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Total logistics cost = Freight costs + Damages + Inventory + Order Processing costs + Packaging costs

In a lean management system, the inventory is kept at a minimum level to uncover problems, the crux of a lean management system. The inventory levels are determined both by predictability and length of travel.

Poor infrastructure results in higher transit time, resulting in higher pipeline inventory. In a recent study carried out by KPMG, it was estimated that the time taken to cover a comparable distance between ports and manufacturing hub in India is 4.5 times (8 days against 1.5 days in US)¹. This necessitates higher inventory levels in the Indian supply chain.

Not only does poor infrastructure result in a higher pipeline, the transit time is relatively unpredictable compared to the developed countries. Empirical data, atleast in the auto sector, suggests that the variability in lead time affects has a greater adverse impact on costs than transit time itself. This can be explained mathematically as follows:

Safety stock = z σ
Where σ = Function (Supply variability, demand variability)

It has been documented in a recent study that a normal transit time of 7 days in India has a variability of 3 days, the number going even higher for imports where a 35 days transit time has a variability of 10 days². This makes holding higher safety stocks imperative.

Thus, even if the final manufacturer and its suppliers were able to control all other problems associated with procuring raw materials and components - say ensure, zero product defects, optimize ordering systems - the high and unpredictable transit time would prevent them from achieving low inventory level.

¹ Data from KPMG study: Manufacturing in India: Opportunities and Myths.
² Data from "Impact of poor transportation on Industrial Cluttering" by Sumilya Gulyani.

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* Contributed by -
Amandeep S. Bedi & Namit Puri,
Indian School of Business (ISB),
Hyderabad.