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Elements of Logistics
and
Supply Chain Management
Definition: “Logistics is the process of
planning, implementing, and
controlling the efficient, effective
flow and storage of goods, services,
and related information from point of
origin to point of consumption for
the purpose of conforming to
customer requirements.”
Origin: The term "logistics" comes from the Greek
"logos“ meaning speech, reason, ratio, rationality,
language, phrase and more specifically from the
Greek work "logistiki“ meaning accounting and
financial organization. Logistics is considered to
have originated in the military's need to supply
themselves with arms, ammunition and rations as
they moved from their base to a forward position.
In ancient Greek, Roman and Byzantine empires,
there were military officers with the title Logistikas
who were responsible for financial and supply
distribution matters.
In military science, all the activities of armed-force
units in support of combat units, including
transport, supply, communications, and medical
aid. The term, first used by Henri Jomini, Alfred
Thayer Mahan, and others, was adopted by the
U.S. military in World War I and gained currency in
other nations in World War II. Its importance grew
in the 20th century with the increasing complexity
of modern warfare.
The scope of logistics goes well beyond
transportation. Logistics forms the system that
ensures the delivery of the product in the entire
supply pipeline. This includes transportation,
packaging, storage and handling methods, and
information flow. The impact of logistics in the
ability of a company to satisfy its customers cannot
be overstated. All other efforts at modernization
within a company would not bear fruit until the
logistics system is carefully designed to facilitate the
smooth and efficient flow of goods in the system.
Competitive edge: In the fiercely competitive
environment logistics provides the edge. Due to
technological revolution most of the products are
moving into commodity markets. In a commodity
market where price is controlled by competition,
where there is no product differentiation in terms
of quality parameters like performance &
reliability, where brands are almost irrelevant,
competitive edge is that of availability of product
and service in terms of time, place and quantity.
Effective logistics management can provide a major
source of competitive advantage. The basis for
success are several and are based on the links of 3
C’s, namely Company, Customer, and Competitors.
The source of competitive advantage is found firstly
in the ability of the organisation to differentiate
itself in the eyes of the customer, from its
competition and by operating at a lower cost and
correspondingly at a greater profit.
Seeking a sustainable and defensible competitive
advantage is the concern of every Company
Management and it is no longer acceptable to
assume that good products will sell themselves,
neither to imagine that the success of today will be
carried forward tomorrow.
Considering the bases for success in a competitive
context, commercial success derives either from a
cost advantage or a value advantage or both. The
productivity advantage gives a lower cost profile
and the value advantage gives the product a ‘plus’
over competition.
1. Productivity Advantage: In most of the
industries there will be at least one competitor
who will be a low cost producer, and more often
than not, will have the greater sales volume. This
is partly due to economies of scale which enable
fixed costs to be spread over a greater volume but
more particularly to the impact of the ‘experience
curve’
The experience curve is a phenomenon which has
its roots in the earlier notion of the ‘learning
curve’. Researchers discovered that it was possible
to identify and predict improvements in the rate of
the output of workers as they became more skilled
in the processes and tasks on which they were
working.
Bruce Henderson of Boston Consulting went a step
further to extend this concept by demonstrating
that all costs would decline at a given rate as
volumes increased.
Traditionally it has been suggested that the main
route to cost reduction was by gaining greater sales
volume and there can be no doubt about the close
linkage between relative market share and relative
costs. However logistic management can provide a
multitude of ways to increase efficiency and
productivity and hence contribute significantly to
reduced per unit costs.
2. Value Advantage. It has long been a maxim that
‘customers do not buy products, they buy benefits’.
Alternatively, the product is purchased not for itself
but for the promise of what it will deliver. These
benefits may be intangible i.e. they relate not to
specific product features but rather to such things
as image or reputation.
Unless the product or service offered can be
distinguished in some way from its competitors
there is a strong likelihood that the market place
will view it as a ‘commodity’ and the sale will tend
to go to the cheapest supplier. Therefore the
importance of seeking to add additional values to
the offering will mark it out from the competition.
What are the means by which such value
differentiation may be gained?
Essentially, the development of a strategy based
upon added values will normally require a more
segmented approach to the market. When a
company scrutinises markets closely it frequently
finds that there are distinct ‘value segments’.
It means different group of customers within the
total market attach different importance to
different benefits. Often there are substantial
opportunities for creating differentiated appeals for
specific segments. E.g. In cars there are different
models aimed at defined segments. In between the
basic small car to a very large car there are a whole
variety of options, each seeking to satisfy the needs
of different benefit segments.
Adding value through differentiation is a powerful
means of achieving a definite advantage. Equally
powerful as a means of adding value is ‘Service’.
Markets are becoming more sensitive to service and
this poses a challenge to the logistics management.
This means it is becoming progressively more
difficult to compete purely in the basis of brand or
corporate image. Additionally, technology plays a
very important role within product categories,
which means that it is no longer possible to
compete effectively on the basis of product
differences alone.
Thus the need to seek differentiation through
means other than technology. A number of
companies have responded to this by focusing upon
‘service’ as a means of gaining a competitive edge.
Service in this context refers to the process of
developing relationship with customers augmented
by ‘offers’ such as delivery service, after sales
service, rebates, technical support etc.
Customer service is a key element in logistics
strategy. Value added customer service is leveraged
to gain competitive advantage. Good customer
service builds customer loyalty amongst existing
customers and through positive word of mouth
communication.
The following are the few cues that affect customer
perception of service quality:
Competence: The information provided by the firm
through product brochures, manuals, websites,
sales talk and the service offerings of the firms.
Reliability: Delivery of product or services as
promised in terms of place, time and quality.
Responsiveness: Returning customer calls, e-mails,
letters etc, in time and resolving customer
problems or complaints with speed.
Transaction security: This aspect relates to the
confidentiality of customer information and
transaction.
Access: This refers to the ease with a customer will
have access to information on products, and
services before placing an order, status of the order
placed and the status of the product complaints,
claims, and damages post sale phase.
Marketing is the central point of all business
processes. The objective of the marketing function
is to identify the need of the customers and fulfill it
by providing a product or service at an appropriate
price to generate profits. Hence, logistics
competency plays a very important in customer
service planning for developing sustainable
competitive advantage, not just for growth but for
survival.
What are operating objectives of logistics
management?
1) Rapid response
•Flexibility objective of an organization: Some
companies measure this as response time to
customer’s order. On an average how much time
do we need to fulfill one particular type of
customer’s order in a year? This is a measure of
Rapid response
Logistics should ensure that the supplier is able to
respond to the change in the demand very fast.
Entire production should change from traditional
push system to pull system to facilitate rapid
response. Instead of stocking the goods and
supplying on demand, orders are executed on
shipment to shipment basis. Information
Technology plays an important role here as an
enabler.
IT helps management in producing and delivering
goods when the consumer needs them. This
results into reduction of inventory and exposes all
operational deficiencies. Now the management
resolves these deficiencies and slashes down costs.
2.Minimum variance
Delivery objective of an organization, this can be
measured as ‘On Time Delivery’ or OTD. If 100
deliveries are made in a month/quarter/year how
many reached as per the commitment made to
the customer? This percentage is OTD.
Any event that disrupts a system is variance.
Logistics operations are disrupted by events like
delays due to obstacles in information flow, traffic
snarls, acts of god, wrong dispatches, damage in
transit.
Traditional approach is to keep safety stocks and
transport the goods by high cost mode. The cost of
this approach is huge. Logistics is expected to
minimize these events, thereby minimize and
improve on, On Time Delivery.
3. Minimum inventory
This is component of cost objective of a company.
Inventory is associated with a huge baggage of
costs. It is termed as a necessary evil. Objective of
minimum inventory is measured as Inventory Turns
or Inventory Turnover Ratio. Americans call this
measure as turn velocity. Logistics management
reduces these turns without sacrificing customer
satisfaction. Lower turns ensure effective utilization
of assets devoted to stock.
[Concept of single piece flow as practiced by JIT
companies in Japan or elsewhere]. Logistical
management should keep the overall wellbeing of
a company in view and fix a minimum inventory
level without trying to minimize the inventory level
as an isolated objective.
4. Movement consolidation
Transportation is the biggest contributor to
logistics cost. Transportation cost depends on
product type, size, weight, distance to be
transported etc. for transporting small shipments
just in time [reduction in inventory costs] expensive
transport modes are used which again tend to hike
the costs. Movement consolidation is planning
several such small shipments together [of different
types of shipments] by integrating interests of
several players in the supply chain.
Generally, large shipment size and long distances
reduce transportation cost per unit. Movement
consolidation shall result into reduction in
transportation costs.
5.Quality
If the quality of product fails logistics will have to
ship the product out of customers premises and
repeat the logistics operation again. This adds to
costs and customer dissatisfaction. Hence logistics
should contribute to TQM initiative of
management. In fact, commitment to TQM has
made the managements world over wake up to the
significance of logistics function. Logistics can play
a significant role in total quality improvement by
improving the quality of logistics performance
continuously and continually.
6.Life cycle support [cradle to cradle logistical
support- produce, pack (cradle) and repack(cradle)]
Logistics function is expected to provide life cycle
support to the product after sale. This includes
a. After sales service: the service support needed
by the product once it is sold during its life cycle
b. Reverse logistics or Product recall as a result of
•rigid quality standards [critical in case of
contaminated products which can cause
environmental hazard]
•transit damage [leaking containers containing
hazardous material]
product expiration dating
•rigid laws prohibiting unscientific disposal of
items associated with product [packaging]
•Rigid laws making recycling mandatory
•Erroneous order processing by supplier
Logistical Performance Cycles
Logistical performance cycles link the facilities in
a value chain with each other.
The facilities in the value chain are called nodes
and the links connecting these nodes are
logistical performance cycles.
These links are product transportation and
information flows. Obviously information flow is
vigorous in both directions where as product
flows down the value chain although in some
cases upward flow is possible. Close examination
these links reveals dynamics, interfaces and
decisions within the logistical system.
Logistical performance cycles are input sensitive
and highly dynamic. They render entire system
dynamic and responsive to customer needs. If the
LPCs are not dynamic obviously the organization
loses the edge.
Logistical Performance Cycle
Diagram next slide.
TMATERIAL
ERIAL
COMPONENTS
PLANT
PLANT
MBASSEMBLY
LY
DIS
DISTRIBUTION
CENTER
UTION
CENTER
CUSTOMER
MER
SSYSTEM
OUT PUT
PPROCUREMENT
CYCLE
CUREMENT
CYCLE
G MANUFACTURING
SUPPORT CYCLE
E
PH PHYSICAL
DISTRIBUTION
AL
DISTRBUTION
SYSTEM
INPUT T
Physical Distribution Cycle
Order
Processing
Order
Transmission
Order
Selection
Product
Transport
Customer
Order
Sourcin
g
Order Placement
& Expediting
Supplier
Delivery To
Receivin
g
PHYSICAL DISTRBUTION
CYCLE
Transportation
PROCUREMENT
CYCLE
Inventory is made to flow from one warehouse to
another, factory to ware house, plant to plant or
warehouse to customer. Sluggish LPCs reveal poor
interface between the nodes and between
customer and organization.
