Tag: Order Processing

The product packaging system (i.e. primary, secondary and tertiary packages and accessories) is highly relevant in the supply chain and its importance is growing because of the necessity to minimize costs, reduce the environmental impact and also due to the development of web operations (i.e. electronic commerce).

A typical supply chain is an end-to-end process with the main purpose of production, transportation, and distribution of products. It is relative to the products’ movements normally from the supplier to the manufacturer, distributor, retailer and finally the end consumer. All products moved are contained in packages and for this reason the analysis of the physical logistics flows and the role of packaging is a very important issue for the definition and design of manufacturing processes, improvement of layout and increase in companies’ efficiency.

In recent years, companies have started to consider packaging as a critical issue. It is necessary to analyse the packages’ characteristics (e.g. shape, materials, transport, etc.) in order to improve the performance of companies and minimize their costs. Packaging concerns all activities of a company: from the purchasing of raw materials to the production and sale of finished products, and during transport and distribution.

In order to manage the activities directly linked with the manufacturing of products (and consequently with the packaging system), the OM discipline is defined. It is responsible for collecting various inputs and converting them into desired outputs through operations.

Recently, more and more companies have started to use web operations. Electronic commerce (e-commerce) is the most promising application of information technology witnessed in recent years. It is revolutionising supply chain management and has enormous potential for manufacturing, retail and service operations. The role of packaging changes with the increase in the use of e-commerce: from the traditional “shop window” it has become a means of information and containment of products.

Objectives

Physical protection: the objects enclosed in the package may require protection from mechanical shock, vibration, electrostatic discharge, compression, temperature, etc.;

• Hygiene: a barrier from e.g. oxygen, water vapour, dust, etc. is often required. Keeping the contents clean, fresh, sterile and safe for the intended shelf life is a primary function;
• Containment or agglomeration: small objects have to be grouped together in one package for efficiency reasons;
• Information transmission: packages can communicate how to use, store, recycle, or dispose of the package or product;
• Marketing: packages can be used by marketers to encourage potential buyers to purchase the product;
• Security: packages can play an important role in reducing the risks associated with shipment. Organizations may install electronic devices like RFID tags on packages, to identify the products in real time, reducing the risk of thefts and increasing security.
• Packaging system and operations management
• In recent years, packaging design has developed into a complete and mature communication discipline [24]. Clients now realize that packages can be a central and critical element in the development of an effective brand identity. The packaging system fulfils a complex series of functions, of which communication is only one. Ease of processing and handling, as well as transport, storage, protection, convenience, and re-use are all affected by packaging.

The packaging system has significant implications in OM. In order to obtain successful management of operations, packaging assumes a fundamental role along the whole supply chain and has to be connected with logistics, marketing, production, and environment aspects. For example, logistics requires the packages to be as easy as possible to handle through all processes and for customers. Marketing demands a package that looks nice and is the right size. Packages do not only present the product on the shelf but they also arouse consumers’ expectations and generate a desire to try out the product. Once the product is purchased, packages reassure the consumer of a product’s quality and reinforce confidence.

Production requires only one size of packaging for all kinds of products in order to minimize time and labour cost. The environmental aspect demands the packaging system to be recyclable and to use the least material possible.

Facilitate goods handling. This function considers the following aspects:

1. Volume efficiency: this is a function of packaging design and product shape. In order to optimize the volume efficiency of a package, this function can be split into two parts, internal and external filling degree. The first regards how well the space within a package is utilized. When using standardized packages with fixed sizes, the internal filling degree might not always be optimal. The external filling degree concerns the fitting of the primary packages with secondary and of secondary with tertiary. Packages that perfectly fill each other can eliminate unnecessary handling and the risk of damage, but it is important not to be too ambitious. Too much packaging may be too expensive, and there is a point where it is less costly to allow some damage than to pack for zero damage;
2. Consumption adaptation: the quantity of packages must be adapted to the consumption in order to keep costs low and not to tie unnecessary capital. Moreover it is desirable to have flexible packages and a high turnover of the packaging stock.
3. Weight efficiency: the package must have the lowest possible weight, because volume and weight limit the possible amount to transport. The weight is even more important when packages are handled manually.
4. Handleability: the packaging must be easy to handle for people and automatic systems working in the supply chain, and final customers. According to Regattieri, the handleability is considered the most critical packaging quality attribute by Italian companies and users;

Identify the product. The need to trace the position of goods during transport to the final destination can be achieved in different ways, for example by installing RFID tags in packages. Thanks to this new technology, it is possible to identify the position of both packages and products in real time. This system leads to a reduction in thefts, increase in security, mapping of the path of products and control of the work in progress;

Protect the product. The protection of the product is one of the basic functions of packaging for both companies and users. An unprotected product could cause product waste, which is negative from both the environmental and the economic point of view. Packages must protect products during manufacturing and assembly (within the factory), storage and picking (within the warehouse) and transport (within the vehicle) from surrounding conditions, against loss, theft and manipulation of goods.

