs to maintain its technology.
d) The needed material can be less expensively obtained within than outside
e) Production and distribution schedules need to be controlled to maintain supply chain flexibility.
f) The organization needs to maintain its technology.

Factors influencing outsourcing

a) Limited resources and financial capacity for any additional investment in new products or
markets.
b) The need to focus on core competency and leave out costly noncore functions.
c) Existing skills and technology cannot be readily adapted to produce products and parts in-
house.
d) Lack of patent rights to produce product and/or parts in-house.
e) The anticipated demand is temporary or seasonal.
f) The anticipated demand is small in volume.
g) Avoidance of labour-management conflicts and work stoppages
h) Avoidance of emergencies and unexpected supply chain interruption.

Other types of sourcing decisions

C. Offshoring: Involves moving sourcing activities to another country where labor costs are
lower.
D. Nearshoring: Similar to offshoring, but the sourcing activities are moved to a country that
is closer to the home country, which makes communication and transportation easier.
E. Joint Venture: Involves forming a partnership with another organization to share resources
and expertise.
F. Captive Service Operations: Involves setting up a wholly-owned subsidiary in another
country to perform sourcing activities.
3.4 Stages of outsourcing
Outsourcing stages represent a continuum of outsourcing, from low involvement (simple task
delegation) to full strategic partnership. There are four stages as indicated in the table below:

18
Table 3.1: Stages of Outsourcing

Outsourcing Definition Features Integration Example

stage
Out-tasking Contracting a third • Low complexity Minimal Out-tasking customs
party to perform a • Minimal clearance for a single
specific task or integration shipment or hiring a
function, often • Task-level control courier to deliver
short-term or remains with the documents.
project-based. company
Co-managed The company and • Shared decision- Moderate A company co-
services the service provider making manages its
share responsibility • Moderate warehouse with a
for a function. The integration 3PL, where the 3PL
client retains • Client retains some runs operations but
control, but the operational control the company manages
provider contributes staffing and inventory
expertise, systems, systems.
or manpower.
Managed The provider fully • High trust and High A 3PL manages a
services manages a function integration regional distribution
or process, typically • Long-term center, including
with performance contracts staffing, IT systems,
KPIs. The client • Service provider security, and all
oversees results, not accountable for logistics KPIs.
day-to-day performance
operations.
Full Complete transfer of • Strategic Very high A company
outsourcing a business function partnership outsources its entire
to a third party, • Full responsibility global supply chain
including resources, and integration planning, freight
systems, and • Long-term forwarding, customs,
strategy. transformation or warehousing, and
cost advantage delivery operations to
a 4PL.

3.5 Risks of outsourcing

A poor outsourcing plan can cause more harm than good. Firms must evaluate the following risks
when engaged in any outsourcing relationship:
• Involving a third party when the process is broken

19
 • Underestimation of the cost of coordination
• Reduced customer/supplier contact
• Loss of internal capability and growth in third-party power
• Leakage of sensitive data and information
• Ineffective contracts
• Loss of supply chain visibility
• Negative reputational impact

3.6 Supplier Selection Process

Choosing the right suppliers is critical in logistics and transport because it directly affects:
• Delivery lead times
• Service quality
• Transport reliability
• Total supply chain costs
• Risk and compliance levels

Table 3.2: Step-By-Step Process of Supplier Selection

S/N Step Description Example

1 Identify needs Define the product/service to be Need for refrigerated transport
sourced. for vaccines.
2 Define selection Cost, quality, delivery time, Must deliver within 24 hours,
criteria financial stability, etc. under TZS50,000/load.
3 Search for potential Use databases, request for Request bids from 5 local
Suppliers quotations, referrals, directories. carriers.
4 Evaluate suppliers Assess each supplier against the Evaluate fuel efficiency, on-time
criteria. rates.
5 Negotiate and select Final negotiation and selection of Award contract to top-scoring
supplier(s). carrier.
6 Monitor and review Measure supplier performance over Monthly delivery reports and
time. reviews.

20
Table 3.3: Supplier Selection Criteria

S/N Criteria Attributes

1 Quality • Quality of products
• Warranty
• Past records on the reliability of products
• Quality certification, affidavits
• Willingness to take corrective actions
• Willingness to accept responsibility for defects or latent
deficiencies
• Prompt replacements of rejects
2 Price • Competitive price
• Accurate price quotation
• No hidden costs
• Correct billing/invoicing
3 Delivery services • Delivery on schedule
• Delivery per routing instructions
• Delivery without constant follow-ups
• Prompt responses to emergent and rush delivery requests
• Good packaging
• Geographical location
4 Production capacity and • Adequate facility, equipment, and know-how
technical capability • Adequate housekeeping (e.g. cleanliness, maintenance)
• Good labour-management relations
• Skilled labour
• Technical ability to innovate
• Information technology/communication system structure
• Room for growth/expansion
5 Financial stability • Credit rating (e.g., Dun and Bradstreet report}
• Cash flow, liquidity, and profitability
• Bank references
6 Environmental • Environment-friendly initiatives/policies
compliance • ISO 14000 certification

3.7 Supplier evaluation methods

Depending on the importance of the supply, risk level, and strategic goals, companies apply
different evaluation approaches and tools. Basically, there are two main methods for evaluating
suppliers:
A. Qualitative methods
B. Quantitative methods

21
Qualitative methods
Qualitative methods are based on subjective judgment, experience, or descriptive analysis. They
are used when:
• Hard data is limited
• New suppliers are being considered
• Supplier relationship quality matters

Table 3.4: Common Qualitative Evaluation Criteria

Criteria Description Example

Communication How responsive and clear is the supplier? Easy to reach during emergencies
Flexibility Can they adjust to urgent changes? Can add trucks during peak
seasons
Reputation Known for reliability or issues? Industry feedback shows strong
service record

Quantitative methods
Based on measurable data and scoring systems. They are used when:
• Data is available (e.g., historical supplier performance)
• Procurement is large-scale or repetitive
• Comparability is key

Types of quantitative methods

They are mainly two:
A. Weighted Point Model
B. Cost-Ratio Method

Weighted Point Model

This model assigns weights to evaluation criteria based on the importance and scores of each
supplier.