LPCs reveal effectiveness and efficiency of
resource allocation and operational decisions in
the organization.
To understand the operating system one has to
analyze these links. A logistical operating system
requires links, nodes and inventory to perform
logistical operations. Nodes are the facilities
linked by logistical performance cycles. Inventory is
measured, stored and moved in nodes regularly.
But this may also be done during transportation.
We can notice that three types of logistical
performance cycles exist in a logistical operating
system. The cycle linking material source and
components plant is procurement cycle.
Procurement cycle
Components plant is a node which manufactures
components or detailed parts needed to make sub
assemblies for the final assembly. This is where the
operations function begins to operate. Raw
materials are to be made available here for
production. Procurement cycles connect raw
material source and component plant or plants.
Manufacturing support cycle.
The cycle linking components making plant,
assembly and distribution center is manufacturing
support cycle.
The logistical network for an organization may
contain several components plants and or several
assembly plants. These plants are to be linked to
enable flow of inventory as and when needed.
Finished goods should flow from assembly plant or
plants to the distribution centers. This
support to manufacturing is provided by
manufacturing support cycle.
Physical distribution cycle.
The cycle linking distribution center to customers
is called physical distribution cycle.
Logistical performance cycles are input sensitive
and dynamic in nature. We can visualize these
cycles vibrating with vigor whenever a customer
order is received for fulfillment.
Overall efficiency of logistical operating system
depends on the efficiency of logistical
performance cycles. Logistical performance cycles
link participating firms and organizations inthe
supply chain.
Managing operational uncertainty
Variance in logistical performance cycle results in
customer dissatisfaction. If an overall customer
delivery cycle is analyzed, we naturally find that it
is made up of several mini cycles performed in
logical sequence.
These cycles are, order selection cycle, order
processing, order transmission, customer delivery
cycle and order transportation cycle.
We have to analyze these cycles to find out
difference between average performance time and
maximum cycle time. This gap is to be analyzed to
eliminate variance.
When this variance is reduced goods begin to
arrive at destinations earlier than expected.
Infrastructure is required to be strengthened to
cope with improved performance.
Value Chain
Inbound
Logistics
Operation
>
s
>
Outboun
d
Logistics
>
Marketing
&
Sales
Firm Infrastructure
HR Management
Technology Development
Procurement
>
Service
>
M
A
R
G
I
N
Inbound Logistics: ‘Inbound’ activities to receive,
store and distribute inputs to the product, such as
material handling, inventory control, warehousing
and contact with suppliers.
Inbound logistics traffic departments do not simply
manage shipments from their own companies
(outbound), they plan shipments from other
companies "in" to their location.
OUTBOUND LOGISTICS
Involve The Collecting, Storing, And Distributing the
product to the buyers.
(e.g. Processing of orders, warehousing or storage
of finished goods, and delivery)
Customer Order Cycle
A customer order cycle begins with the placement
of an order by a customer. It ends when you are
finally paid for goods or services rendered. But
there are activities in between the two events that
consume time. Some add value, such as packing
and shipping, and some are non-value adding and
delay time, such as moving the order around the
building from mailbox to mailbox, sitting on a
desk, or repetitive motions.
When a cycle ends, a lot of non-value adding time
has been consumed that may constitute 90-95
percent of total time. Some of the time is lost in
travel, some is lost in the processing backlog, and
some may be lost diverting a customer's order to a
credit department for release. If you can identify
the non-value added time in the cycle, you can
devise ways to eliminate the causes.
Mainstream value-add activities are identified on
flow process charts. Flow process charts are
analyzed for activities that delay mainstream
activities. Delays can be moves, slow operations,
inspections, as well as waiting time. Cutting cycle
times fifty percent per established period of time
is a good goal. The process is continuous.
Mapping process flow is a fundamental step in
reducing total cycle times. Mapping the flow and
tracking time for each of the events provides a
basis for analysis. The process is not difficult,
however it is time consuming. It provides a step
by step image of work flow, systems, procedures,
and volumes. It reveals the relationships between
the tasks.
Once cycles are mapped, the opportunities to
compress time can be pursued. The goal in
compressing time is not to devise the best way to
perform a task, but rather to either eliminate the
task altogether or perform it parallel with other
tasks so that the overall system response time is
reduced.
Lead Time:
Lead time in the supply chain management realm
is the time from the moment the customer places
an order, to the moment it is received by the
customer.
Logistical interfaces:
Logistic functions and activities have a significant
amount of overlap with the other functions and
activities of a company. The functions with a high
degree of overlap are finance, marketing,
information technology and production. Figure in
the next slide shows the relationship between
logistics and other business functions.
Finance
Information Technology
Costing
Interest Factors
Tax Rates
Rates For Services
Depreciation
Negotiations
Information Storage
Information Processing
User Interface
Analytical Tools
Reports
LOGISTICS
Marketing
Inventory Levels
Lead Time
Transport Mode
Delivery Schedule
Product Availability
Production
Location/ no. of Warehouses
Customer Requirements
Customer Commitments
Market Promotion
Capacity Planning
Production Planning
Quality Control
The Logistical Mission: Logistics exists to satisfy
customer requirements by facilitating relevant
manufacturing and marketing operations. The
challenge is to balance service expectations and
cost expenditures in a manner that achieves
business objectives.
Basic logistical service is measured in terms of
1. Availability
2. Operational performance, and
3. Service reliability
1.Availability means having inventory to consistently
meet customer material or product requirements.
2.Operational performance deals with the elapsed
time from order receipt to delivery. Operational
performance involves delivery speed and consistency.
A firm's operational performance can be viewed in
terms of how flexible it is in accommodating unusual
and unexpected customer requests.
3.Service reliability involves the quality attributes of
logistics. For logistics performance to continuously
meet customer expectations, it is essential that
management be committed to continuous
improvement.
The mission of the logistical system is measured in
terms of total cost and performance. Performance
measurement is concerned with the availability of
inventory, operational capability, and quality of
effort. Logistical costs are directly related to
desired level of performance.
As a general rule, the greater the desired
performance, the higher the total logistics cost. The
key to effective logistical performance is to develop
a balanced effort of service performance and totalcost expenditure.
Competitive edge: In the fiercely competitive
environment logistics provides the edge. Due to
technological revolution most of the products are
moving into commodity markets. In a commodity
market where price is controlled by competition,
where there is no product differentiation in terms
of quality parameters like performance &
reliability, where brands are almost irrelevant,
competitive edge is that of availability of product
and service in terms of time, place and quantity.
Customer service is a key element in logistics
strategy. Value added customer service is
leveraged to gain competitive advantage. Good
customer service builds customer loyalty amongst
existing customers and through positive word of
mouth communication.
•Importance of 3 Cs – The three Cs in business are
Company, Customer and Competition. All the
three “C” are vital for healthy business and
prosperous economy. Buying decision is always
triggered by a need a consumer is experiencing
due to the stress he is under.
•Customer is attracted by value when he is about
to make a buying decision.
•Competitors in business continuously add value to
their products in order to be ahead in the
competition.
•Any supplier organization or Company tries to be
better than the Competition by utilizing their
assets efficiently and effectively.
The Supplier Company tries to differentiate her
products in terms of functional quality and product
cost. Competition has ensured that technology and
human skills are almost same everywhere.
Hence product differentiation in terms of
functional quality and product cost is nearly
impossible. But a great opportunity exists for the
Supplier Company to differentiate her products by
service and logistics cost by superior logistics.
When this happens customer sees better value in
the products of Supplier Company as compared to
competition.
Importance of 3Cs
Value
“C” Company
By effective utilization of
assets tries to create
and offer value to
customers
l “C” Customers
Look for value,
benefit at lowest
price benefit at
lowest price
Value l
“C” Competitor
By effective utilization of
assets tries to create and
offer value to customers
Cost differentials
osiffere
Logistics Outsourcing
Outsourcing logistics operations to a 3PL (third
party logistics) adds to the bottom line for both the
retailer and manufacturer through accurate, wellmanaged inventory and supply chain solutions.
Outsourcing reduces the need for costly real estate
to hold inventory. Manufacturers, distributors and
retailers who outsource save time and money.
3PLs offer expertise that manufacturers,
distributors and shippers can tap into, allowing
users to achieve supply chain solutions with their
customers that minimize total delivered costs.
The efficiencies generated by outsourcing logistics
has made it extremely popular. Recent studies
show that fully 80 percent of Fortune 500
companies outsource at least one function - the
largest such number in history.
Third-party logistics. A third-party logistics
provider (abbreviated 3PL) is a firm that provides a
one stop shop service to its customers of
outsourced (or "third party") logistics services for
part, or all of their supply chain management
functions.
Third party logistics providers typically specialize in
integrated operation, warehousing and
transportation services that can be scaled and
customized to customer’s needs based on market
conditions and the demands and delivery service
requirements for their products and materials.
Fourth party logistics (4PL) Arrangement in
which a firm contracts out (outsources) its
logistical operations to two or more specialist
firms (the third party logistics) and hires another
specialist firm (the fourth party) to coordinate
the activities of the third parties.
Integrated Logistics:
“System-wide management of entire logistics
chain as a single entity, instead of separate
management of individual logistical functions”.
For business excellence logistics operations need
to be integrated on the following 2 fronts:
a) Integration of logistics into the business
b) Integration of components of logistics.
Any business process consists of a set of activities
those include raw material procurement,
conversion, and the distribution of the finished
products for selling.
To accomplish the objective of making available
the right product, at the right place, at the right
time at low cost, the assistance of integrated
logistics is needed. This process takes care of
material storage and movement across these
three stages of the business process.
The integration will make the business process run
as a chain rather than as isolated process
elements. The logistics process is a set consisting
of a number of activities those include
warehousing, material handling, packaging,
transportation and information flow.
(In today’s business processes there are many
companies offering total integrated logistics
solutions.)
Material Flow
Suppliers
Procurement
Processing
Distribution
Customers
Information Flow
Logistics Integration
In the logistics process the close coordination of
inventory flow and information flow is essential for
system efficiency and effectiveness. The volume of
logical activities varies with the width of the supply
chain, product category, and volume of business.
Logistics Planning and Strategy
It's an accepted fact that there is always a need for
a proper and efficient business plan for any
particular element such as planning or controlling in
an organization. Similarly, there is also a need for a
business to clearly establish its logistics business
plan. This can clearly point out the steps required
and the personnel who will be performing the tasks
and assigning responsibilities.
The logistics business plan must be clearly defined
so that there is no confusion or vagueness in the
content of the plan that could interfere with
accomplishment of the desired objectives of the
organization.
While drafting a logistics plan, you must keep in
mind all possible present and future scenarios. The
ascertainment of future conceivable scenarios can
be made by a logistic manager with the ability to
carefully plan, analyze and implement forecasts to
a considerable extent on the behalf of the
enterprise.