The role of packaging along the supply chain

Due to the different implications of the packaging system with all the activities of an organization, as underlined in the previous paragraphs, packaging has to be considered an important competitive factor for companies to obtain an efficient supply chain.

The packaging function assumes a crucial role in all activities along the supply chain (e.g. purchase, production, sales, transport, etc.). It is transversal to other industrial functions such as logistics, production, marketing and environmental aspects. The packaging function has to satisfy different needs and requirements, trying to have a trade-off between them. Considering the simplified supply chain of a manufacturing company, it is possible to analyse the role of the packaging function for all the parties of the supply chain.

N suppliers provide raw materials to the manufacturer, which produces the finished products, sold to the distribution centre, then to the retailer and finally to m end consumers. In the middle, there are carriers that transport and distribute finished products along the supply chain. Each party has different interests and requirements regarding the function of packaging. Table 1 shows the different role of packaging for the parties to the supply chain.

Table 1.

The role of packaging for the parties along the supply chain

Inventory Management is the systematic process of ordering, storing, tracking, and controlling raw materials, work-in-progress (WIP), and finished goods within a business. Its primary objective is to ensure the right quantity of stock is available at the right time and place, minimizing shortages and excess. Effective inventory management balances customer demand with supply capabilities, reducing carrying costs, storage expenses, and risks of obsolescence. Techniques such as ABC analysis, Just-in-Time (JIT), Economic Order Quantity (EOQ), and Material Requirements Planning (MRP) are commonly used. By integrating technology like Warehouse Management Systems (WMS) and automation, businesses can improve accuracy, visibility, and decision-making. Ultimately, inventory management ensures efficiency, cost control, and customer satisfaction, supporting overall supply chain success.

Types of Inventories:

• Raw Materials Inventory

Raw materials inventory refers to the basic inputs required to produce goods and services. These materials can be natural resources, parts, or components purchased from suppliers that will undergo processing or manufacturing. Effective management of raw materials ensures a smooth production flow without interruptions. Businesses must balance between holding enough stock to avoid shortages and preventing excess inventory that increases carrying costs. Techniques like Just-in-Time (JIT) or vendor-managed inventory help reduce wastage and maintain efficiency. Raw material inventory is crucial because shortages can halt production, whereas overstocking leads to tied-up capital. Accurate tracking ensures cost efficiency, timely production schedules, and higher profitability by aligning procurement with demand forecasts.

• Work-in-Progress (WIP) Inventory

Work-in-Progress (WIP) inventory consists of items that are in the production process but not yet completed. This includes partially assembled goods, unfinished batches, and materials currently being transformed into finished products. WIP acts as a buffer between raw materials and final goods, ensuring that the manufacturing line continues smoothly. Managing WIP effectively is vital to control production efficiency, labor costs, and lead time. Excess WIP can result in high storage costs, space issues, and process delays, while too little WIP may disrupt output. Companies use lean manufacturing practices to minimize WIP and enhance flow. Well-managed WIP inventory improves cost control, product quality, and overall efficiency in the supply chain.

• Finished Goods Inventory

Finished goods inventory refers to products that have completed the manufacturing process and are ready for sale but are yet to be delivered to customers. These items are stored in warehouses or distribution centers before being shipped. Effective finished goods inventory management ensures timely order fulfillment, customer satisfaction, and reduced holding costs. Excess stock may lead to obsolescence or high carrying expenses, while insufficient stock risks lost sales and damaged reputation. Businesses use forecasting tools, demand planning, and inventory optimization techniques to balance supply with market demand. Since finished goods directly impact revenue, managing this inventory type is critical to achieving sales targets and maintaining profitability.

• Maintenance, Repair, and Operating (MRO) Inventory

MRO inventory includes all materials, tools, and supplies required to keep machines, equipment, and facilities running smoothly, but not directly used in the production of goods. Examples include lubricants, spare parts, cleaning supplies, uniforms, safety equipment, and office consumables. Though not directly tied to product output, MRO items are essential for operational efficiency and minimizing downtime. Poor management of MRO inventory can lead to equipment failures, production delays, or safety risks. Companies often overlook this category, but efficient monitoring reduces unexpected breakdowns and optimizes maintenance schedules. Digitized inventory systems and vendor-managed solutions ensure timely availability of MRO supplies, supporting uninterrupted operations and long-term productivity in the supply chain.

• Transit (Pipeline) Inventory

Transit inventory, also called pipeline inventory, refers to goods that are in transit between suppliers, manufacturing plants, warehouses, or customers. These items have been shipped but have not yet reached their destination. This type of inventory is common in global supply chains where transportation takes time, such as sea freight or cross-country logistics. While it does not physically occupy warehouse space, it still represents invested capital until received. Managing transit inventory effectively requires tracking systems, GPS-enabled logistics, and supplier coordination to avoid delays and losses. Long lead times or poor visibility may increase risks. Optimizing pipeline inventory helps businesses reduce costs, improve delivery accuracy, and maintain customer satisfaction.