Example: Scoring 2 Transport Suppliers

Criteria Weight Supplier A Weighted Supplier B Weighted
(%) (Score /10) A (Score /10) B
Cost 30% 9 2.7 7 2.1
On-Time % 25% 7 1.75 9 2.25
Flexibility 20% 6 1.2 8 1.6
Communication 15% 8 1.2 7 1.05
Sustainability 10% 5 0.5 8 0.8
Total 100% 7.35 7.8

22
Supplier B is selected based on a higher total score, despite a slightly higher cost.

Cost-Ratio Method
Cost-ratio method that adjusts total purchase cost based on performance-related costs (e.g., poor
quality, late deliveries).

Example: Ranking two suppliers based on total purchase costs

Supplier Base Price Add-on Cost (due to poor service) Adjusted Cost
A TZS 50,000/unit TZS 20,000 (late, damage, rework) TZS 70,000/unit
B TZS 51,000/unit TZS 15,000 TZS 66,000/unit
Supplier B is selected despite the higher unit cost because of the lower total cost of ownership
(TCO).

3.8 Key Quantitative KPIs for supplier evaluation

Key Performance Indicators (KPIs) are not a standalone evaluation method, but rather a tool used
within supplier evaluation methods to measure and monitor supplier performance over time. They
are performance metrics that are used to assess, compare, and decide the performance of various
suppliers. Specifically, KPIs are used to:
• Track performance
• Identify weaknesses
• Drive improvement
• Support sourcing decisions

Table 3.5: Common Supplier KPIs in Logistics and Transport

KPI Description Why It Matters
On-Time Delivery % Percentage of deliveries made on Critical for service reliability
time
Order Accuracy Rate % of orders delivered correctly Reduces returns, improves
customer satisfaction
Damage Rate % of items damaged in transit Affects quality perception and
costs
Lead Time Time from order placement to Impacts planning and
delivery responsiveness
Invoice Accuracy % of error-free invoices Reduces admin burden and
disputes
Communication Response time to queries or issues Enhances coordination and
Responsiveness issue resolution
Compliance Score Adherence to regulations or Important for legal and ethical
contract terms standards

23
 Sustainability Metrics CO₂ emissions, use of eco- Supports ESG goals
friendly transport

Example: Using KPIs in a Supplier Scorecard

KPI Weight (%) Target Actual Score (1–10) Weighted Score
On-Time Delivery 30% 95% 93% 8 2.4
Order Accuracy 25% 99% 97% 7 1.75
Damage Rate 20% <1% 2% 6 1.2
Communication 15% Fast Average 6 0.9
Sustainability Score 10% Green Green 9 0.9
Total 100% 7.15
Decision: Supplier stays on contract, but improvement plans may be required.

Tools and Techniques for Supplier Evaluation

Supplier evaluation tools and techniques help organizations systematically assess, compare, and
manage suppliers to ensure they meet required performance, quality, cost, and service standards.
Tool Use Example
RFQ/RFP (Request for Collect pricing and service offers Send RFQ to e.g. 5 local
Quote/Proposal) hauliers
Site Visit Validate capabilities and facilities Visit warehouse or depot
Audit Checklist Standard review of compliance, 3PL compliance
safety, processes checklist
Supplier Scorecard Ongoing performance tracking Monthly review of KPIs
tool

3.9 Supplier Relationship Management

Supplier partnership improves supply chain efficiency. Over 75% successful firms have long term
sourcing contracts. Supplier relationship is more of cooperation between the sourcing firm and
supplier over extended period of time and sharing of information, risks, and rewards.

Benefits of supplier relationship

There are many benefits of effective supplier relationships. These include the following:
a) Reduced uncertainty in material cost, quality, and delivery schedules
b) Cost savings in administrative costs, switching costs, and economies of scale in ordering,
production, and transaction
c) Increased supplier loyalty
d) Risk sharing through joint investment, joint research and development, and joint product
design
e) Better demand forecast and reduced inventory through information sharing
f) Reduced time looking for new suppliers

24
g) Enhanced supply chain process integration

Common causes of supplier relationship failures

In logistics and supply chain management, maintaining strong supplier relationships is essential.
However, many relationships fail due to avoidable issues. Below are some of the most common
causes of failure in supplier relationships:
a) Poor communication: unclear expectations, delayed responses, or inconsistent updates lead to
misunderstandings and mistrust. For example, a logistics provider changes delivery times
without informing the warehouse, causing delays and stockouts.
b) Unrealistic expectations: buyers expect unrealistically low prices, instant deliveries, or
flawless performance without considering operational realities. Also, suppliers may
overpromise to win contracts, then underdeliver.
c) Lack of trust: trust is eroded by missed deadlines, poor transparency, or unethical behavior. In
most cases, suppliers will hide quality issues to avoid penalties.
d) Inadequate performance monitoring: failure to define or track key performance indicators
(KPIs) leads to poor visibility of supplier performance until it is too late.
e) Misaligned objectives: the buyer wants cost savings, while the supplier wants margin growth.
No shared vision or collaborative planning.
f) Cultural or organizational differences: differing corporate cultures, languages, or business
practices can cause friction. This is common in global sourcing.
g) Poor contract management: vague or one-sided contracts can lead to disputes. Absence of clear
service level agreements, penalties, and incentives results in confusion such as when the
logistics provider charges extra fees not covered in the contract.
h) Inconsistent quality or service: include suppliers that fail to meet quality standards, lead times,
or any agreed-upon terms.
i) Financial or capacity problems: suppliers struggling financially may cut corners, delay
deliveries, or go bankrupt. Lack of capacity (fleet, staff, technology) may limit suppliers’
ability to meet growing demand.

How to Prevent Supplier Relationship Failure

a) Use clear, well-drafted contracts with SLAs.
b) Establish regular communication channels.
c) Align expectations from the beginning.
d) Monitor KPIs using scorecards or dashboards.
e) Conduct periodic reviews and joint planning sessions.
f) Build mutual trust through transparency and collaboration.
g) Train sourcing personnel.