The logistics business plan must be organized in a
manner that each of the personnel knows his
duties and roles and makes sure that the duties
assigned to him are performed on time. This would
make sure that the plan is at least worth a try. The
plan's success would be dependent on the entire
organization and a good logistic plan will benefit
the whole organization.
This would require a high level of understanding
and coordination in all departments of the
organization, each giving their best towards the
attainment of common objectives.
What Is a Logistics Strategy?
When a company creates a logistics strategy it is
defining the service levels at which its logistics
organization is at its most cost effective. Because
supply chains are constantly changing and evolving,
a company may develop a number of logistics
strategies for specific product lines, specific
countries or specific customers.
What Is Involved in Developing a Logistic
Strategy?
A company can start to develop a logistics strategy
by looking at four distinct levels of their logistics
organization.
1. Strategic: By examining the company’s
objectives and strategic supply chain decisions, the
logistics strategy should review how the logistics
organization contributes to those high-level
objectives.
2.Structural: The logistics strategy should examine
the structural issues of the logistics organization,
such as the optimum number of warehouses and
distribution centers or what products should be
produced at a specific manufacturing plant.
3.Functional: Any strategy should review how each
separate function in the logistics organization is to
achieve functional excellence.
4.Implementation: The key to developing a
successful logistics strategy is how it is to be
implemented across the organization. The plan for
implementation will include development or
configuration of an information system,
introduction of new policies and procedures and
the development of a change management plan.
Components to Examine when Developing a
Logistics Strategy
When examining the four levels of logistics
organization, all components of the operation
should be examined to ascertain whether any
potential cost benefits can be achieved. There are
different component areas for each company but
the list should at least include the following:
Transportation: Does the current transportation
strategies help service levels?
Outsourcing: What outsourcing is used in the
logistics function? Would a partnership with a third
party logistics company improve service levels?
Logistics Systems: Do the current logistics systems
provide the level of data that is required to
successfully implement a logistics strategy or are
new systems required?
Competitors: Review what the competitors offer.
Can changes to the company’s customer service
improve service levels?
Information: Is the information that drives the
logistics organization real-time and accurate? If
the data is inaccurate then the decisions that are
made will be in error.
Strategy Review: Are the objectives of the
logistics organization in line with company
objectives and strategies?
A successfully implemented logistics strategy is
important for companies who are dedicated to
keeping service levels at the highest levels possible
despite changes that occur in the supply chain.
Supply Chain Management:
The concept of Supply Chain Management is based
on two core ideas. The first is that practically every
product that reaches an end user represents the
cumulative effort of multiple organizations. These
organizations are referred to collectively as the
supply chain.
The second idea is that while supply chains have
existed for a long time, most organizations have
only paid attention to what was happening within
their “four walls.” Few businesses understood,
much less managed, the entire chain of activities
that ultimately delivered products to the final
customer. The result was disjointed and often
ineffective supply chains. Therefore, the
responsibility and authority for implementing SCM
must be placed at the highest levels of an
organization.
Supply chain management, then, is “the active
management of supply chain activities to
maximize customer value and achieve a
sustainable competitive advantage. It represents a
conscious effort by the supply chain firms to
develop and run supply chains in the most
effective & efficient ways possible”.
Supply chain activities cover everything
from product development, sourcing, production,
and logistics, as well as the information systems
needed to coordinate these activities.
Definition of Supply-Chain:
“All the activities in delivering the products from
raw material through to the customer including
sourcing raw materials and parts, manufacturing
and assembling, warehousing and inventory
tracking, order entry and order management,
distribution across all channels, delivery to the
customer and the information systems necessary
to monitor all these activities.”
SCOPE
The scope of SCM is functional and organizational.
The functional scope of SCM refers to which
traditional business functions are included or
excluded in the implementation and the process of
SCM. The functional scope of SCM encompasses
all the traditional intra-- business functions.
The organizational scope of SCM concerns what
kinds of inter-firm relationships are relevant to the
participating firms in the implementation and the
process of SCM. Organizational scope of SCM is the
implementation and process of SCM across three or
more companies, all of which must have a SCO
(Supply Chain Orientation)
Logistics Vs. SCM
Logistics management is that part
of the Supply Chain Management
process that plans, implements,
and controls the efficient,
effective forward and reverse flow
and storage of goods, services,
and related information between
the point of origin and the point of
consumption in order to meet
customers' requirements.
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.
Supply Chain Scenario and Importance
When we talk about the importance of Supply Chain
Management we try to bring into sharp focus the
loss due to the absence of an effective supply chain
strategy and / or the benefit due to a well oiled
supply chain for any firm. Basically, it is a question
of how good is the integration of supply chain that
matters for any firm.
Of critical importance in today's business scenario is
managing competition through partners.
An independent firm on its own may not have all
the resources to match its competitors.
In an era of gaining competitive advantage through
reduced inventories all over ,a company is going to
have a disadvantage of having to carry unnecessary
inventory for the fear of losing future business.
The importance of Supply Chain Management thus
is in :
1.Reduced inventories along the chain
2. Better information sharing among the partners
3. Planning being done in consultation rather than
in isolation
The benefits too would be reflected in terms of :
•Lower costs
•Better customer service
•Efficient manufacturing
•Better trust among the partners leading to win-
win situation for both. Process integration and
other efforts result in improved quality as higher
profit margins shall get reflected in creation of
better facilities for manufacturing, product design
research, enhanced customer service.
In scenario planning, senior managers build
internally consistent, alternative views of possible
future outcomes. Senior managers formulate
strategy to maximize shareholder value; supplychain planners run optimization models
to minimize costs.
Combining scenario planning with supply-chain
planning achieves the best of both worlds, which
leads to long-term competitive advantage. Any
company that has a global supply chain should
consider introducing its strategic left hand to its
operational right hand.
Strategic supply-chain planning that combines
aspects of business-strategy formulation with
aspects of tactical supply-chain planning can make
each far more valuable to the planning effort than
either would be alone.
Strategic supply-chain planning is the Pegasus of
strategy: It can soar, but it also needs to keep its
feet on the ground.
Conventional supply chains concern all materialmanagement stages from the supply of raw
material through to the sale of final product to the
end customer. Key concepts used in conventional
supply chains are demand management, strategic
sourcing, inventory management, supply
synchronization, project management, and use of
technology.
Conventional supply chain management targets
mainly the operational aspect of businesses,
whereby inventory levels need to be analyzed on
a month to month basis with corresponding
customer demand and ad-hoc operational issues.
Supply Chain Planning Matrix
Supply chain management, in addition, provides all
companies connected in a supply partnership with
the greatest level of transparency. i.e, all orders and
requests are readily accessible to all connected
parties, which not only facilitates the transaction
process by providing all companies with
information, but also increases accountability, as all
companies are made aware of each movement
through the supply chain and can spot
shortcomings.
In this way, business partnerships are forced to
become more honest, and there is less room for
laziness or skimming off the top.
From the examples that have been analyzed it is
clear that most supply chain problems are related
to the lack of co-ordination and linkage between
various parties in the chain. Indeed there is a
growing recognition by many companies that
partnership and co-operation achieves more than
narrow self-interest and conflict.
The benefits of co-maker relationships
•Shorter delivery lead times
•Reliable delivery promises
•Less schedule disruption
•Lower stock levels
•Faster implementation of design changes
•Fewer quality problems
•Stable competitive prices
•Orders given higher priority
Supply Chains and the Value Delivery Network
Value Delivery Network
The network made up of the company, suppliers,
distributors, and ultimately customers who
“partner” with each other to improve the
performance of the entire system.
•Marketing Channel
Set of interdependent organizations involved in the
process of making a product or service available for
use or consumption by the consumer or business
user.
Channel choices affect other decisions in the
marketing mix
•Pricing, marketing communications
A strong distribution system can be a competitive
advantage
Channel decisions involve long-term commitments
to other firms
Channel structures range from two to five levels.
The simplest is a two-level structure in which goods
and services move directly from the manufacturer
or provider to the consumer. Two-level structures
occur in some industries where consumers are able
to order products directly from the manufacturer
and the manufacturer fulfills those orders through
its own physical distribution system.
In a three-level channel structure retailers serve as
intermediaries between consumers and
manufacturers. Retailers order products directly
from the manufacturer, then sell those products
directly to the consumer. A fourth level is added
when manufacturers sell to wholesalers rather than
to retailers.
In a four-level structure retailers order goods from
wholesalers rather than manufacturers. Finally, a
manufacturer's agent can serve as an intermediary
between the manufacturer and its wholesalers,
making a five-level channel structure consisting of
the manufacturer, agent, wholesale, retail, and
consumer levels.
A five-level channel structure might also consist of
the manufacturer, wholesale, jobber, retail, and
consumer levels, whereby jobbers service smaller
retailers not covered by the large wholesalers in
the industry.
Relationship Management.
Like customer relationship management, supply
chain management seeks to build relationships
with vendors. Building a collaborative, teamoriented culture starts with the leader's realization
that the company must work together with supply
chain partners to deliver value for consumers. In
practice, such a culture encompasses the codes of
conduct in the process of pursuing mutual as well
as individual supply chain goals.
Broadly speaking, codes of conduct include the
willingness to share information with partner
firms, flexible actions such as quickly adapting to
changing supply and demand for the good of the
entire supply chain, and performing mutual
responsibilities with a team spirit when the supply
chain faces threats and/or a part of supply chain
process fails. Narrowly, codes of conduct include
"vendor codes of conduct," "labor regulation"
and/or "business ethics codes."
What Is Extended Enterprise?
The term "extended enterprise" represents a new
concept that a company is made up not just of its
employees, its board members, and executives,
but also its business partners, its suppliers, and its
customers.
The notion of extended enterprise includes many
different arrangements such as virtual integration,
outsourcing,
distribution
agreements,
collaborative
marketing,
R&D
program
partnerships, alliances, joint ventures, preferred
suppliers, and customer partnership.
The Bullwhip Effect
The bullwhip effect is the magnification of demand
fluctuations. The bullwhip effect is evident in a
supply chain when demand increases and
decreases. The effect is that these increases and
decreases are exaggerated up the supply chain.
The essence of the bullwhip effect is that orders to
suppliers tend to have larger variance than sales to
the buyer. The more chains in the supply chain the
more complex this issue becomes.
This distortion of demand is amplified the farther
demand is passed up the supply chain.
Some of the reasons that the bullwhip effect occurs
include the following:
• Over reacting to the backlog orders.
• Little or no communication between supply chain
partners.
• Delay times between order processing, demand,
and receipt of products.
•Order batching: method for reduction of ordering
costs due to price discounts for bulk ordering,
transportation expense decrease by ordering fulltruck loads, etc.
•Limitations on order size (i.e. retailers can order
products in cases of 10 from wholesaler; however,
distributors receive orders in cases of 1,000)
• Inaccurate demand forecasts.
• Free return policies.
Organisation Structure
Basic Concept:
An organization structure is the way in which the
tasks and subtasks required to implement a
strategy are arranged.
