Critical parameters of cost competence supply chain

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The purpose of this study is to identify some critical parameters of cost competence supply chain. Supply chain management involves dealing with a whole range of control parameters and a large numbers of key performance indicators. This paper reports on a study for understanding the impact of control parameters for a cost effectiveness supply chain. The understanding is used to identify the potential operating ranges that balance the desired performance objectives.

Design/ Methodology/ approach-

The universe of this study is the cosmopolitan city of Karachi. The study was based on primary source of data for this purpose survey method was used by closed ended Questionnaire. In Measurement Scale we used 5-Likert Scales as a tool for data collection & the sample Nature was chosen on Convenient Sampling.

Research limitation-----

The study had certain limitations and those limitations included time and resources constraints which limited our research to only city of Karachi.


The importance of supply chain management in business world is playing vital role in production to finish goods stage. Supply chain management covers materials obtaining, the goods converts into finish products and distributes to end consumers. These tasks of decisions increase business competitiveness and profit too.

The second most important thing is inventory management system and those costs that are directly related with inventory like, Production cost, Transportation, and Location. These are all costs combine effect on cost effectiveness. Many manufacturing business are taking advantage from SCM, they are creating strategies to cover up all aspects of today's business. Supply chain management creates betterment in production chain which is leads to end user customer. Many suppliers are very conscious about their inventory which are stock in their warehouses because inventory has its own cost.

Keywords--- Cost effectiveness, Inventory management, competitive, procurement


Table 1: SPSS data results 14

Table 2: Correlation data result 23

Table 3: Regression analysis (Inventory data results) 24

Table 4: Regression analysis (Production data result) 25

Table 5: Regression analysis (Transportation data result) 26

Table 6: Regression analysis (Location data result) 27


Figure 1: Role Played by Logistics Service Provider in Global Supply Chain 6

Figure 2:General processes identified using SCOR [Stadler and Kilger: 2005: 42, Poirier and Walker: 2005: 14, Bolstorff and Rosenbaum: 2003: 5] 7

Figure 3: Variables model 10

Table of Content










References 21

Appendix 23



A supply chain management is a method of manufacturing firms, persons, knowledge, actions, information and resources involved in delivering a product or service from supplier to customer.

In today's dynamic business world the importance of an efficient supply chain is critical. Competition has increased and customers have learned to expect more value from their products and services. To provide more value to customers while continuing to profit in a difficult economy companies are forced to find value throughout their supply chain. This study focuses on identifying some critical parameters that helps to implement the appropriate cost effectiveness supply chain. Along with the global marketplace arrives extraordinary competition. In addition, the slow economy has heightened the competition. Even with a possible expansion in the near future, companies will need to continue cost cutting and improving their operations to remain competitive. To be successful in such a difficult environment companies are being forced to find value throughout their supply chain.

In today's competitive markets, companies strive for any advantage they can get over their competitors. This has been recognized by a number of companies that supply chain excellence is an opportunity to create such an advantage. A superior supply chain includes, on time delivery, lower cost products and manufacturing flexibility as compare to their competitor.

Problem Statement

The purpose of the study is found out the critical parameters which are involved in supply chain management. In order to consistence study we found out the cost effective elements which shows the important roles.

To evaluate the critical aspects in supply chain management

To evaluate the utilization of production cost in proper manner

To evaluate the transportation facility fulfill the JIT process

To assess the location of making and storing points

To evaluate the stock and safety cost determination


The purpose of this study is to find the relationship between the deterministic parameters of supply chain on the cost effectiveness of supply chain. Or the impact of some critical parameters on the supply chain cost effectiveness.


H0: when inventory is high cost effectiveness is low

Ha: when inventory is low cost effectiveness is high

H0: Higher the production higher the cost effectiveness

Ha: lower the productions lower the cost effectiveness

H0: when transportation is low the cost effectiveness is high

Ha: when transportation is high the cost effectiveness is low

H0: when location is far the cost effectiveness is low

Ha: when location is near the cost effectiveness is high


Management of material and information flow in a supply chain to provide the highest degree of customer satisfaction at the lowest possible cost. Supply chain management requires commitment of supply chain partners to work closely to coordinate order generation, order taking, and order fulfillment thus, creating an 'extended enterprise' spreading far beyond the producer's location. (Business Dictionary)


This paper reports on a study for understanding the impact of control parameters for a cost effectiveness supply chain. The understanding is used to identify the potential operating ranges that balance the desired performance objectives.