25
 4 CHAPTER FOUR
TRANSPORTATION IN SUPPLY CHAINS

4.1 Learning Objectives

By the end of this lesson, students will be able to:
a) Understand the role of transportation in supply chains.
b) Identify different modes of transportation and their characteristics.
c) Explain how transportation decisions impact cost, service, and efficiency.
d) Evaluate transportation performance using key metrics.
e) Analyze real-world logistics scenarios involving transportation choices.

4.2 Introduction to transportation

Transportation is the physical movement of goods from one location to another, such as from
suppliers to manufacturers, between facilities, or to end customers.
Transportation plays a crucial role in the supply chains as it connects all supply chain elements:
suppliers, manufacturers, warehouses, and customers.

The role of transportation in supply chains

a) Product movement: Raw materials, work-in-progress, and finished goods.
b) Product storage in-transit: Especially for long-haul shipments.
c) Customer service: Fast, reliable delivery increases satisfaction.
d) Cost efficiency: Accounts for 30–60% of total logistics cost.

Key transportation parties and their roles

a) Shipper: uses transport to minimize the total cost (transportation, inventory, information,
sourcing, and facility)
b) Carrier: makes transport investment and operating decisions (e.g., locomotives, trucks,
airplanes), tries to maximize the return from these assets.
c) Owners and operators of infrastructure: influence effectiveness of shippers and carriers, by
infrastructure such as ports, roads, waterways, and airports
d) Policy makers: set directions to guide the actions of shippers, carriers and owners and operators
of infrastructure

4.3 Transportation Types in Supply Chains

There are practically four types of transportation activities in supply chains. For description and
examples, refer Table 4.1.

26
Table 4.1: Transportation Types in Supply Chains

Type Description Example

Inbound Transportation Movement from suppliers to Raw materials to
manufacturer or warehouse factory
Outbound Transportation Goods from manufacturer/warehouse to Deliveries to retailers
end customer
Reverse Logistics Returns, recycling, disposal Customer returns to
warehouse
Inter-facility movement Moving goods between plants, From receiving to
warehouses, or distribution centers storage area

Modes of Transportation and Their Performance Characteristics

The different modes of transportation play a crucial role in supply chain management because they
directly impact how goods flow from suppliers to manufacturers, distributors, retailers, and finally
to customers.
The mode of transport chosen in a supply chain determines how fast, how reliably, and how
affordably goods can be moved and therefore directly affects overall supply chain performance.

Table 4.2: Modes of Transport and Performance Characteristics

Mode Description Advantages Limitations Typical Use

Road Trucks, vans Flexible, door-to- Traffic, fuel cost Local/regional
door distribution
Rail Trains High-volume, Fixed routes, Bulk transport across
economical slower countries
Air Cargo planes Fastest for long High cost, weight Urgent or high-value
distances limits goods
Sea Ships Lowest cost per Slow, port delays Global trade, heavy
unit goods
Pipeline Fluids, gases Continuous flow, High capital cost Oil, gas, chemicals
safe
Multimodal Combined Efficiency, reach Coordination Global supply chains
modes complexity

4.4 Transportation Cost Components

Understanding transportation cost components is vital in supply chain management because
transportation typically accounts for 30–60% of total logistics costs. Knowledge of these costs
plays the following role:
a) Helps in selecting cost-effective transport modes.

27
 b) Informs route optimization and load consolidation.
c) Supports total cost of ownership (TCO) calculations.
d) Enables negotiation with carriers and 3PLs.
e) Affects pricing, profitability, and customer service levels.

Table 4.3: Summary of Transport Cost Components

Cost Component Description Applies To
Freight charges Base cost of transportation All modes
Fuel costs Varies with distance and mode Road, Air, Rail
Tolls, duties, fees Regulatory or infrastructure charges Road, Sea, Cross-border
Driver/labor wages Personnel directly involved in transport Road, Air, Warehousing
Vehicle/equipment costs Maintenance, leasing, depreciation Road, Rail, Air, Sea
Loading/unloading Port handling, warehouse fees Sea, Air, Rail, Trucking
Inventory carrying in Cost of goods while en route Long-haul, sea, air
transit
Insurance Coverage for cargo damage or loss All modes
Delay/time-based costs Demurrage, late delivery impacts All modes
Admin/Overheads Systems, staff, compliance All modes

Example of total cost comparison:

Scenario: You need to ship goods from Dar es Salaam to Dodoma.
Mode Base Freight Fuel & Customs Total
Handling
Road Only TZS 900,000 TZS 300,000 TZS 100,000 TZS 1,300,000
Rail + TZS 600,000 (rail) + TZS TZS 150,000 TZS 50,000 TZS 1,050,000
Truck 250,000 (truck)
Decision: Rail + truck is cheaper, assuming delivery time is acceptable.

4.5 Factors affecting transportation decisions

There are various factors to be considered when selecting the modes of transport.

Table 4.4: Factors Affecting Transport Decisions

Factor Explanation
Cost Must balance cost vs. speed
Transit time Urgent deliveries need faster modes
Reliability On-time performance crucial for JIT
Distance Longer routes may favor rail or sea
Product type Fragile or perishable goods need special handling
Volume and weight High-volume favors rail/sea

28
 Infrastructure Roads, ports, railways, airport availability
Environmental impact CO₂ emissions influence mode choice

4.6 Key Performance Indicators (KPIs) for Transportation

Table 4.5: Key Performance Indicators for Transportation

KPI Description
On-time delivery rate % deliveries made as scheduled
Freight cost per unit Total transport cost ÷ units shipped
Transit time Time from dispatch to delivery
Order tracking accuracy Real-time shipment visibility
Damage rate % of goods damaged in transit
Fuel efficiency Distance per liter/km per ton
Example: A 3PL with 98% on-time delivery and 0.5% damage rate is ideal for time-sensitive
goods.