A strategist has to grapple with the complexities of
creating the structure, making it work, redesigning
when required, and implementing changes that
will keep the structure relevant to the needs of the
strategies that have to be implemented.
Successful strategy formulation does not guarantee
successful strategy implementation. It varies
among different types & sizes of organizations.
Organizational structure & the controls that are a
part of it affect firm's performance. When the firm's
strategy is not matched with the most appropriate
structure & controls; performance declines.
Organizational structure specifies the firm's formal
reporting relationships, procedures, controls &
authority, and decision-making process.
It influences how managers work & the decisions
resulting from that work.
It specifies the work to be done & how to do it given
the firm's strategy or strategies.
It provides the stability a firm needs to successfully
implement its strategies & maintain it's competitive
advantages.
Definition:
“Organizational structure determines the manner
and extent to which roles, power, and
responsibilities are delegated, controlled, and
coordinated, and how information flows between
levels of management”
Scope
Structural Stability: Provides the capacity the
firm requires to consistently and predictably
manage its daily work routines.
Structural Flexibility: Provides the opportunity to
explore competitive possibilities & allocate
resources to activities that will shape the
competitive advantages of the firm that it will
need to be successful in the future.
The importance and objectives for conducting
organizational structure are to control: ·
. Markets: share and growth, customer base and
diversification, competitor information, pricing,
sales, etc.
· Organization: size, structure, responsibilities and
accountability, etc.
· Product: quality, performance, reliability,
maintainability, design technology and innovation,
demand, mix, packaging, pricing, warranty,
support, etc.
· Processes: facility, capability, capacity,
technology, reliability, quality
· Supplier management: quality, delivery, price,
consistency, flexibility
· Workforce: labor availability, competence, mix,
utilization, compensation, health and safety, etc.
· Capital: sourcing, availability, cost, prioritization
of use, return, etc.
· Other: environment, regulatory issues,
governmental policies, communications, etc.
Barriers In Forming Effective Organizational
Structure:
The traditional organisations are not capable of
implementing any cross functional processes.
These are structured to divide authority and
responsibilities according to functional work such
as inventory control, warehousing, or
transportation.
Each of such organisations become concerned with
achieving their own functional excellence thereby
hindering the goal of integration achieved by co-
The traditional functioning as described above is
referred to as silo mentality. (A lack of
communication and common goals between
departments in an organization.) Successful
integration of logistics requires a structure that
facilitates cross functional coordination.
Stages in evolution of logistical organization,
with emphasis on modern flat organization.
The evolution of enterprise logistics management
went through the following five stages:
1) The logistics function of the individual
management phase (Transportation and
Warehousing) At this stage, the true sense of the
concept of logistics and logistics management
awareness had not yet appeared. To reduce total
logistics costs was not the goal, but only in
lowering transportation costs and storage costs for
individual links.
2) The logistics function of a systematic
management phase (PD Management)
This stage is characterized by: the enterprise’s
setting up a dedicated logistics management
system; This era of supply chain management
studies was highlighted with the development of
Electronic Data Interchange (EDI) systems in the
1960s and developed through the 1990s by the
introduction of Enterprise Resource Planning (ERP)
systems.
This era has continued to develop into the 21st
century with the expansion of internet-based
collaborative systems and is characterized by
increasing value-addition and cost reductions
through integration.
3. Globalization phase
The globalization phase, can be characterized by
the attention given to global systems of supplier
relationships and the expansion of supply chains
over national boundaries and into other continents.
It was in the late 1980s that a considerable number
of organizations started to integrate global sources
into their core business. The main aim was in
increasing competitive advantage, value-adding,
and reducing costs through global sourcing.
4. Specialization Phase : Outsourced
Manufacturing and Distribution
In the 1990s industries began to focus on “core
competencies” and adopted a specialization
model. Companies abandoned vertical integration
(absorption into a single firm of several firms
involved in all aspects of a product's manufacture
from raw materials to distribution), sold off noncore operations, and outsourced those functions
to other companies.
This changed management requirements by
extending the supply chain well beyond company
walls and distributing management across
specialized supply chain partnerships.
5) Supply chain logistics management phase (SCM)
Into the 90's, the U.S. business logistics system
became more systematic, integrated technology,
and internet technology, were instrumental in the
success of supply chain management, providing a
strong support. The supply chain was built around
the core business, through the information flow,
logistics, capital flow controls, starting from
procurement of raw materials to final products.
Supply Chain Logistics Management stressed that
the alliance between the various business
partnerships in developing the logistics alliances
and extensive cooperation. At any given moment,
market forces could demand changes from
suppliers, logistics providers, locations and
customers, and from any number of these
specialized participants as components of supply
chain networks.
Supply chain specialization enabled companies to
improve their overall competencies in the same
way that outsourced manufacturing and
distribution had done; it allowed them to focus on
their core competencies and assemble networks of
specific, best-in-class partners to contribute to the
overall value chain itself, thereby increasing overall
performance and efficiency.
Customer Service
"Customer service is an organization's ability to
supply their customers' wants and needs"
Scope of Customer Service
Creating, communicating and delivering value to
selected customers can only be achieved if the
company aligns and co-ordinates its relationships
with four other major constituencies: suppliers,
owners/investors, employees and partners.
Together, these five constituencies form the
S.C.O.P.E. of customer relationship management.
Suppliers:
Suppliers are all those who provide input to a
company’s value chain. These include suppliers of
raw material, components, technologies, money
(relationship banks), people, knowledge and so on.
The emphasis is on building strategic, long-term
relationships with a smaller number of suppliers.
These relationships feature co-operation to
conjointly produce value for all parties – supplier,
customer and the customer’s customer.
Owners/investors:
Being successful at customer relationship
management means creating value for the
company and the customer over the long-term. It
may mean sacking customers in the short-term,
nurturing a relationship now in order to reap a
future benefit, investing in technologies which
facilitate customisation.
Employees:
Employee behaviours can either enhance or
damage value for the selected customers. In other
words, employee satisfaction drives customer
satisfaction and, in a competitive market place
where customers can switch suppliers, customer
satisfaction is the outcome of customer retention.
Partners:
Partnering relationships can support the creation,
communication and delivery of value to
strategically significant customers in many ways.
Value-adding partnerships, strategic alliances and
joint ventures are all forms of partnering
arrangements.
Objectives/Importance Of Customer Service:
Looking at the main objectives of the supply chain
management, one can easily notice that they all
have implications related to customer service. The
following features are mentioned most often:
1. Reduced order lead time;
2. Ensured reliability, proper frequency, quality and
flexibility of deliveries;
3. Optimized stock level within the entire supply
chain;
4. Minimized total costs of goods flow.
Objectives no. 1 and 2 are actually the fundamental
objectives of the logistic customer service.
Objective no. 3 pertains to stock optimization, not
minimization, meaning that stock management
may
not be treated as an autonomous activity, but the
stock level must be flexibly adjusted to match
customer preferences, as it determines the
availability of goods, i.e. the basic element of the
logistics service. Minimized total costs of goods
flow, in turn, must always be confronted with the
level of delivery service, as this is the basic trade-off
of the whole logistics system.
The objective of supply chain should be to establish
a chain of customers that links people at all levels in
the organization directly or indirectly to the
marketplace.
Elements of Customer Service:
The widely accepted trend is to view customer
service in the marketing context under three
different headings:
1. Pre transaction elements
2. Transaction elements
3. Post transaction elements
Pre transaction
elements
Written customer
service policy:
Accessibility:
Organisational culture:
System flexibility:
documented and well
articulated policy
easy to reach and easy
to communicate
management focus on
customer service and
organisational structure
adaptability to meet
customer requirement
Transaction elements
Order cycle time:
elapsed time between
order and delivery
Inventory availability:
percentage of demand
met from stock in hand
Order fill rate:
proportion of order
filled within the stated
lead time
query response time
and exception advise
Order status
information:
Post- transaction
elements
Availability of spares:
Warranty and product
tracing:
Customer complaint
handling:
in stock level of service
parts
warranty handling and
product tracing
capability
dealing with complaints
and returns
This way customer service can be viewed as an
important front end element for value creation.
The Seven Rights:
The seven rights state that the logistician's job is
to ensure the 1)availability of the right product 2)at
the right time 3)in the right quantity 4)in the right
condition 5)at the right place 6)for the right
customer 7)at the right cost.
Customer Service Audit:
Customer service audit is collection and
examination of records and customer data.
Verification of accounts and financial data is done
to check any errors and corrections. Customer
service audit comprise of many methodologies
which helps in for improved employee
performance and overall development of the
organization. Customer service audit is beneficial
for the management of value service of a
customer.
Such constant checks are necessary in order to
keep close eye on customer satisfaction and
responses. Customer service audit encompasses
variety of methodologies like customer feedback,
customer questionnaires, customer information
records, communication with customers and their
records, and the customer service measurement.
These all methods when applied simultaneously
with proper scrutinizing tools, gives you the
optimum customer service audit. Such a
productive service audit is very crucial for future
strategy and current trends and quality service.
Customer Service Strategy:
When a company creates a logistics strategy it is
defining the service levels at which its logistics
organization is at its most cost effective. Because
supply chains are constantly changing and
evolving, a company may develop a number of
logistics strategies for specific product lines,
specific countries or specific customers.
As services are customer-centered, the strategy,
systems and people in the operations of service
should also focus on the customer. Customers’
expectations are central to the design of service
strategy of the firm. The line linking customer to
people (service providers) signifies that people are
extremely important in producing and delivering
services to the customer.
The customer to systems link shows that the service
operations/delivery system should also be
designed with the customer in mind.
The strategy to system link means that the systems
and procedures should follow from the service
strategy. The systems should support the strategy.
The strategy to people link means that all the
service providers (people in the service
organization) should be well aware of the
organization’s strategy.
The system to people link means that the service
operations system and procedures should be
people-friendly.
The only criterion that counts in evaluating a
service quality is defined by the customers. Only
customers can judge quality. All other judgments
are essentially irrelevant.
Demand Forecasting
Definition:
“Estimate of expected demand over a specified
future period. Also called forecast demand.”
Accurate demand forecasting is essential for a firm
to enable it to produce the required quantities at
the right time and arrange well in advance for the
various factors of production, viz., raw materials,
equipment, machine accessories, labour, buildings,
etc.
Purposes of forecasting
Purposes of short-term forecasting
a.
b.
c.
d.
Appropriate production scheduling.
Reducing costs of purchasing raw materials.
Determining appropriate price policy
Setting sales targets and establishing controls
and incentives.
e. Evolving a suitable advertising and
promotional campaign.
f. Forecasting short term financial requirements.
Purposes of long-term forecasting
a. Planning of a new unit or expansion of an
existing unit.
b. Planning long term financial requirements.
c. Planning man-power requirements.
Demand forecasts of particular products form
guidelines for related industries (e.g. cotton and
textiles). Also helpful at the macro level.
Nature of Demands:
It is the nature (or source) of demand which
provides the real key to inventory control
technique applicability and selection. The
fundamental principle in the selection of order
point or material requirements planning is whether
demand for the item is dependent or independent
of that for other items."