Now a days a business expansion increases rapidly by globalization. Supply chain management is not only concern delivering the shipments but also provide the huge business tactics for further diversification in industries. The business environment rapidly changed from past strategies to new technological climate. Globalization has an umbrella of various businesses which are concern all types of products and services. Logistics and supply of goods industry has its core competences and standards for executes the steps of shipments and consignments.



Supply chain is the reality which has a long and the important history, either in a form of bartering or in the form of exchange of goods that would be an example of supply chain in the simplest form. The simple model for the supply chain was developed in the medieval communities and economies which were typically operated in the localized market place apparently much of the systems, structures the processes today's supply chain were in existence already (Brindley, 2004). (Mentzer,J. T., Stank, T. P. & Esper, T. L., 2008) describes that, demand creation and fulfillment, and all Logistics Management activities. Thus, it also contains direction and teamwork with channel partners, which can be suppliers, intermediaries, third-party service providers, and consumers. supply chain management integrates supply and demand management within and through companies." (Hofman, 2008) Explains that how, where and when reliable value throughout the entire supply chain including flows of material, intellectual property and money in a global context can be created.

(Womack, 2003) Discusses that the operational excellence of a firm has been demanded with the increased responsibilities of supply chain and more complex process are required for supply chain risk analysis than ever before. This includes lean manufacturing principles, process control theory, process mapping and modeling to the entire supply chain. This phenomenon is also applicable to the concept of risk management in throughout the supply chain risk analysis in a broader term than ever before.

Supply chain management contains of businesses collaborating to influence strategic positioning and to expand operating efficiency. (Bowersox, 2002).

The Supply Chain as the network of facilities (warehouses, factories, terminals, ports, stores, and homes), vehicles (trucks, trains, planes, and ocean vessels), and logistics information systems (LIS) connected by an enterprise's supplier's suppliers and its customer's customers. Logistics is what happens in the supply chain. Logistics activities (customer response, inventory management, supply, transportation, and warehousing) connect and activate the objects in the supply chain. To borrow a sports analogy, logistics is the game played in the supply chain arena (Frazzelle, 2002).

The development of logistics services and communication technologies has revolutionized supply chain management and has created a "global" market. Shippers and consignees require efficient logistics services that can move their goods to the right place, at the right time, in the right condition, and at the right price (Grant, 2006).

It is, therefore, of great importance that linkages within and between Asian countries be strengthened to facilitate trade and integrate supply chains for better access to the global market. Supply chain management is an integrative method for planning and controlling the material flow from suppliers to end users (Carter, J. R., and B. G. Ferrin, 1995)

The Role of Logistics Providers in Handling Supply Chain Dynamics

SCM aims are rarely fully met because of the individual behavior of decision makers in firms along the SCM, as their behavior is neither optimal nor rational (Parnaby, 1979).

Due to the changing nature of the SC, magnifications and variations occur from suppliers all the technique down the chain (Sterman, 1989).

Logistics provider is selected by critical supply chain effectiveness (Hensher, D. A., and G. Chow., 1999).

Outsourcing the logistics plays a vital role in the creation and provision of combine supply chain that responds to the buyer's needs. Logistics provider does acting like a partner with buyers in sometime. They also need to organize their buyer's orders.

Figure 1: Role Played by Logistics Service Provider in Global Supply Chain

The role of Supply chain management is providing the facility of trading goods to one destination to origin point. The buyers and sellers have certain intermediaries that play the role of logistics provider services. As the distance between the manufacturer and distributor is usually considerable problem relating to material and information.

This approach was build-up thinking at the SCOR model (Supply Chain Operations Reference Model) developed by Supply-Chain Council - SCC. The model is a way to see supply-chains, rather than an optimization tool. (Stadler, H., Kilger, C.,, 2005)

Figure 2:General processes identified using SCOR [Stadler and Kilger: 2005: 42, Poirier and Walker: 2005: 14, Bolstorff and Rosenbaum: 2003: 5]

Plan covers processes to balance resource capacities with demand requirements and the communication of plans across the supply chain. Source covers the identification and selection of suppliers, measurement of supplier performance as well as scheduling of their deliveries, receiving of products and processes to authorize payments. In the scope of make are processes that transform material, intermediates and products into their next state, meeting planned and current demand. Deliver covers processes like order reception, reservation of inventories, generating quotations, consolidation of orders, load building and generation of shipping documents and invoicing. In the scope of return are processes for returning defective or excess supply chain products.