Summary table for the role of transportation modes in SCM

Mode SCM Impact
Road Last-mile delivery, high flexibility, local reach
Rail Cost-effective for long inland bulk shipments
Air High-speed, high-cost — for urgent or valuable goods
Sea Cheapest for global trade, high volume, slow
Pipeline Reliable for fluids, low operating cost, limited use

4.7 Design options for a transportation network

The design of the transportation network is a strategic decision that directly affects cost, service
level, speed, and flexibility. Transportation network design defines how goods flow from suppliers
to customers, including the routes, hubs, modes, and connections used.

When designing a transportation network, consider the following:

a) Should transportation be direct or through an intermediate site?
b) Should the intermediate site stock product or only serve as a cross-docking location?
c) Should each delivery route supply a single destination or multiple destinations (milk run)?

Transport network design options

There are various design options, each chosen based on factors like product type, delivery speed,
distance, cost efficiency, and customer demand. The table below describes the different transport
design options.

29
Table 4.6: Design Options for Transport Network

Transport Description Advantages Disadvantages Best for

network design
Direct Shipment Goods are shipped • Simple and fast for • High transportation Small
Network (Point- directly from the small volumes cost per unit volumes,
to-Point) supplier or • Reduces handling • Not ideal for bulk urgent items
manufacturer to and lead time or low-value items
the customer • Suitable for urgent • Limited economies
without any deliveries of scale
intermediate
stops.
Centralized All products are • Easier inventory • Longer delivery National
Distribution shipped to and control distances distribution,
Network (Single from one central • Lower inventory • Higher transport low SKUs
Warehouse) warehouse. holding cost costs for far-off
• Better coordination customers
• Risk of service
delays in remote
areas
Decentralized Products are • Faster delivery • Higher inventory Fast-moving
Distribution stored at regional times and facility costs consumer
Network warehouses • Lower outbound • goods
(Multiple closer to demand transport costs • Complex
Warehouses) centers. • Better customer coordination
service •
• Duplication of
stock
Cross-Docking Products are • Reduces inventory • Requires accurate
Perishables,
Network shipped to a cross- holding retail
demand forecasting
dock facility, replenishment
• Speeds up delivery • High dependency
sorted • Minimizes on transport
immediately, and warehousing needs coordination
sent to customers • Not suitable for all
— with no products
storage in
between.
Milk-Run A single vehicle • Cost-effective for • Requires precise JIT systems,
Transportation picks up or frequent small scheduling multiple small
delivers goods to deliveries deliveries

30
 multiple locations • Efficient use of • Longer transit
in a loop, reducing vehicle capacity times for some
empty miles. • Ideal for JIT stops
systems
Hub-and-Spoke Goods flow • Consolidates • Hub congestion JIT systems,
Network through a central shipments for scale risks multiple small
hub (e.g., a • Reduces long-haul • Added transit time deliveries
regional trips for consolidation
warehouse or • Works well for both
sorting center), inbound and
then move to outbound logistics
spokes (local
destinations).
Multimodal / Combines two or • Cost-effective for • Complex International
Intermodal more transport long distances scheduling trade, bulk
Network modes (e.g., sea + • Uses strengths of • Requires shipments
rail + road) to each mode intermodal
optimize cost, • Reduces infrastructure
speed, and reach. environmental (ports, railheads)
impact

4.8 Sustainability issues in transportation

Sustainability in transportation is a critical issue, as the transport sector is a major contributor to
environmental, economic, and social impacts. Companies today are under increasing pressure to
make their transportation operations greener, safer, and more efficient.

Transport sustainability issues fall under the three pillars:

A. Environmental
B. Economic
C. Social

A.Environmental Issues
− Greenhouse Gas (GHG) Emissions
• Transportation accounts for approximately 20–30% of global CO₂ emissions, mainly from
fossil fuel use in road, air, and sea transport.
• High carbon footprint from long-haul trucks, airplanes, and diesel-powered ships.
• For example, a truck emits approx. 1 kg of CO₂ per km depending on load and fuel
efficiency.
− Air and Noise Pollution

31
 •
Emissions from vehicles contribute to smog, particulate matter (PM2.5), and nitrogen
oxides (NOx).
• Air pollution affects public health, especially near highways and ports.
• Noise pollution is a concern in urban and residential areas.
− Fossil Fuel Dependence
• Transport heavily relies on non-renewable fuels (diesel, petrol, jet fuel).
• Volatile fuel prices and supply risks make it unsustainable in the long run.
− Land Use and Habitat Destruction
• Building roads, railways, and ports can lead to deforestation, soil degradation, and loss of
biodiversity.
• Urban sprawl due to logistics infrastructure expansion.

B.Economic Issues
− Rising Operational Costs
• Fuel, tolls, emissions taxes, and vehicle maintenance costs are increasing.
• Sustainability efforts (e.g., cleaner fuels, EVs) require high initial investment.
− Inefficiencies in Transport
• Empty return trips, poor route planning, and underutilized capacity increase costs and
emissions.
• Last-mile delivery is especially inefficient in urban areas.
− Supply Chain Disruptions
• Extreme weather (caused by climate change) disrupts transport networks.
• Infrastructure damage from floods, hurricanes, or heatwaves affects delivery timelines.

C.Social Issues
− Road Safety and Accidents
• High rates of road transport accidents cause injuries and fatalities.
• Heavy trucks in urban areas raise safety concerns for pedestrians and cyclists.
− Labor Conditions
• Drivers and logistics workers often face long hours, low wages, and poor working
conditions.
• Social sustainability includes fair labor practices, health, and well-being.
− Community Impact
• Increased freight movement in cities causes congestion, noise, and reduced quality of life
for residents

32
Table 4.7: Solutions and Sustainable Practices
Sustainable Practice Benefit
Use of electric or hybrid vehicles Reduces GHG and air pollution
Modal shift (e.g., road to rail) Lower emissions per ton-km
Route optimization software Minimizes fuel use and travel distance
Load consolidation Reduces number of trips and fuel use
Green fuels (biofuel, LNG, hydrogen) Less CO₂ than diesel or petrol
Driver training (eco-driving) Improves fuel efficiency
Urban consolidation centers Reduces last-mile emissions in cities
Investment in public & non-motorized transport Reduces congestion & emissions

Impact on transportation
a) Sustainable transportation improves efficiency, reduces costs, and enhances brand reputation.
b) Companies are increasingly required to report their carbon footprint and adhere to
environmental regulations.
c) Consumers and stakeholders demand eco-friendly logistics.