Independent demand must be forecast, but
dependent demand can be calculated since it is
directly related to, or derives from, the demand for
another inventory item or product...Dependent
demand need not and should not be forecast; it
can be precisely determined from the demand for
those items that are its sole cause.
Forecasting Components:
Raw Data
Trend Component: Trend identify the rate of growth
or decline of a series over time (Long-term
historical pattern between demand time)
Seasonal Component: Seasonal variations consists
of annually recurring movements above and below
the trend line
• Demand fluctuates in a repetitive pattern from
year to year
• Seasonal periodic peaks and valleys should occur
at the same time every year
• Seasonal variations should be of larger
magnitude than the random variations .
Cyclic Component: Cyclical variations are long
term oscillations or swings about a trend line
• The cycles may or may not be periodic, but they
often are the result of business cycles of
expansion and contraction of economic activity
over a number of years·
•Business cycles may be due to one or more of the
following: prosperity, recession, depression and
recovery
•The cycles may vary with respect to the time of
occurrence, the length of the phases, and the
amplitude of the fluctuations
Random Component: Random variations have no
particular pattern and usually are without specific
assignable cause
•They represent all influences not included in
trend, seasonal, and cyclical variations
•Erratic occurrence may be isolated and removed
from the data, but there are no general techniques
for doing so
•Averaging process will help to eliminate its
influence
•Random variations are often referred to as noise,
residuals, or irregular variations
Approaches to Forecasting : Qualitative &
Quantitative:
There are two approaches to determine demand
forecast
(1) the qualitative approach,
(2) the quantitative approach.
The comparison of these two approaches is shown
below:
Descriptio Qualitative Approach Quantitative
n
Approach
Applicabilit Used when situation is Used when situation is
y
vague & little data exist stable & historical data
(e.g., new products and exist
technologies)
(e.g. existing products,
current technology)
Considerati Involves intuition and Involves mathematical
ons
experience
techniques
Techniques Jury of executive
Time series models
opinion
Causal models
Sales force composite
Delphi method
Consumer market
survey
Qualitative Method
Description
Jury of executive
opinion
The opinions of a small group of high-level managers are
pooled and together they estimate demand. The group
uses their managerial experience, and in some cases,
combines the results of statistical models.
Sales force composite
Each salesperson (for example for a territorial coverage) is
asked to project their sales. Since the salesperson is the
one closest to the marketplace, he has the capacity to
know what the customer wants. These projections are then
combined at the municipal, provincial and regional levels.
Delphi method
A panel of experts is identified where an expert could be a
decision maker, an ordinary employee, or an industry
expert. Each of them will be asked individually for their
estimate of the demand. An iterative process is conducted
until the experts have reached a consensus.
Consumer market
survey
The customers are asked about their purchasing plans and
their projected buying behavior. A large number of
respondents is needed here to be able to generalize certain
results.
There are two forecasting models here – (1) the
time series model and (2) the causal model. A time
series is a set of evenly spaced numerical data and
is obtained by observing responses at regular time
periods.
In the time series model , the forecast is based
only on past values and assumes that factors that
influence the past, the present and the future sales
of your products will continue.
On the other hand, the causal model uses a
mathematical technique known as the regression
analysis.
The time series forecasting methods are described
below:
Description
Time Series
Forecasting
Method
Naïve
Approach
Assumes that demand in the next period is
the same as demand in most recent period;
demand pattern may not always be that
stable
For example:
If July sales were 50, then Augusts'
sales will also be 50
Time Series Description
Forecasting
Method
Moving Averages MA is a series of arithmetic means and is used if little or no trend is
(MA)
present in the data; provides an overall impression of data over
time
A simple moving average uses average demand for a fixed
sequence of periods and is good for stable demand with no
pronounced behavioral patterns.
Equation:
F 4 = [D 1 + D2 + D3] / 4
F – forecast, D – Demand, No. – Period
A weighted moving average adjusts the moving average method
to reflect fluctuations more closely by assigning weights to the
most recent data, meaning, that the older data is usually less
important. The weights are based on intuition and lie between 0
and 1 for a total of 1.0
Equation:
WMA 4 = (W) (D3) + (W) (D2) + (W) (D1)
WMA – Weighted moving average, W – Weight, D – Demand, No. –
Period
Exponential Smoothing
A statistical technique that calculates a moving average
where the most recent data are given a different weight
to earlier data; useful if recent changes in data are the
results of actual change (e.g., seasonal pattern) instead of
just random fluctuations
F t + 1 = a D t + (1 - a ) F t
Where
F t + 1 = the forecast for the next period
D t = actual demand in the present period
F t = the previously determined forecast for the present
period
• a= weighting factor referred to as the smoothing
constant
Order Processing
Order processing is the term used to identify the
collective tasks associated with fulfilling an order
for goods or services placed by a customer.
Integrated System:
Is relevant to any organization, regardless of size
or sector, looking to integrate two or more of their
management systems into one cohesive system
with a holistic set of documentation, policies,
procedures and processes.
The first stage of the fulfillment cycle is the way in
which your business processes a customer's order.
How your business handles orders has a major
impact on customer service, from encouraging
initial interest to prompting repeat business.
While several factors - price, quality of product or
service, range of goods, stock availability - are vital
to achieving sales in the first place, a responsive,
fully automated order-fulfillment procedure plays
a key part in overall customer satisfaction.
Automating your internal systems can help
achieve the speed and efficiency you need from
order processing. It brings together all
departments that handle the order, from website
or sales reps to warehouse staff.
You can do this by:
•Considering using enterprise resource planning
software which can tie in your website with other
facets of your business, such as planning,
manufacturing and distribution.
• Connecting your suppliers and customers to the
system. Integrate your system with your website,
then customer orders that arrive in your system
can be transformed into orders to your suppliers.
This is so that they can benefit from more timely,
accurate order information, with invoices sent and
processed automatically.
Customer Order Cycle
The customer order cycle occurs at the
customer/retailer interface and includes all
processes directly involved in receiving and filling
the customer’s order. Typically, the customer
initiates this cycle at a retailer site and the cycle
primarily involves filling customer demand.
The retailer’s interaction with the customer starts
when the customer arrives or contact is initiated
and ends when the customer receives the order.
The processes involved in the customer order cycle
include:
• Customer arrival
• Customer order entry
• Customer order fulfillment
• Customer order receiving
Customer Arrival. The term customer arrival refers
to the customer’s arrival at the location where he
or she has access to his or her choices and makes a
decision regarding a purchase. From the supply
chain perspective, the key flow in this process is the
customer’s arrival. The goal is to facilitate the
contact between the customer and the appropriate
product so that the customer’s arrival turns into a
customer order.
Customer Order Entry. The term customer order
entry refers to customers informing the retailer
what products they want to purchase and the
retailer allocating products to customers. The
objective of the customer order entry process is to
ensure that the order entry is quick, accurate,
and communicated to all other supply chain
processes that are affected by it.
Customer Order Fulfillment. During the process,
the customer’s order is filled and sent to the
customer. Order fulfillment takes place directly
from the manufacturer’s production line. The
objective of the customer order fulfillment process
is to get
the correct orders to customers by the promised
due dates at the lowest possible cost.
Customer Order Receiving. During this process, the
customer receives the order and takes ownership.
In SCM receiving occurs when the product is
delivered to the customer.
EDI (Electronic Data Interchange) EDI is a set of
protocols for conducting electronic business over
computer networks. EDI defines the electronic
exchange of structured business data, such as
purchase orders, invoices, and shipping notices,
typically between one organization and another.
The relationship is usually between a vendor and
customer. For example, EDI provides a way for a
customer's computer to place orders for goods with
a vendor's computers, based on reorder levels. The
EDI system coordinates the transaction, initiates
deliveries, and generates invoices.
Advantages: EDI can reduce costs, workforce
requirements, and errors associated with retyping
orders, invoices, and other documents. With EDI,
computer data already entered by one
organization is made available to a business
partner. EDI is typically handled using store-andforward technologies similar to e-mail.
•Accuracy: Traditionally, the manufacturing, and
sale of new products and services involves a long
paper work. EDI simplifies this process and makes
it possible to accomplish receiving the data exactly
as transmitted, so you eliminate errors.
•Competitive Advantage: If you are able to
receive point of sales data allowing you to keep
the shelves stocked while saving transaction costs
for your customer, you will have a competitive
advantage over non-EDI competitors. This helps
build long term relationships with your customers.
•Informed Decision Making :More accurate
information leads to improved decision making
procedures.
•Customer Service: Responding to customer
needs is the key to continued long term customer
relationships. EDI insures that information is
accurate and readily available for maintaining a
high level of service within a competitive market
place.
•Enhanced Partnership: EDI makes doing
business with your company easier and more cost
effective. This will advance you from being merely
a vendor to a full business partnership where both
sides work together for mutual profitability.
• Improved Cash Flow: EDI allows you to instantly
turn over invoices on purchase orders and
immediately begin transmitting electronic funds
transfers (EFTs) to your account.
•Inventory Control: EDI will decrease the cost of
storing inventory because it reduces the lead-time
necessary to process an order.
•Labor Cost Reduction: Data entry, manual reviews
and reconciliations, sorting, copying, filing
documents and, most importantly, errors are
significantly reduced by limiting the number of
person hours involved in processing an order from
bid request to invoicing.
•Responsiveness: Integration of EDI with retailers'
point of sale(POS) information allows you to
respond more quickly to immediate changes in
market conditions.
•Paper and Postage: Since transactions are
completed electronically, EDI will eliminate the
expense of paper, envelopes, preprinted forms and
postage.
•Shipping: EDI communicates with bar codes that
allows for tight tracking of inventory. EDI provides
quick and accurate information. Better shipment
planning, through a well designed EDI system,
saves you time and money.
•Streamlined Processes: With EDI, information is
shared, human intervention is reduced, customer
response is increased, and you gain the ability to
respond to the market fluctuations almost
instantaneously.
Transportation (9-07-2010)
Transportation means “movement of people and
goods from one location to another.”
Principles of Transportation:
Principle #1: Access: People are entitled to
reasonable access to other people, places, goods
and services.
Principle #2: Equity: Nation states and the
transportation community must strive to ensure
social, interregional and inter-generational equity,
meeting the basic transportation-related needs of
all people including women, the poor, the rural,
and the disabled.
Principle #3: Health and Safety:
Transportation systems should be designed and
operated in a way that protects the health
(physical, mental and social well-being) and safety
of all people, and enhances the quality of life in
communities.
Principle #4: Individual Responsibility :
All individuals have a responsibility to act as
stewards of the natural environment, undertaking
to make sustainable choices with regard to personal
movement and consumption.
Principle #5: Integrated Planning :
Transportation decision makers have a
responsibility to pursue more integrated
approaches to planning.
Principle #6: Pollution Prevention:
Transportation needs must be met without
generating emissions that threaten public health,
global climate, biological diversity or the integrity
of essential ecological processes.