Supply Chain Resilience

All firms rely on their suppliers to maintain smooth operations and their customers for continued revenue. Therefore, a resilient firm is truly only as resilient as its supply chain. Jack Welch, former CEO of GE, wrote in a Business Week segment that resilience should be on every manager's must-have list (Welch, Jack and Suzy Welch, May 14, 2007).

Supply Chains Structure

Logistics Providers

The processes usually function independently of one another and in ongoing order. In the contrast the high priority issue is high cost of logistics that create inadequate facilities and awkward administration gaps with legal framework not modified or clear to modern business practices (Banomyong, R., P. Cook, and P. Kent, 2008).

The logistics supplier sees its function in the supply chain as that of a distributor.

Customer panic occurs when a client is faced with a difficult situation in the supply chain-usually a stock out-and is unable to rectify the situation.

While breaking the logistics occurs, there is a very strong risk that the entire supply chain will be restrained, usually for a longer period that it took the break to occur (Hong-Minh, 2000).

The business revolution and city transport of goods driven the use of inventory as the usual method of decoupling making from demand and combating the myriad of uncertainties throughout the system. Ford W. Harris' Economic Order Quantity (EOQ) model (Harris, 1913) was later adapted to account for uncertainty in lead time and demand (Whitin, 1954) Adding safety stock to cycle stock extended the use of inventory as the primary buffer against uncertainty for decades.

The era of customer focus in the 1970s brought service to the forefront (Kent, Jr, John L. and Daniel J. Flint, 1997).

Network design method

The SCM is a normative model for resource distribution in a worldwide manufacturing and delivery network. Global after-tax profit is maximizing through the design of facility network and control of material flows within the network. The cost structure consists of variable and fixed costs for material procurement, production, distribution and transportation. They validate the model by applying it to analyze the global manufacturing strategies of a personal computer manufacturer (Cohen, M. A. and H. L. Lee., 1989)

(Arntzen, 1995) Provide the most comprehensive deterministic model for supply chain management. The objective function minimizes a combination of cost and time elements. Examples of cost elements include purchasing, manufacturing, pipeline inventory, transportation costs between various sites, duties, and taxes. Time elements include manufacturing lead times and transit times. Unique to this model was the explicit consideration of duty and their recovery as the product flowed through different countries. Implementation of this model at the Digital Equipment Corporation has produced spectacular results --- savings in the order of $100 million dollars.

These network-design constructed methods add value to the firm in that they lay down the manufacturing and distribution strategies far into the future. It is imperative that firms at one time or another make such integrated decisions, encompassing production, location, inventory, and transportation, and such models are therefore indispensable. Even though the above review presents considerable potential for these models as strategic determinants in the future, they are not without their limitations. They are frequently difficult to solve to optimality. Furthermore, most of the models in this category are largely deterministic and static in nature. Furthermore, those that consider stochastic elements are very preventive in nature.


Method of data collection

The sample was chosen on convenient sampling .The sample size for this study is 30 respondents from supply chain and logistics firms. The questionnaire is designed on LIKERT scale and is analyzed through Correlation and Regression technique.

Sampling technique

For knowing the effect the critical identification parameters in supply chain management process a lot of efforts have been put in the gathering of data. A sample of 30 experts of SCM has been used to conduct the study. I had got the information within 4 to 5 weeks.

Sample size

A sample of experts is not more than 30 respondents. I had required the minimal platform for measuring the parameters of supply chain management.

Research Model developed

I have designed the research model in the sense of variables, one of dependent and others are independent variables.

Figure 3: Variables model

Instrument of Data Collection

Validity and Reliability Test

Reliability and validity are mostly found from conducting quantitative method. To measure reliability and validity in qualitative method, it is important not to seek only for frequencies but to focus on meanings or interpretation as well (Kirk, J. and Miller, M., 1985)

In this study, the reliability and validity will be obtained through acquiring and analyzing data from many sources. The data from different sources can help crosschecking the information. At the same time, the reliability will gain during the analysis part when those proved information can be interpreted in the consistent manner.

Dependent Variable

Cost Effectiveness

In this model cost effectiveness is taken as dependent variable. I have designed the five questions that belong to the questionnaire 9 to 13. These questions are covering whole research. Cost effectiveness is the dependent of other factors of supply chain and logistics because if any of one factors fall down due to any condition so overall cost would have effect.