33
 5 CHAPTER FIVE
MANAGING WAREHOUSING OPERATIONS

5.1 Learning objectives

By the end of this lesson, students should be able to:
a) Define the role of warehousing in supply chains.
b) Identify the key functions and types of warehouses.
c) Understand warehouse layout and design principles.
d) Manage warehousing activities and performance.
e) Apply warehouse technology and automation concepts.
f) Analyze warehousing decisions through real-life logistics examples.

5.2 Introduction to warehousing

Warehousing plays a vital role in supply chain management by facilitating the efficient movement
and storage of goods.
It is used to store products (e.g., raw materials, parts/components, goods-in-process, finished
goods) at and between the point of origin and the point of consumption.
It helps balance supply and demand, supports order fulfillment, and improves customer service by
ensuring product availability.

What is a warehouse?
A warehouse is a facility used for the storage, handling, and movement of goods in the supply
chain, before they are distributed to the next stage: manufacturers, retailers, or customers.

Role of Warehousing in Supply Chains

Warehouses serve as key nodes between supply and demand, supporting:
• Inventory buffering: Protects against demand variability.
• Supports demand management: Companies store extra stock to manage fluctuations in
demand.
• Product consolidation: Combines goods for full truckloads.
• Order fulfillment: Prepares products for dispatch to customers.
• Value-added services: Labeling, kitting, packaging, customization.
• Enables cost savings – Consolidation, cross-docking, and bulk storage reduce logistics
costs.
• Enhances customer satisfaction – Ensures timely product availability and service.

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5.3 Key warehouse operations
Warehouses serve multiple purposes beyond just storing goods. The main operations are as
indicated in the table below:

Table 5.1: Key Warehouse Operations

Operational Activity Description

Receiving • Goods are delivered, inspected, and recorded into the inventory
system.
• Ensures products meet quality and quantity requirements
before being stored.
• Requires coordination between suppliers, transporters, and
warehouse staff.
Storage • Products are placed in appropriate storage locations based on
size, demand, and accessibility.
• Two types of storage:
a) Active Storage – For fast-moving, frequently accessed
products.
b) Extended Storage – For long-term, less frequently accessed
products.
Order Picking and Packing • Picking is the process of selecting products from storage to
fulfill orders.
• Packing involves preparing orders for safe transportation,
including labeling and documentation.
Crossdocking • Involves receiving bulk shipments and then breaking these
shipments into smaller orders.
• Packing them, and shipping them immediately without being
stored in the warehouse
Unitizing • Consolidating a number of individual items onto one shipping
unit for easy handling
• Packaging merchandise in appropriate shipping containers
• Accumulating orders by outbound carriers
Shipping • Ensures that the correct products are dispatched on time to the
right destination.
• Involves coordination with transportation providers and
distribution centers.

5.4 Types of warehouses

Businesses can use different types of warehouses based on their needs:

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A. Private Warehouse
B. Public Warehouse
C. Contract Warehouse (Third-Party Logistics, 3PL)

A. Private warehouses
− Owned and operated by a company for its own storage needs.
− Used by large retailers, manufacturers, and wholesalers with consistent demand.
− Advantages: Greater control, security, and customization.
− Disadvantages: High investment costs and less flexibility.

B. Public warehouses
− Facilities offered by third-party providers to multiple businesses.
− Companies rent storage space as needed, paying based on usage.
− Advantages: Low initial cost, flexibility, and scalability.
− Disadvantages: Less control over operations and inventory management.

Forms of public warehouses

a) General merchandise warehouse: Intended for storing any kind of products.
b) Refrigerated warehouse: Intended for preserving perishable items such as grocery store items
in a temperature-controlled storage environment.
c) Household goods warehouse: Intended for storage of personal property.
d) Special commodity warehouse: Designed for some agricultural products such as grains, salt,
wool, and cotton.
e) Bulk storage warehouse: Designed for dry products such as coal, sand, and chemicals.
f) Bonded warehouse: Storage for imported goods. The company doesn’t have to pay customs
duties and excise taxes until those goods are released and sold

C. Contract warehouses
− A hybrid model where a company outsources warehousing operations for a specific period.
− Used by businesses needing specialized storage solutions (e.g., cold storage, hazardous
materials).
− Advantages: Cost-effective with access to expertise and technology.
− Disadvantages: Dependency on third-party service providers.

5.5 Warehouse layout and planning

An effective layout should aim to:
• Minimize travel distance
• Maximize storage space utilization
• Facilitate smooth inbound and outbound flow

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 • Ensure safety and compliance
• Support future expansion

Types of Warehouse Layout Designs

Warehouse layouts are usually categorized by flow and dock orientation. The most common
options are indicated in the table below:
Table 5.2: Warehouse Layout Designs

Warehouse layout Description Advantages Disadvantages

design
U-Shaped Layout Receiving and shipping docks Compact, shared Congestion, limited
are next to each other (on the resources, easy scalability
same side), forming a "U" supervision
pattern of product flow.
I-Shaped (Through- Receiving is on one side, and Clear flow, supports Clear flow,
Flow) Layout shipping is on the opposite high volume supports high
side, forming a straight line volume
(like an "I").
L-Shaped Layout Receiving and shipping are at Better segregation, Not suitable for
a 90-degree angle (adjacent space-saving large operations
sides), forming an "L".
Cross-Docking Products are received, sorted, Fast, low inventory Fast, low inventory
Layout and immediately dispatched cost cost
without going into storage.