Principle #7: Land and Resource Use:
Transportation systems must make efficient use of
land and other natural resources while ensuring
the preservation of vital habitats and other
requirements for maintaining biodiversity
Principle #8: Fuller Cost Accounting: Sustainable
transportation systems must be cost effective.
Transportation decision makers must move as
expeditiously as possible toward fuller cost
accounting, reflecting the true social, economic
and environmental costs, in order to ensure users
pay an equitable share of costs.
The Role of Transportation
The role that transportation plays in logistics
system is more complex than carrying goods for
the proprietors. Its complexity can take effect only
through highly quality management. By means of
well-handled transport system, goods could be
sent to the right place at right time in order to
satisfy customers’ demands. It brings efficacy, and
also it builds a bridge between producers and
consumers.
Therefore, transportation is the base of efficiency
and economy in business logistics and expands
other functions of logistics system. In addition, a
good transport system performing in logistics
activities brings benefits not only to service quality
but also to company competitiveness.
Logistics Functions: Transportation Functionality
provides 2 major functions:
1) Product movement:
To move various types of product whether it is
raw materials component, semi- finished goods,
finished goods, packaging material, scrap and so
on. Transportation has become a very essential.
Transportation of a product involves the use of
temporal (related to time)resources. This is
because a particular product is inaccessible while
it is in-transit. i.e. while it is being transported
from one place to another place.
These products are called in-transit inventories.
These products are significantly important because
they influence a variety of supply chain decision.
For e.g. if supply chain is a considering a just in
time strategy, or say. quick response strategy with
regard to supply of goods to the customer then this
influences the time for which the goods should be
in transit because the goods have to reach quickly,
or just in time to meet the requirement of the
customer.
Further, if goods are dispatched only when a
customers requires them. Then such decision also
affects the amount of inventories that have to be
stored at the distribution centers.
Transportation of product involves the use of
financial resources. Expenses on transport result
from cost of driver, cleaner, casual laborer, taxes,
administrative costs, and repairs/ maintenance. In
addition, if during transportation there is product
loss or product damage, these expenses have also
to be taken into consideration.
Transportations of product also use environmental
resources. It uses a very large amount of energy in
term of fuel and oil and also creates environmental
expenses in terms of congestion, air pollution, and
noise pollution.
2. Product storage:
Though it is not very common, but one of the
functions of transportation is also temporary
storage of goods. Of course, storing goods in
vehicles is quite an expensive affair. However, in
case of goods have to be moved once again
within just a few days. It is advisable to keep
them stored in transport vehicles themselves.
this will avoid the cost of unloading and loading
as well as the possible damage to goods during
such a operation.
It may happen that a company has limited storage
facility at a particular warehouse. Hence, when the
company loads the goods in to the transport
vehicle to be sent to the warehouse. It may
request the transport company to take a longer
route to reach the destination. This will act as
temporary storage for the goods.
Importance of Transportation
The transport sector is an important component of
the economy impacting on development and the
welfare of populations. When transport systems
are efficient, they provide economic and social
opportunities and benefits that result in positive
effects such as better accessibility to markets,
employment and additional investments.
The economic impacts of transportation can be
direct and indirect:
Direct impacts related to accessibility change
where transport enables larger markets and
enables to save time and costs.
Indirect impacts related to the economic multiplier
effect where the price of commodities, goods or
services drop and/or their variety increases.
The economic importance of the transportation
industry can thus be assessed from a
macroeconomic and microeconomic perspective:
At the macroeconomic level (the importance of
transportation for a whole economy),
transportation and the mobility it offers are linked
to a level of output, employment and income
within a national economy. In many developed
countries, transportation accounts between 6%
and 12% of the GDP.
At the microeconomic level the importance of
transportation is linked to producer, consumer and
production costs.
Transportation Modes:
Transport modes are the means by which people
and freight achieve mobility. They fall into one of
three basic types, depending on over what surface
they travel – land (road, rail and pipelines), water
(shipping), and air. Each mode is characterized by
a set of technical, operational and commercial
characteristics: When designing a supply chain,
either domestic or global, it is essential to
understand the different modes of transportation,
transit times, related steps and cost implications
that will affect how goods move.
ROADWAYS
ROADS : A road is an identifiable route, way or
path between two or more places. Roads are
typically smoothed, paved, or otherwise prepared
to allow easy travel; though they need not be, and
historically many roads were simply recognizable
routes without any formal construction or
maintenance.
ADVANTAGES
1.Provide high flexibility,
2.Allow easy travel,
3.Serve as initial and final stage of freight
transport,
4.Most commonly used mode of transportation,
5.Suitable for short and medium distances.
DISADVANTAGES
1.Low capacity,
2.High energy and area use,
3.Main source of noise and air pollution,
4.Cause of road accidents.
EXAMPLES: Cars, Buses, Trucks, Motor Bikes,
Rickshaws etc.
RAILWAYS
RAIL: Rail transport is where train runs along at
two parallel steel rails, known as a railway or
railroad. Alternative methods include monorail
and maglev. A train consists of one or more
connected vehicle that run on the rails.
Propulsion is commonly provided by a
locomotive, that hauls a series of unpowered
cars, that can carry passengers or freight. The
locomotive can be powered by steam, diesel or
by electricity supplied by a trackside systems.
Railed vehicles move with much less friction than
rubber tires on paved roads, making trains more
energy efficient, though not as efficient as ships.
Intercity trains are long-haul services connecting
cities. Modern high-speed rail is capable of speeds
up to 350 km/h (220mph),but this requires
specially-built track.
ADVANTAGES:
1.Fast medium of transportation,
2.Suitable for long distances,
3.Economical medium of transportation,
4.Suitable for transportation of heavy goods,
5.Energy efficient mode of transportation.
DISADVANTAGES:
1.Requires special infrastructure,
2.Chances of accidents are high,
3.Require high cost,
4.Not flexible mode of transportation.
AIRWAYS
Air transport: This is the fastest mode of
transport. It carries goods and passengers through
airways by using different aircrafts like passenger
aircraft, cargo aircraft, helicopters, etc. Besides
passengers it generally carries goods that are less
bulky or of high value.
In hilly and mountainous areas where other mode
of transport is not accessible, air transport is an
important as well as convenient mode. It is mostly
used for transporting goods and passengers during
natural calamities like earthquake and floods, etc.
Advantages of Air transport
It has the following advantages.
1. It is the fastest mode of transport.
2. It is very useful in transporting goods and
passengers to the area, which are not
accessible by any other means.
3. It is the most convenient mode of transport
during natural calamities.
4. It provides vital support to the national security
and defense.
Disadvantages of air transport
1. It is relatively more expensive mode of
transport.
2. It is not suitable for transporting heavy and
bulky goods.
3. It is affected by adverse weather conditions.
4. It is not suitable for short distance travel.
5. In case of accidents, it results in heavy losses of
goods, property and life.
Water transport
Water transport
Water transport refers to movement of goods and
passengers on waterways by using various
means like boats, steamers, launches, ships, etc.
With the help of these means goods and
passengers are carried to different places, both
within as well as outside the country. Within
the country, rivers and canals facilitate the
movement of boats, launches, etc.
Since the goods and passengers move inside the
country, this type of transport is called inland water
transport. When the different means of transport
are used to carry goods and passengers on the sea
route it is termed as ocean transport. There are two
types of water transport.
I. Inland water transport
Inland water transport use boats, launches,
barges, streamers, etc., to carry goods and
passengers on river and canal routes. These
routes are called inland waterways and are used in
domestic or home trade to carry bulky goods.
Passenger transport through waterways is not so
popular in our country. Inland water transport
system exists only in few states like. West Bengal,
Andhra Pradesh, Assam, Tamil Nadu, etc.
2. Ocean transport
Ocean transport refers to movement of goods and
passengers with the help of ships through sea or
ocean waterways. It plays an important role in the
development of international trade. It is also used
for transporting goods and passengers in the
coastal areas. Ocean transport has its fixed route,
which links almost all the countries of the world.
Sea transport may be of the following two types.
1. Coastal Shipping:- In this transport, ships ply
between the main ports of a country. This helps in
home trade, and also in carrying passengers within
the country.
2. Overseas Shipping:- In this transport, ships ply
between different countries separated by sea or
ocean. It is mainly used for promotion and
development of international trade. It is
economical means of transport to carry heavy
machines and goods in bulk.
Overseas transport is carried out on fixed routes,
which connect almost all the countries. In ocean
transport, different types of ships are used to carry
passengers and goods. These may be classified as
under.
Liners:
1. A liner is a passenger or cargo vessel, which
belongs to a regular shipping company. These
ships ply over a fixed route according to a
prescribed schedule or timetable.
2. Tramps:- A tramp is a cargo ship, which does
not make regular trips but plies whenever cargo is
offered to it. It does not follow a fixed route or a
prescribed timetable like that of liners.
Advantages of water transport
1. It is a relatively economical mode of transport
for bulky and heavy goods.
2. It is a safe mode of transport with respect to
occurrence of accidents.
3. The cost of maintaining and constructing routes
is very low as most of them are naturally made.
4. It promotes international trade.
Disadvantages of water transport
1. The depth and navigability of rivers and canals
vary and thus, affect operations of different
transport vessels.
2. It is a slow moving mode of transport and
therefore not suitable for transport of perishable
goods
PIPELINES
Pipeline transport is the transportation of goods
through a pipe. Most commonly, liquid and gases
are sent, but pneumatic tubes that transport solid
capsules using compressed air have also been
used. As for gases and liquids, any chemically
stable substance can be sent through a pipeline.
Therefore sewage, slurry, water, or even beer
pipelines exist but arguably the most valuable are
those transporting oil and natural gas.
Advantages
1.Lower cost of transportation
2.Lower transit losses
3.Lower energy intensiveness
4.Economies of scale
5.Safety and Reliability -minimum disruptions
6.Environment-friendliness
7.Multi-product handling
8.Flexibility
9.Stationary carrier
10.Augmentation at low cost
11.Minimal land costs
12.Decongestion of surface transport systems
Disadvantages
As easy targets:
Pipelines can be the target of vandalism ,
sabotage, or even terrorist attacks. In war,
pipelines are often the target of military attacks,
as destruction of pipelines can seriously disrupt
enemy logistics.
Ropeway Systems
Ropeway Systems
Aerial ropeway is one such unique and ingenuous
mechanical system, which facilitates
transportation of man and material over difficult
and peculiar terrain bringing about comparative
ease and economy vis-à-vis other means of
transport.
Ropeway refers to a mode of transport, which
connects two places on the hills, or across a valley
or river. In the hilly areas, trolleys move on wheels
connected to a rope and are used for carrying
passengers or goods, especially building materials,
food, etc.
Advantages
Ropeways can generate their own power and use it
efficiently and economically. A major advantage of
ropeways is their ability to operate over rough
terrain. A technical advance is more efficient
loading, and the noise level on a ropeway is low.
Disadvantages
It lags behind in heavy investments and limitations
on size, nature and quantity of the haul.