• Buffer (Safety Stock) Inventory

Buffer or safety stock inventory is extra stock kept on hand to protect against uncertainties in demand or supply chain disruptions. It acts as a cushion against issues such as sudden demand spikes, supplier delays, or transportation bottlenecks. Safety stock ensures businesses can continue operations and meet customer requirements without interruption. However, holding too much safety stock increases carrying costs, while too little exposes the firm to stockouts. Companies often calculate safety stock levels using demand forecasting, lead time analysis, and risk assessment models. Effective management ensures a balance between risk coverage and cost efficiency. Safety stock is particularly critical in industries with seasonal demand or volatile markets.

• Anticipation Inventory

Anticipation inventory refers to stockpiling goods in advance of expected demand increases, such as during festive seasons, promotional campaigns, or product launches. Businesses produce and store goods ahead of time to ensure they can handle peak demand efficiently without production stress. For example, toy companies build anticipation inventory before holidays, while retailers stock more before Black Friday or Diwali. While anticipation inventory prevents shortages and supports smooth sales during peak seasons, it also increases risks of overproduction, obsolescence, and storage costs if demand is overestimated. Using predictive analytics, sales data, and market trends, businesses can optimize anticipation inventory. Properly managed, it ensures higher sales, customer satisfaction, and competitiveness.

Different Costs of Inventory:

• Ordering Costs

Ordering costs are the expenses incurred each time an order is placed for replenishing inventory. These include administrative costs such as preparing purchase orders, processing supplier invoices, communication costs, transportation arrangements, and inspection of goods on arrival. Even if the order quantity is small or large, the cost per order generally remains fixed. For example, if a company places frequent small orders, the overall ordering costs will rise. Efficient procurement systems, bulk ordering, and automation through digital purchase systems can reduce ordering costs significantly, making this a crucial component of inventory cost management.

• Holding (Carrying) Costs

Holding costs represent the expenses of keeping inventory in stock over time. They include warehousing charges, insurance, depreciation, security, spoilage, obsolescence, and the cost of capital tied up in unsold goods. These costs are usually expressed as a percentage of the inventory value, often ranging between 20–30% annually. High holding costs encourage businesses to minimize excess stock and adopt lean inventory methods like Just-in-Time (JIT). However, maintaining too little stock may result in stockouts. Thus, finding an optimal balance between holding costs and service levels is essential for effective inventory control.

• Shortage (Stockout) Costs

Shortage costs arise when inventory levels fall below demand and the company cannot fulfill customer orders. These costs include lost sales, loss of goodwill, penalties for late delivery, and disruption of production schedules. In manufacturing, stockouts may halt operations, leading to idle labor and machinery, which is very costly. In retail, it leads to dissatisfied customers who may switch to competitors. Companies manage shortage costs by maintaining safety stock, accurate demand forecasting, and efficient replenishment planning. While holding stock prevents shortages, excessive inventory increases carrying costs, so trade-offs are carefully evaluated.

• Setup Costs

Setup costs are incurred when production machinery or systems are adjusted to manufacture a different product or batch. This includes costs of machine calibration, downtime, labor, and wastage during adjustments. For companies following a make-to-order approach, frequent changes in production batches increase setup costs significantly. Setup costs are closely related to ordering costs in procurement. Businesses often reduce setup costs through standardization, automation, and flexible manufacturing systems. By producing in larger batches, setup costs per unit can be minimized, though this must be balanced against increased holding costs from larger inventory levels.

• Purchase Costs

Purchase costs represent the actual cost of buying goods or raw materials from suppliers. It is the largest component of inventory costs and directly impacts profitability. Purchase cost includes not just the unit price of goods but also related expenses such as shipping charges, customs duties, and discounts. Negotiating favorable terms, leveraging bulk purchases, and developing strong supplier relationships can lower purchase costs. However, organizations must balance low purchase costs with quality, reliability, and delivery timelines. Poor supplier quality can increase hidden costs in the form of rejections, returns, or delays.

• Transportation Costs

Transportation costs are incurred in moving inventory from suppliers to warehouses, between storage facilities, or to customers. These costs include freight charges, fuel, packaging, and handling fees. Depending on distance, volume, and mode of transport (air, sea, road, or rail), transportation costs can vary significantly. Poor logistics planning increases costs, delays, and risks of damage. Many companies use third-party logistics (3PL) providers to optimize transportation. Technology like GPS tracking and route optimization further reduces costs. Transportation cost is critical in global supply chains, where international shipping, tariffs, and compliance charges can heavily impact inventory expenses.

• Risk Costs

Risk costs refer to losses associated with inventory uncertainties such as theft, pilferage, obsolescence, perishability, and damage. For example, electronic products quickly lose value due to rapid technological advancement, while perishable items like food have limited shelf lives. Insurance premiums against such risks are also included in this category. Risk costs can be minimized through better inventory control, effective demand forecasting, quality packaging, and secured storage facilities. Businesses must also monitor inventory turnover to ensure goods are sold before losing relevance or value. Reducing risk costs improves overall supply chain efficiency.