5.6 Functional Zones in a Warehouse

Regardless of layout, warehouses typically include various zones with distinct functions as
indicated in the table below:
Table 5.3: Warehouse Functional Zones

Zone Function
Receiving area Unload, inspect, and check-in goods
Put-away area Transition goods to storage locations
Storage area Bulk storage, rack storage, bin storage
Picking area Order picking and staging
Packing area Labeling, sorting, packaging
Shipping area Loading of outbound orders
Value-Added Services Custom labeling, kitting, light assembly
Office/Admin area Supervisors, control systems, support

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Factors to consider when designing a warehouse layout
When designing a warehouse layout, the following factors need to be considered:
• Type of goods (perishable, bulky, fragile)
• Volume of transactions (daily order volume)
• Turnover rate (fast- or slow-moving SKUs)
• Available space and building shape
• Technology use (manual vs. automated)
• Budget
• Safety and regulatory compliance
• Scalability for future growth

5.7 Warehousing Equipment

Warehousing equipment is critical to the efficiency, safety, and productivity of warehouse
operations. It supports material handling, storage, order picking, and loading/unloading, and plays
a big role in labor cost control, space utilization, and inventory accuracy.

Warehousing equipment falls into four main categories:

A. Storage equipment: Holds inventory until needed
B. Handling equipment: Moves goods within the warehouse
C. Packing/shipping equipment: Prepares goods for outbound transport
D. Safety equipment: Protects people, goods, and infrastructure

Table 5.4: Warehousing Equipment and Selection

Category Equipment Description

Storage equipment Pallet Racking Upright racks for palletized goods
Shelving Units For small items or hand-picked goods
Mezzanine Floors Elevated platforms for extra storage
Bin Systems For organizing small SKU items
Mobile Racking Movable racks to save space
Handling Equipment Forklifts Powered trucks for pallet movement
Pallet Jacks Manual or electric tools to move pallets
Automated systems for continuous
Conveyor Belts
movement
Cranes & Hoists For lifting very heavy items
Automated Guided Vehicles
Robots that move goods autonomously
(AGVs)
Trolleys & Carts Manual picking and movement
Packing/shipping Packing Tables Workstations for packing and labeling
equipment Stretch Wrapping Machines Wraps pallet loads securely
Strapping Machines Applies straps to bundles/pallets

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 Label Printers & Scanners Print barcodes, update WMS
Weighing Scales For weight verification
Safety equipment Guard Rails Prevent vehicle collision with racks
Safety Signs & Floor
Guide movement and mark hazard zones
Markings
Personal Protective
Helmets, gloves, safety shoes
Equipment (PPE)
Fire Suppression Systems Fire alarms, sprinklers
Emergency Exits & Lighting Evacuation during emergencies

Factors to consider when choosing equipment

• Type of goods (fragile, bulky, perishable, hazardous)
• Warehouse size and ceiling height
• Volume and turnover rate
• Level of automation desired
• Budget
• Safety and regulatory compliance
• Scalability for future growth

5.8 Warehouse Leases

As a compromise between private and public warehousing, leasing all or part of a warehouse space
can be a good business move.
The leasing option gives a company greater flexibility because it frees up capital and reduces sunk
cost. There are various types of leases a company can select from as indicated in the table below:

Table 5.5: Types of Warehouse Leases

Warehouse Description Advantages Disadvantages Best for

lease
Gross lease • Also called full-service lease. Simplicity, Usually, higher Best for
• Tenant pays a fixed rent, and the cost stability base rent businesses
landlord covers most or all wanting
operating expenses (utilities, predictable
maintenance, taxes, insurance). costs without
handling
building
expenses.
Net lease • Tenant pays base rent plus some Lower base Unpredictable Tenants who
or all operating expenses. rent expenses want more
• Three categories: control or
lower base rent

39
 a) Single Net Lease (N): Tenant
pays property taxes.
b) Double Net Lease (NN): Tenant
pays taxes and insurance.
c) Triple Net Lease (NNN):
Tenant pays taxes, insurance,
and maintenance.
Flat rental • Tenant pays a fixed and equal Flexibility, Higher rates, Startups,
lease amount of rental fee to the low potential businesses with
landlord at specified rental commitment availability seasonal spikes
periods (e.g., monthly) issues in inventory
throughout the duration of the
contract.
Percentage • Common in retail-adjacent Lower base Higher total Tenants with
lease warehouses. rent during cost during variable
• Tenant pays base rent plus a slow months peak seasons income or
percentage of revenue sales-driven
generated from the space. operations

5.9 Warehousing costs

Warehousing costs are composed of:
A. Real-estate costs
B. Equipment costs
C. Labor costs
D. Administrative expenses
E. Hidden miscellaneous costs

Table 5.6: Types of Warehousing Costs

Warehousing cost Description Composition
Real-estate costs Costs associated with the • Land purchase cost, leasing cost, or
ownership of a real estate rental fee
property • Property taxes
• Property insurance
• Utilities
• Interior maintenance and
renovation/modification
• Exterior maintenance associated with
mowing, snow plowing, cleaning,
painting, and parking lots

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 • Depreciation
Equipment costs Incurred from the purchase • Maintenance (including fuel charges,
and use of storage and lubrication, service part replacement)
handling equipment and repair
• Depreciation
• Detention/demurrage
• Leasing or rental cost
Labor costs Direct labor cost • Wages
• Bonuses
• Overtime pays
Compensation and fringe • Health and compensation insurance
benefits • Pension
• Life and accidental death insurance
• Long-term disability benefit
• Vacation
• Holidays
• Sick leave
• Personal leave (including funeral and
maternity leaves)
Payroll taxes • Worker’s compensation
• Social security tax
• Unemployment tax
Other expenses • Training and education
• Employee turnover costs, including
recruitment, interviews, and referral
bonuses
Administrative Tied to payroll set aside for • Executive salaries
expenses warehousing executives, • Supporting staff (e.g., secretaries)
administrative staff, and salaries
office maintenance • Office maintenance (e.g., dedicated
office space, office equipment
maintenance)
• Janitorial services
• Securities
• Office supplies
• Data processing fees
• Postage, telephone, copying, printing,
courier services, and office utilities

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 Hidden Expenses that are often • Cost of vacancy or underutilization
miscellaneous costs overlooked when operating a • Damage, loss, and pilferage
warehousing facility • Trash hauling
• Pest control
• Legal expenses
• Loss of insurance deductibles
• Executive travel expenses
• Security system installation and
maintenance
• Relocation and moving expenses.