Intermodal freight transport
Intermodal freight transport involves the
transportation of freight in an intermodal container
or vehicle, using multiple modes of transportation
(rail, ship, and truck), without any handling of the
freight itself when changing modes. The method
reduces cargo handling, and so improves security,
reduces damages and losses, and allows freight to
be transported faster.
Reduced costs versus over road trucking is the key
benefit for intra-continental use. The negative is
that it takes longer than normal truck delivery
would.
Factors to be considered for mode and carrier
selection:
Essential to effective transportation management
is knowing what carrier and what mode to utilize
and when. In making a mode and carrier selection,
a shipper must: (1) consider both quantitative cost
factors and less tangible, qualitative factors; and
(2) determine how to weigh all of these factors
together.
Carrier selection is one of the most important
decisions in the transportation strategic
planning that affects both logistics cost and
customer service. As the entire supply chain is
affected by carrier selection, the decision
process should incorporate 5 groups of criteria
that influence the carrier selection and
evaluation:
1) Cost,
2) Insurance of service provision,
3) Handling services,
4) Customer service and
5) Strategic compatibility.
The exact definition of objectives is a crucial task
which should be considered before going into the
process of carrier selection.
The methodology consists of three phases:
Phase one: Requirements identification:
The ultimate goal is to select carriers which are best
suited for the firm to achieve its objectives. So, the
first question is what are the objectives in each
market? For instance in a market that the firm has
newly entered, it needs to suggest a high level of
service to be able to get a share, or in a market in
which there is a strong competition on the price the
firm should try to reduce its costs.
Each of the objectives will define the kind of carriers
it needs. For example, a responsive and an
effective carrier are appropriate for each of the
mentioned objectives, respectively. After the
identification of objectives, the relevant criteria
should be defined. So the kind of criteria that a
decision maker considers is dependent to the
objectives and this dependency prevents suggesting
a fixed number of criteria to all the firms even in a
similar industry.
However, this order is not definite and different firms
in various situations can put different importance to
each criteria but it seems that “cost of
transportation” is usually the most important one.
Phase two: Planning:
Carrier weighting: The data necessary in this
section (criteria, potential carriers, objectives and
etc.) are gathered in the previous section. In the
first step, all the carrier selection criteria should be
categorized. The first group contains cost relevant
criteria.
The second group consists of criteria of customer
service. Quality of drivers and personnel of the
carrier, computerized links and flexibilities in
deliveries can affect the reputation of the firm and
are included in this group.
This leads us to third group which is named
insurance of service provision.
The forth group consists of freight handling
services. Facilities, the ability to handle special
freights, expedited shipments and capacity are
main considerations of this group.
The last group is about strategic compatibility
between the firm and the carrier. Previous
experiences, consistency of strategies, reputation
and the possibility of long term relationships are
included in this group.
Phase three: Implementation and appraisal:
Implementation: As is stated by Bowersox there
are four steps in implementing a logistics project
which are: planning, timing, success criteria and
implementation. The definition of implementation
includes breaking down the project into
independent activities, determining the sequence
and relations between activities and assigning a
person or a team to each activity.
Performance appraisal: After implementation, in
order to measure the deviation from the
objectives, some performance appraisal programs
should be done. In performance measurement, the
difference between the actual and planned
outcome will be calculated and in a case with
significant difference, the real causes will be
investigated.
This difference could be caused by the weakness or
negligence of the carrier and be solved with more
cooperation with them. For example, inefficient
routing by the carrier may have cause late
deliveries or the increase in the transportation
costs. This could be solved by helping the carrier in
routing programs.
Modal Characteristics & Classifications
How do we measure relative weight of each
mode?
• System mileage, traffic volume, revenue, nature
of traffic composition .
Railways – Rail network
* Stands out in terms of tonne / kilometres moved
* 226 billion tonne / kilometres and 55.8% of total
tonne/kilometers moved in 1982 in India
* 449 billion tonne / kilometres and 51.7% of total
tonne kilometers now moved in India
* Facing very stiff competition from roadways
* High capital investment due to right of way,
switching yards, terminals, locomotives and
rolling stock, but low operating costs.
(contd)
* Focus on specific products than on broad range
Developments in this area
*Recent customer friendly attitude
*Development of Specialized Equipment to suit
the needs of bulk volume of customers
* Unit trains
* Container trains
* Double stack containers
Road transport
* High flexibility and speed
* Ultimate mode of transport
* Rapid growth
* Low capital cost as compared to railways
* 179.2 billion tonne/kilometres and 44.2% of
total tonne /kilometres moved in 1982 in India
* 585 billion tonne/kilometres and 56% of total
tonne/ kilometres moved in India now.
* Operating costs are higher
* Ideal for small shipments over short distances
* Labor intensive
* Occasional fuel shortages
* Availability of good quality vehicles
* Availability & cost of maintenance and spares
* Bad and unsafe road conditions
* Carrier organizations and their disputes with
government
* Octroi
* Restrictive permits
Developments in this area
* Entry of several manufacturers of trucks-entry
of Daimler to produce Mercedes CVs
* Trailer-tractor sets
* National grid of highways
* Road widening schemes, bypass to cities
* Pay and use roads – private road builders
* Express ways
Water transport
* Sailing vessels, steamships, diesel driven
ships
* Limited scope for deep water transport
* Limited extent of navigable inland water
transport -lakes, rivers, canals
* Main advantage of water transportation is
extremely large shipments & low cost
* Importance of deep water vessels & deep water
ports to fully realize benefits of water transport
* Diesel towed barges- high flexibility,
disadvantages are range of operation (not for
long distance) and slow speed
* Ferries- for small water bodies like rivers and
bays.
* Inland water Transport is not used to its full
potential in India although we have used
mechanized IWT since early 1800.
Main hurdles appear to be
1. Low priority in policy
2. Construction of dams
3. Receding water levels in the rivers
4. Tough competition by other modes
Developments in this area
* Construction of deep water ports: JNPT
* Construction of ports with private investment
* Port Pipavav, India's first port in the private
sector is operated by APM Terminals, one of the
largest operators of container terminals in the
world
* A consortium led by P&O Australia is setting up
a $200 million Container terminal on BOT basis at
Jawaharlal Nehru Port Trial operation started in
April 1999
* Agreement signed for construction of a captive
coal Jetty at Mumbai by Tata Electrics.
Pipelines
* Reliable all weather means of transport
* Low energy consumption
* Pipeline being under ground space occupation is
minimal
* Pipe line operates all the time except when it is
shut down for maintenance
* No empty container or wagon to be brought
back
* Highest fixed costs, right of way and laying of
pipeline, and lowest operating costs
* Not labour intensive
(contd)
* Not flexible by nature. Pipe lines are stationary
* Physical state of the commodity is a limitation.
* This mode of transport can release capacity of
other modes for transport of essential
commodities
Rope ways
* Hilly and otherwise inaccessible area
* Steep gradients
* Cause minimum ecological imbalance
* Point of supply and demand can be connected
by shortest route
*Logistics of fruits in Himachal Pradesh
Air transport
* Speed of transport is highest
* Fixed costs are lower than rail or road or pipe
line. But operating costs are highest
* Air transport brings distant markets closer perishables market in gulf countries
* Overcomes the hassle and cost of setting up
depots and service centers overseas
* Full potential of peak seasonal demand can be
taken
* Test marketing is easy. Products can be
shipped directly from the factory
Total Transportation Cost
The transportation problem is one of the problem
where the objective is to transport various
quantities of a single product which are initially
stored at various origins, to different destinations
in such a way that the total transportation is
minimum.
Transportation models or problems are primarily
concerned with the optimal (best possible) way in
which a product produced at different factories or
plants (called supply origins) can be transported to
a number of warehouses (called demand
destinations).
The objective in a transportation problem is to fully
satisfy the destination requirements at the
minimum possible cost.
Whenever there is a physical movement of goods
from the point of manufacture to the final
consumers through a variety of channels of
distribution (wholesalers, retailers, distributors
etc.), there is a need to minimize the cost of
transportation so as to increase the profit on sales.
Transportation problems arise in all such cases. It
aims at providing assistance to the top
management in ascertaining how many units of a
particular product should be transported from each
supply origin to each demand destinations to that
the total prevailing demand for the company’s
product is satisfied, while at the same time the
total transportation costs are minimized.
Factors influencing cost of transportation
1. Cover actual cost of transportation.
A. Fixed costs:
• Interest on capital
• Depreciation
• Insurance premium
• Administrative overheads
• Expenses on fixed facilities like buildings
B. Semi fixed costs:
• Salaries of the staff
• Facility for servicing, periodic maintenance etc
C. Variable costs
• Cost of fuel and lubricants
• Maintenance directly attributable to a
particular trip – breakdown
• Damage to the vehicle and also the cargo. E.g.
hilly roads, bad roads, war effected sea routes
D. Vehicle utilization
• Carrier likes to gain maximum mileage out of
his vehicle
• Runs the vehicle at top speed to cover max.
distance at min time.
• Quotes higher rates if following are not conducive
to the above
• Road conditions
• Terminal detentions [congestion, formalities,
loading/unloading etc.]
• Obtaining a return load [market factors]
• Nature of goods, hazardous, corrosive [liability,
insurance]
• Density, consignment light by weight
• Stow ability, shape and size of the product
2. Traffic Bearing Capacity
• Value addition by transportation.
• Transportation cost should not upset the value
added
3. Public use
• Items to satisfy basic needs of common man
should be moderately charged
4. Government Policy
Freight rates are controlled by the state for
• Promotion of certain type of trade
• Development of certain type of industry
• Freight rates are hiked or depressed by state
5. Profit
• Margin for reasonable return on investment
• Entrepreneurial time and efforts
• Funds for future development of business
Transportation Infrastructure
Road and highway networks, including structures
(bridges, tunnels, culverts, retaining walls),
signage and markings, electrical systems (street
lighting and traffic lights) and edge treatments
(curbs, sidewalks, landscaping)
Railways, including structures, terminal facilities
(rail yards, train stations), level crossings, signaling
and communications systems
Canals and navigable waterways requiring
continuous maintenance (dredging, etc.)
Seaports and lighthouses
Airports, including air navigational systems
What constitutes Transport Infrastructure?
[Transport elements]
Factors that affect the smooth functioning of
transport?
Terminal facilities - well maintained loading
unloading facilities, space for movement of
vehicles, platforms, railway yards
Vehicles- trucks, ships or wagons. Their size,
shape & speed
1. Rights of way- cost of right to use passage.
Rails, roads, airways
2. Routes and sectional capacity-number of lanes
3. Limit on speed, weight, height
4. Weigh bridge facility
5. Nature of product
6. Carrier organizations
Micro Logistics and Macro Logistics
Transportation decisions affect the other subfunctions, and there is a close linkage between
them. Hence, transport decisions cannot be made
in a vacuum. This part of the role of transportation
in logistics may be termed as "Micro Logistics,"
where at the firms' level, the companies optimize
this function for competitive cost advantage.