Independent Variables


In supply chain and logistics, inventory is the major part and showing the shadow of profits. All factors of supply chain depend on inventory. In model I have designed the five questions that belongs 1 to 5 in questionnaire. Inventory is significant to profitability.


In this model production is another independent variable and most important one. I have designed three questions that belongs 6 to 8 in questionnaire. Supply chain and logistics firms are totally concern about production because the core business turns into more and marginal turnover. As quick as productivity enhance profit would increase rapidly.


In this variable I have designed the four questions that belongs 14 to 17 in questionnaire which are directly hit on cost effectiveness in overall. In supply chain and logistics transportation cost are very significant and flexible. In those countries where transportation cost is high JIT process become fail therefore firms take alternatives to reduce the non-added value activities in inventory.


In this model location is another independent variable that contain three questions that belongs 18 to 20 in questionnaire. In logistics and supply chain firms chose very cost effective place where they can easily move their goods to another at right time.

Statistical technique

Researcher used different analysis from SPSS i-e, Mean, median, mode, t-test, regression analysis, correlation. All these analysis confirmed the data from different angles and proved very useful.

T- Test

A statistical test that establishes a significant mean difference in a variable between two groups.

Pearson's Correlation

The Pearson Correlation matrix obtained for the five interval-scaled variables. The Pearson coefficient is appropriate for interval and ratio scaled variables. It is the strength and degree of linear relationship between two variables.

Regression Analysis

The threat to internal validity that results when various groups in the study have been selected on the basis of their extreme scores on some important variables.

Y = Cost Effectiveness

X1= Inventory

X2= Production

X3= Transportation

X4= Location


Finding and interpretation of the result

Data Analysis






























Table 1: SPSS data results

As we know that dependent variable is cost effectiveness and independent variable are inventory, Production, Transportation and Location.

To check the intensity of links between each independent variable and dependent variable we build the matrix of the correlations. For each estimated correlation coefficient, SPSS program calculated a level of significance (sig.) t test to check whether links exist between variables. It can be noticed that most simple correlation coefficients between independent variables and dependent variable are significant because the level of significance is less than 0.05 (Correlation matrix chart in Appendix)

Hypothesis Summary


H0: when inventory is high cost effectiveness is low

Ha: when inventory is low cost effectiveness is high

In above hypothesis the inventory variable tells us that the correlation is positive .290 there is little bit correlation but still relationship is negative because when large amount of holding inventory on hands and difficult to transferring the goods origin to destination according to time then cost effectiveness would less. The t-test value is 1.604 which is relatively less than 2.5 therefore we accept the null hypothesis and reject alternative hypothesis. Secondly R square is 0.084 which indicates that the variation on the dependent variables is explained by the predictor variable which is significantly low. The F value is also very low at 2.573 and falls in the critical region that mean variation of independent variables are unequal.


H0: Higher the production higher the cost effectiveness

Ha: Lower the productions lower the cost effectiveness

In this hypothesis the production variable depicts that the correlation value is .052 that means there is weak correlation between production and cost effectiveness. The t-test value is 0.278 which is less than 2.5 therefore we accept the null hypothesis and reject alternate hypothesis. Meanwhile R square is 0.003 which indicates that 0.3% variation on the dependent variables is explained by the predictor variables which are significantly very low. The F value is .077 which does not fall in critical region and tell us that variation of independent variable is equal.


H0: when transportation is low the cost effectiveness is high

Ha: when transportation is high the cost effectiveness is low

The correlation is -0.024 which indicates that there is negative and weak relation between transportation and cost effectiveness. The t-test value is -.129 which less than 2.5 therefore we accept the null hypothesis and reject alternate. Meanwhile R-square the coefficient of determination value is .001 which indicates that 0.1% variation on dependent variable is explained by the predictor variables which are significantly very low. The F value is .017 which does not fall in critical region and shows that variation of predictor variable is equal.


H0: when location is far the cost effectiveness is low

Ha: when location is near the cost effectiveness is high

The correlation is -.036 which indicates that there is again negative and weak relation between location and cost effectiveness. The t-test is -.193 which is less than 2.5 therefore we accept the null hypothesis and reject alternate hypothesis. Simultaneously R-square value is .001 which indicates again 0.1% variation on dependent varaiable is explained by the predictor variable which is significantly very low. The F value is .037 which does not fall in critical region and shows that variation of predictor variable is equal.