5.10 Technology in warehousing

Modern warehouses use technology to improve efficiency, accuracy, and cost management.
common technologies include:
A. Warehouse Management Systems (WMS): Robotics and conveyor systems to store and retrieve
goods automatically. Increases efficiency and reduces labor costs.
B. Automated Storage and Retrieval Systems: Software that tracks inventory levels, order
processing, and labor management. Benefits include: Real-time inventory tracking, Faster
order processing, and Automated reporting and analytics.
C. Internet of Things (IoT) and RFID: RFID Automates inventory tracking. IoT-enabled sensors
monitor warehouse temperature, humidity, and product conditions.

5.11 Challenges in warehousing

• Rising Costs – Land, labor, and transportation expenses are increasing.
• Space Limitations – Finding large warehouse spaces near urban centers is difficult.
• Labor Shortages – Skilled warehouse workers are in high demand.
• Supply Chain Disruptions – Global crises (e.g., pandemics, natural disasters) affect
warehousing and distribution.
• Sustainability Concerns – Companies are pressured to adopt eco-friendly practices, such as
solar energy and waste reduction.

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 6 CHAPTER SIX
INVENTORY PLANNING AND CONTROL

6.1 Learning Objectives

By the end of this lesson, students will be able to:
a) Define inventory and its role in supply chains
b) Understand the objectives and types of inventory
c) Apply key inventory planning techniques
d) Analyze inventory control systems and performance metrics
e) Recognize best practices and technology in inventory management

6.2 The meaning of Inventory

Inventory refers to the stock of goods that a company holds for the purpose of future sale or
production.

Objectives of Inventory Planning and Control

• Ensure product availability (service level)
• Minimize total cost of inventory (ordering, holding, shortage)
• Optimize order quantities and timing
• Avoid stockouts and overstocking
• Improve visibility and tracking of stock
Balance is key: Too much = waste; too little = lost sales

6.3 Types of Inventory

There are various types of inventories with distinct roles in supply chains. The most cited types
are indicated in the table below.

Table 6.1: Types of Inventory

Type Description Example

Raw Materials Basic materials used in production Steel for manufacturing cars
Work-in-Progress Semi-finished goods in the Half-assembled furniture
production process
Finished Goods Completed products ready for sale Packaged smartphones in
warehouse
Maintenance, Repair, Used to support operations Tools, lubricants, safety gear
Operating

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 Transit Inventory Goods in transit between facilities
Imported electronics on the
way
Cycle Stock Inventory needed to meet normal Weekly replenishment stock
demand
Safety Stock Buffer against demand/supply Extra vaccines during flu
variability season
Seasonal Inventory Stock built up ahead of peak Holiday decorations in
seasons October

6.4 Inventory planning techniques

Inventory planning refers to the process of determining how much inventory to order, when to
order it, and how to manage it over time to meet customer demand while minimizing costs.

It involves:
• Forecasting demand
• Setting stock levels
• Calculating optimal order quantities
• Managing lead times and safety stock

Effective inventory planning ensures:

• The right quantity of products is available at the right time
• Businesses avoid both stockouts (lost sales) and overstocking (excess cost)
• Operations remain responsive, cost-efficient, and customer-focused

The commonly used planning techniques include:

A. Economic Order Quantity (EOQ)
B. Reorder Point (ROP)
C. Safety Stock Calculation
D. ABC Analysis

A. Economic Order Quantity (EOQ)

Determines the optimal order size that minimizes the total cost of ordering and holding inventory.
Formula:
2DS
𝐸𝑂𝑄 = √ H
Where:
D = Annual demand
S = Ordering cost per order
H = Holding cost per unit per year

44
Advantages:
• Balances order size and cost
• Reduces excess inventory
Disadvantages:
• Assumes steady demand and lead time
• Not ideal for perishable goods

Example:
A company sells 10,000 units of chairs/year. Ordering cost = TZS 50,000/order. Holding cost =
TZS 2,000/unit/year. Calculate the EOQ, i.e., how many chairs should be ordered each time to
minimize the total ordering cost.

2 X 10,000 X 50,000
𝐸𝑂𝑄 = √ = 707 units
2,000

Additional activities:
Calculate the number of orders per year:
Annual Demand
EOQ
10,000
= 14.1 𝑜𝑟𝑑𝑒𝑟𝑠/𝑦𝑒𝑎𝑟
707
Calculate the total annual ordering cost:
Nmber Of Orders X Ordering Cost = 14.1 x 50,000 = TZS 705,000

Calculate the average inventory:

EOQ 707
= = 353.5 units
2 2

Calculate the total annual holding cost:

Average Inventory X Holding Cost = 355.5 x 2,000 = TZS 711,000

B. Reorder Point (ROP)

Tells when to reorder by identifying the stock level that should trigger a new purchase.

Formula:
Lead Time X Daily Demand

With safety stock included:

(Lead Time X Daily Demand) + Safety Stock

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Example:

The supplier lead time is 7 working days (from order to delivery), and the average daily usage of
oil filters is 50 units/day. Due to fluctuations in customer bookings and occasional delivery delays,
Company AA+ maintains a safety stock of 150 units. Calculate the inventory level that Company
AA+ should place a new order to ensure uninterrupted service. In other words, what is the reorder
point (ROP)?

(7 x 50) + 150 = 500 Units

When inventory reaches 500 units, a new order should be placed.

C. Safety Stock Calculation

Adds a buffer stock to protect against unexpected demand spikes or supply delays.
Formula:
Safety Stock = Z x 𝜎𝑑 x √𝐿
Where:
Z = Service level factor (e.g., 1.65 for 95%)
σd = Standard deviation of daily demand
L = Lead time

Example:
The pharmacy typically sells 100 units per day, and the supplier’s lead time is 5 days. Due to
occasional demand surges and supplier delays, demand isn’t always predictable. Based on
historical data, the standard deviation of daily demand is 20 units and the pharmacy wants a 95%
service level, meaning only a 5% risk of stockout. What is the appropriate Safety Stock level?