The major infrastructure required for moving
goods from one place to another in India involve
the active roles of Roads, Road Freight Industry,
Railways, Ports and Shipping, and Pipelines, all of
which are either managed or regulated by the
government. The efficient and effective
management of this infrastructure to enable the
smooth flow of goods constitutes "Macro
Logistics.“
Any improvement in the Micro Logistics will be
effective only if the Macro Logistics is effective.
Warehousing
A warehouse is a commercial building for storage of
goods.
Principles of Warehousing
1.
2.
3.
4.
5.
6.
Load unitisation
Best use of space
Minimize movement
Control of stock movement,
Safety/Security/Environment,
Minimum total cost
Role of Warehousing
Today's most important role of warehousing is how
to maximize the value added while storing and
repackaging the product. Efficient operation and
flexibility are critical so that the warehouse can be
used as a distribution center.
Warehousing plays a vital role in providing the
desired level of service to the customer at the
lowest possible cost and is an important link
between the producer and the customer. Improving
the flow of goods through a warehouse by
minimizing handling and movement can generate
significant and measurable business benefits.
Warehousing Functions
The basic warehousing functions are they provide
protection to goods against heat, wind, storm,
moisture, etc. and also cut down losses due to
spoilage, wastage etc. This is the basic function of
every warehouse.
In addition to this, warehouses now a days also
perform a variety of other functions. In this section
let us learn about the various functions of
warehouses.
Warehouses perform the following functions:
i. Storage of goods
ii. Protection of goods
iii. Risk bearing
iv. Financing
v. Processing
vi. Grading and branding
vii. Transportation
i. Storage of goods:- The basic function of
warehouses is to store large stock of goods.
These goods are stored from the time of their
production or purchase till their
consumption or use.
ii. Protection of goods:- A warehouse provides
protection to goods from loss or damage
due to heat, dust, wind and moisture, etc. It makes
special arrangements for different
products according to their nature. It cuts down
losses due to spoilage and wastage
during storage.
iii. Risk bearing:- Warehouses take over the risks
incidental to storage of goods. Once goods are
handed over to the warehouse-keeper for storage,
the responsibility of these goods passes on to the
warehouse-keeper. Thus, the risk of loss or
damage to goods in storage is borne by the
warehouse keeper. Since it is bound to return the
goods in good condition, the warehouse becomes
responsible for any loss, theft or damage, etc.
Thus, it takes all precautions to prevent any
mishap.
iv. Financing:- When goods are deposited in any
warehouse, the depositor gets a receipt, which
acts as a proof about the deposit of goods. The
warehouses can also issue a document in favour of
the owner of the goods, which is called
warehouse-keeper’s warrant. This warrant is a
document of title and can be transferred by simple
endorsement and delivery.
So while the goods are in custody of the
warehouse-keeper, the businessmen can obtain
loans from banks and other financial institutions
keeping this warrant as security. In some cases,
warehouses also give advances of money to the
depositors for a short period keeping their goods
as security.
v. Processing:- Certain commodities are not
consumed in the form they are produced.
Processing is required to make them consumable.
For example, paddy is polished, timber is
seasoned, and fruits are ripened, etc. Sometimes
warehouses also undertake these activities on
behalf of the owners.
vi. Grading and branding:- On request warehouses
also perform the functions of grading and branding
of goods on behalf of the manufacturer, wholesaler
or the importer of goods. It also provides facilities
for mixing, blending and packaging of goods for
the convenience of handling and sale.
vii. Transportation:- In some cases warehouses
provide transport arrangement to the bulk
depositors. It collects goods from the place of
production and also sends goods to the place of
delivery on request of the depositors.
Importance /Benefits of Warehousing
Benefits realized from strategic warehousing are
classified on the basis of economics and service.
From a conceptual perspective, no warehouse
should be included in a logistical system unless it is
fully justified on a cost-benefit basis. While there is
some overlap, the major warehouse benefits are
reviewed individually.
Economic Benefits
Economic benefits of warehousing result when
overall logistical costs are directly reduced by
utilizing one or more facilities. It is not difficult to
quantify the return on investment of an economic
benefit because it is reflected in a direct cost-tocost trade-off. For example, if adding a warehouse
to a logistical system will reduce overall
transportation cost by an amount greater than the
fixed and variable cost of the warehouse, then
total cost will be reduced.
Distribution Center
Warehouse is for storage of inventory whereas
Distribution Center is to keep finished product
moving towards its destination. Where the
emphasis is on processing and moving goods on to
wholesalers, retailers, or consumers rather than on
storage.
Need for Warehousing
Warehousing is necessary due the following
reasons.
(i) Seasonal Production:- Agricultural commodities
are harvested during certain seasons, but their
consumption or use takes place throughout the
year.
Therefore, there is a need for proper storage or
warehousing for these commodities, from where
they can be supplied as and when required.
(ii) Seasonal Demand:- There are certain goods,
which are demanded seasonally, like woolen
garments in winters or umbrellas in the rainy
season. The production of these goods takes place
throughout the year to meet the seasonal demand.
So there is a need to store these goods in a
warehouse to make them available at the time of
need.
(iii) Large-scale Production:- In case of
manufactured goods, now-a-days production
takes place to meet the existing as well as future
demand of the products. Manufacturers
also produce goods in huge quantity to enjoy the
benefits of large-scale production, which is more
economical.
So the finished products, which are produced on a
large scale, need to be stored properly till they are
cleared by sales.
(iv) Quick Supply:- Both industrial as well as
agricultural goods are produced at some
specific places but consumed throughout the
country. Therefore, it is essential to stock
these goods near the place of consumption, so that
without making any delay these goods are made
available to the consumers at the time of their
need.
(v) Continuous Production:- Continuous production
of goods in factories requires adequate supply of
raw materials. So there is a need to keep sufficient
quantity of stock of raw material in the warehouse
to ensure continuous production.
(vi) Price Stabilization:- To maintain a reasonable
level of the price of the goods in the market there
is a need to keep sufficient stock in the
warehouses. Scarcity in supply of goods may
increase their price in the market. Again, excess
production and supply may also lead to fall in
prices of the product. By maintaining a balance of
supply of goods, warehousing leads to price
stabilisation.
Economic and Service Benefits of Warehouses
1. Economic benefits:- Consolidation, Break bulk,
Cross Dock, processing postponement, stock
piling[seasonal storage]
2. Service benefits:- Spot stocking, Assortment,
mixing, production support, market presence
PLANT A
PLANT B
PLANT C
1. Economic Benefits
CONSOLIDATION WAREHOUSE
Customer
Product
A BC
The primary benefit of consolidation is that it
combines the logistical flow of several small
shipments to a specific market area.
Consolidation warehousing may be used by a
single firm, or a number of firms may join together
and use a for-hire consolidation service.
Through the use of such a program, each
individua1 manufacturer or shipper can enjoy lower
total distribution cost than could be realized on a
direct shipment basis individually.
CUSTOMER A
Plant
Break Bulk
warehouse
CUSTOMER B
CUSTOMER C
Break bulk warehouse operations are similar to
consolidation except that no storage is performed.
A break bulk operation receives combined
customer orders from manufacturers and ships
them to individual customers.
The break bulk warehouse sorts or splits individual
orders and arranges for local delivery.
Because the long-distance transportation
movement is a large shipment, transport costs are
lower and there is less difficulty in tracking.
Plant A
[Product A]
Plant B
[Product B]
Plant C
[Product C]
Customer X
(A+B+C)
Cross Dock
warehouse
Customer Y
(A+B)
Customer Z
(B+C)
Customer W
(A+B+ C)
The term cross docking refers to moving product
from a manufacturing plant and delivers it directly
to the customer with little or no material handling
in between. Cross docking not only reduces
material handling, but also reduces the need to
store the products in the warehouse.
Benefits
1. Reduction in labor costs, as the products no
longer requires picking and are put away in the
warehouse.
2. Reduction in the time from production to the
customer, which helps improve customer
satisfaction.
3. Reduction in the need for warehouse space, as
there is no requirement to storage the
products.
Processing/Postponement: This functionality of
warehousing enables postponement of
commitment of products to customer until orders
are received from them. This is utilized by
manufacturers or distributors for storing products
ready up to packaging stage. These products are
packaged and labeled for the particular customer
only on receipt of the order.
For e.g. Asian Paints has 1000s of SKUs and its
literally impossible to store all the SKUs in all of
their retail stores. Basically, Asian Paints
postpones the “coloring” part to last stage and
hence any dealer/retailer when they order a color,
can receive the paint within a days time.
Stock piling: This function of warehousing is
related to seasonal manufacturing or demand. In
the case of seasonal manufacturing, certain raw
materials are available during short periods of the
year. Hence, manufacturing is possible only during
these periods of availability, while the demand is
full year around. This requires stockpiling of the
products manufactured from these raw materials.
An example is mango pulp processing. On the
other hand, certain products like woolens are
required seasonally, but are produced throughout
the year, and thus need to be stockpiled as such.
2. Service benefits :
Spot stocking:
• Under spot stocking, a selected amount of a
firm's product line is placed or "spot stocked" in a
warehouse to fill customer orders during a critical
marketing period.
• In particular, manufacturers with limited or highly
seasonal product lines are partial to this service.
• Rather than placing inventories in warehouse
facilities on a year-round basis or shipping directly
from manufacturing plants, delivery time can be
substantially reduced by advanced inventory
commitment to strategic markets.
• Utilizing warehouse facilities for stock spotting
allows inventories to be placed in a variety of
markets adjacent to key customers just prior to
a maximum period of seasonal sales.
• Suppliers of agricultural products to farmers
often use spot stocking to position their products
closer to a service-sensitive market during the
growing season.
• Following the sales season, the remaining
inventory is withdrawn to a central warehouse.
Assortment
An assortment warehouse stocks product
combinations in anticipation of customer orders.
The assortments may represent multiple products
from different manufacturers or special
assortments as specified by customers.
In the first case, for example, an athletic wholesaler
would stock products from a number of clothing
suppliers so that customers can be offered
assortments.
In the second case, the wholesaler would create a
specific team uniform including shirt, pants, and
shoes.
Mixing
In a typical mixing situation, truckloads of
products are shipped from manufacturing plants
to warehouses.
Each large shipment enjoys the lowest possible
transportation rate.
Upon arrival at the mixing warehouse, factory
shipments are unloaded and the desired
combination of each product for each customer or
market is selected.
When plants are geographically separated, overall
transportation charges and warehouse
requirements can be reduced by mixing.
Production Support
Production support warehousing provides a steady
supply of components and materials to assembly
plants.
Safety stocks on items purchased from outside
vendors may be justified because of long lead times
or significant variations in usage.
The operation of a production support warehouse is
to supply or "feed" processed materials,
components, and subassemblies into the assembly
plant in an economic and timely manner.
Market Presence
While a market presence benefit may not be so
obvious, it is often cited by marketing managers as
a major advantage of local warehouses.
The market presence factor is based on the
perception or belief that local warehouses can be
more responsive to customer needs and offer
quicker delivery than more distant warehouses.
As a result, it is also thought that a local warehouse
will enhance market share and potentially increase
profitability.