Supply chain management has become a most important entity of today's businesses. Manufacturing firms are using the cost cutting strategy due to logistics and reducing inventory burden from their stocks. Supply chain management is highly cost effective part of manufacturing companies. As the raw material enter into processing unit then finish goods to end consumers by high effective transportation services. Delivering the goods at time is the high priority objective of suppliers.

The initial stage of supply chain management is called plan. A plan or strategy must be developed to report how a given good or service will meet the needs of the consumers. A substantial portion of the strategy should focus on planning a profitable logistics.

In the next stage, the product is manufactured and move for testing then packaged and then distributed for consumer. When logistics phase start, consumer orders are received and delivery of goods designed. Then next stage logistics is appropriately name distributes to consumers.

The last stage of logistics is called return. As the name suggests, during this stage, consumers may return defective or damage products. The feedback of consumers is very important for company's reportations.

One aspect of successfully managing the supply chain requires that a company understand their logistical strategies and practices.

The above the analysis shows that the cost effectiveness fairly dependent on main variables of supply chain management which are inventory, production, transportation and location. In inventory variable the output of results are linearly and moderate. The correlation is positive but silent relation is inversely. In past the holding large amount of inventory on hand was normal business practice to guard against risk. In the todays, large amount of holding inventory is too costly and risky.

In the case of production variable, if manufacturer increase their production capacity consequently cost effectiveness would high, other variable which is very important variable for shifting goods origin to destination point is transportation.

The results shows that the transportation cost is high therefore cost effectiveness will suffer. In supply chain management we have to use cost cutting strategy for transportation. We have to control over distribution methods, and use JIT (just in time) system. This is last and most fruition variable of supply chain is location. JIT is a chain process for less inventory investment.


Supply chain management is a key concern in many industries as companies understand the significance of producing an integrated correlation with their distributor and consumers. Handling the supply chain management has become a way of improving effectiveness by reducing uncertainty and improving service. One aspect of successfully managing the supply chain requires that a company understand their logistical strategies and practices. There are three main steps of creating supply chain management are follows:

To reduce inventory investment

To increase the customer services

To help a build a competitive advantages for the channel

If we talk about transportation, respondents having access to low cost and reliable transportation is important to be a successful supplier. The idea of backhauling is becoming an important concept to make transportation more efficient and less costly. Transportation will suffer in rural areas and it will get worse. SCM or logistics cannot resolve the distance issues. They choose where they want to locate and if distance is a detriment it is the company's own fault.

Place assessments are often fix and cannot change in the very short time. For instance Billions of dollar automobile plant is difficult to change their location on customer demands. Analysis shows that very amazing results that if location is far from origin so it has an increment impact on cost effectiveness.

Implication and Recommendation

The supply chain management has four main factors of cost effectiveness, Inventory, production, transportation and location. If inventory cost is going to increase and showing the bulk impact on cost so firms have to follow alternate strategy to reduce the inventory cost. JIT is one of the well implemented systems in logistics and supply chain. Inventory is seen as gaining costs, instead of accumulation and storage value, different to traditional accounting.

Furthermore production is the key issue of manufacturing cost which is directly related with cost effectiveness. If production capacity increases at timely manner simultaneously the cost effectiveness impact would higher but there is fair relation between production and inventory, if we control over production capacity rapidly so inventory must be reduce according to demand and transfer to end consumer then cost effectiveness is higher.

Third variable is transportation which is the key factor of supply chain. Transportation cost differ the routine lubricant problem in country, for instance if fuel cost promptly high on global market then transportation cost also rise.

Fourth variable is location which has the relation with transportation if we look upon the situation of transferring goods to warehouse. As the warehouse far transportation cost will be creating cost burdens on cost effectiveness. Warehousing strategy have to be strong in the sense of delivering goods at proper location with time management.

Future Research

The future research is to evaluate the critical parameters of supply chain management in logistics firms. As we took the major parameters which are the true picture of cost effectiveness of supply chain management. This study gives us the close relationships. Supply chain management is the most efficient part of business. It manages large amount of inventory in short time. Large scale companies design supply chain system to reduce their investment and cost risks. They focus on most crucial parts like transportation and production. In these study four main parts we discuss and analyze with real data of firms that how to get opportunity cost from cost effectiveness. In addition to that, the current research study will further help to finds the possible ways and proactive tools to mitigate the low cost effectiveness risks within the supply chain firms.


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