Available:
Z = Z-score based on desired service level (1.65 for 95%) – 1.65
σd = Standard deviation of daily demand – 20 units
L = Lead time in days – 5 days

Safety Stock = 1.65 X 20 X √5 = 73.79 Units

The pharmacy should hold approximately 74 units of safety stock to maintain a 95% service level.

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D. ABC Analysis
ABC Analysis is an inventory classification technique based on the Pareto Principle (80/20 rule),
which states: “A small percentage of items often account for a large percentage of the inventory
value”.

Hence, ABC analysis involves classifying inventory based on value and impact so companies can
prioritize control efforts.

In most cases inventories are classified into three categories depending on their impact and value
to the organization as indicated in the Table below.
Category % of Items % of Value Management Focus
A ~20% ~80% Tight control, frequent review
B ~30% ~15% Moderate control
C ~50% ~5% Basic control
Example: Laptops (A), chargers (B), manuals (C)

Benefits:
• Optimizes resource allocation
• Focuses attention on critical items

Example:
AutoParts Hub wants to categorize 10 key SKUs using ABC Analysis based on their annual usage
value (unit cost × annual demand). They want to know which items should be in Class A, B, or C
to improve inventory control.

Given Data:
SKU Unit Cost (TZS) Annual Usage (units) Annual Usage Value (TZS)
A001 120 200 24,000
A002 10 800 8,000
A003 500 100 50,000
A004 5 1,000 5,000
A005 80 150 12,000
A006 2 2,000 4,000
A007 300 50 15,000
A008 7 700 4,900
A009 90 250 22,500
A010 15 600 9,000

Stepwise calculation:
Calculate annual usage value (already done above)

47
Sort usage by value (high to low)
SKU Annual Usage Value
A003 50,000
A001 24,000
A009 22,500
A007 15,000
A005 12,000
A010 9,000
A002 8,000
A008 4,900
A004 5,000
A006 4,000

Calculate cumulative value and percentage of total

SKU Value Cumulative Value % of Total Classification
A003 50,000 50,000 32.4% A
A001 24,000 74,000 47.9% A
A009 22,500 96,500 62.5% A
A007 15,000 111,500 72.2% B
A005 12,000 123,500 80.0% B
A010 9,000 132,500 85.8% B
A002 8,000 140,500 91.0% C
A008 4,900 145,400 94.8% C
A004 5,000 150,400 97.4% C
A006 4,000 154,400 100.0% C
Total Inventory Value = TZS 154,400

Final Classification
• Class A: A003, A001, A009
• Class B: A007, A005, A010
• Class C: A002, A004, A006, A008

Interpretation:
Class A (3 SKUs) = 30% of items, ~62.5% of value → High attention
Class B = Moderate control, monthly reviews
Class C = Low control, annual reviews or bulk purchase

48
6.5 Inventory Performance Metrics (KPIs)
Inventory performance metrics (also called inventory KPIs) are essential tools that help businesses
monitor, evaluate, and improve how effectively inventory is being managed.
These metrics guide decisions on stock levels, order timing, cost control, and service levels,
making them critical to supply chain performance.

Uses of inventory KPIs

• Benchmark performance across products, categories, or branches
• Identify slow-moving or obsolete stock
• Improve replenishment planning
• Track service level performance
• Justify inventory reduction strategies

Table 6.2: Common Inventory Performance Metrics

Metric What It Measures Why It Matters

Inventory Turnover How many times inventory is High turnover = efficient
Ratio sold/replaced during a period inventory use
Days of Inventory Average number of days inventory Lower DOI = faster inventory
(DOI) stays in storage movement
Stockout Rate % of orders not fulfilled due to lack of Indicates lost sales and
stock service failure
Carrying Cost of Total annual cost of holding inventory Helps identify cost-saving
Inventory (% of total inventory value) opportunities
Order Accuracy Rate % of orders shipped correctly (right Affects customer satisfaction
product, right quantity) and returns
Cycle Time Time from order placement to Measures speed and
delivery responsiveness
Inventory Accuracy Match between recorded stock and Ensures data reliability for
actual physical stock planning and forecasting
Fill Rate % of customer demand fulfilled from Measures service level and
available stock stock availability
Example: A high turnover rate (e.g., 10x/year) means better efficiency

6.6 Inventory Control Technologies

Inventory technologies refer to software systems, tools, and devices that enable organizations to
track, control, and optimize inventory across the supply chain.
These technologies support accuracy, visibility, automation, and data-driven decisions. They are
essential for modern logistics and transport systems. Refer Table xx for key inventory
technologies.

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Table 6.3: Key inventory technologies

Technology Function Benefit

WMS (Warehouse Manages inventory locations, stock Improves space and
Management System) levels, and workflows picking efficiency
ERP Systems Integrates inventory with Centralizes data, supports
procurement, finance, and sales planning
Barcode Systems Tracks products using unique Reduces human error, fast
barcodes and scanners data entry
RFID (Radio Frequency Uses radio waves for automatic item Enables real-time visibility
Identification) tracking
IoT Sensors Monitors conditions (e.g., Helps manage perishables,
temperature, humidity, stock sensitive items
movement)
Inventory Optimization Uses algorithms to suggest ideal stock Data-driven planning and
Software levels, EOQs automation
Cloud-Based Inventory Accessible from anywhere, scalable Flexibility for SMEs and
Systems remote teams
Mobile Inventory Apps Allows handheld tracking and real- Increases responsiveness
time updates on-the-go in operations

50
References

Chopra, S., & Meindl, P. (2022). Supply chain management: Strategy, planning, and operation (8th
ed.). Pearson.

Christopher, M. (2016). Logistics & supply chain management (5th ed.). Pearson.

Grant, D. B., Trautrims, A., & Wong, C. Y. (2017). Sustainable logistics and supply chain
management (2nd ed.). Kogan Page.

Rushton, A., Croucher, P., & Baker, P. (2017). The handbook of logistics and distribution
management: Understanding the supply chain (5th ed.). Kogan Page.

Waters, D. (2019). Supply chain risk management: Vulnerability and resilience in logistics (3rd
ed.). Kogan Page.

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