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EPGPBM Second Semester ( 2012 - 2013 ) Course: Logistics and Supply Chain Management Professor-Yashodhar Uchil

Introduction to Logistics
What is Logistics? Philip Kotler defines logistics as the process of planning, implementing, and controlling the physical flows of materials and finished goods from the point of origin to point of use to meet the customers need at a profit. In Other Words Logistics moves and positions inventory to achieve desired time , place and possession benefits at the lowest total cost. Why is Logistics Important? Logistics costs is anywhere between 8-13% of GDP It leads to Competitive advantage It helps reduce inventory across supply chain contributing to stronger cash flows. One cannot accomplish any marketing; manufacturing or international commerce without logistics Customer expectations are increasing It adds value to the supply chain by strategically positioning the inventory Logistics effecting Profitability.. Reducing raw material input cost through intelligent sourcing and inbound logistics optimization Increasing productivity/through put from the plant Choice of cost effective technology Reducing outbound logistics cost Quick/Prompt response Since all of the above can be controlled by effective logistics management, logistics assumes a pivotal significance in Business Strategy The Functionality Of Logistics Order processing Inventory Management Transportation Warehousing Facility Network design Order Processing Very important stage since it is the input stage. Order registration Order checking Coordination IT plays a very crucial role today since information is power as it helps even in forecasting customer requirements 1

2 Inventory Management Objective is to achieve desired customer service with minimum inventory commitment Core Customer Segmentation - Pareto Principle Product Profitability High availability of Profitable products Transportation Integration -Assortments of products through shipment consolidation Time based performance Reduce safety stock Competitive performance -Positioning inventory Transportation As a Crucial cause it accounts for 60-70% of Logistics Cost Cost But not at the cost of business Speed Higher speed-Higher costs Consistency Since unexpected variance creates serious supply chain operational problems Warehousing This largely helps in adding value to the products apart from the storage Kitting Sorting & Sequencing Labeling Packaging Transportation Consolidation Product Modification Facility Network Design Impacts customer service capability and cost Determining the number and locations of all warehouse /distributor/retailer facilities Inventory levels at each facility mapped/ascertained to the customer requirements Networking between manufacturing plants, warehouses, cross dock operations and retail stores. What Is Distribution The steps taken to move and store a product from the supplier stage to a customer stage in the supply chain OR It is the process of delivering the products manufactured or a service rendered by a firm to the end user. Importance of distribution It is a key driver of overall profitability of the firm It impacts the supply chain costs . It impacts customer experience directly. The right distribution network can achieve a supply chain objective of low cost and high responsiveness A major task of distribution is management of demand Demand management involves anticipating the customer requirements and fulfilling them against defined customer service norms Requirement fulfillment is done through proper distribution network Levels Of Distribution Coverage Mass distribution- Suitable for low priced products with huge consumer demand eg., thumsup, lifebuoy etc. Selective Distribution- Small market size hence selected locations Exclusive Distribution High-end products-small customer size. 2

Transportation Functionality
What is Transportation? It is an activity of movement of people ,goods from one place to another and helps in trade and commerce Transportation serves two purposes ,one is the product movement and the other is the intransit storage The guiding principle for choosing a mode of transportation is the least cost/unit weight or volume moved over a unit distance Modes Of Transportation Road accounts for 39% of the cargo moved Rail around 35% of the cargo moved Inland water Sea Account for the balance Air Road Transportation Some Highlights Approximately 25mn trucks on road The avg. distance travelled by a truck is 250-300kms/day vis a vis 550-600kms.day in developed countries. The avg operating cost of an Indian truck is INR 15/km The national highway carries nearly 40% of the road traffic The national and state highways account for 1.42 and 5.56 percentage respectively of the roads in the country Rail Transportation It is used in the main supply of essential commodities The Indian railways operate through a network of 6,896 rail stations across 62,800 kms. Goods movement is done through 2,53,186 wagons with a total carrying capacity of 10.6million tonnes. 96% of IR cargo consists of bulk items like coal, iron ore , cement, fertilizers , raw materials for steel plants, finished steel products, and petroleum Bulk cargo is transported through this mode cause of the cost advantage over other modes Sea Transport The Shipping industry is divided into Liner service Tramp shipping Types : Cargo ships/freighters can be divided into four groups, according to the type of cargo they carry. 1. General Cargo Vessels- packaged items like chemicals, foods, furniture, machinery, motor vehicles, footwear, garments, etc 2. Tankers- petroleum products or other liquid cargo. 3. Dry-bulk Carriers- coal, grain, ore and other similar products in loose form 4. Multipurpose Vessels - different classes of cargo e.g. liquid and general cargo at the same time. The major sea trade is handled at 11 major sea-ports (95%intl and 85%domestic)

4 Air Transport The most expensive of all the modes of transport Its mainly used for highly perishable items and urgent shipments Air traffic is handled by 8 international airports,87 domestic airports and 28civilian airports(armed forces) Air transport is concentrated around gateway airports such as Mumbai, Chennai, Delhi, Kolkata and Bangalore .These airports handle 87 % of the air-cargo traffic in India Inland Water Transportation It is an eco-friendly transportation mode India has 1,45,000kms of IWT infrastructure comprising of rivers , lakes and channels IWT is an alternative mode of transportation and cargo movement through them in India is at 1% compared to 10-12% in UK, Europe and China It is a good option for hazardous materials Besides lower fuel consumption and construction cost IWT has the advantage of ensuring minimum human loss as opposed to road and rail accidents Pipeline The basic advantages of pipeline is that they reduce operational costs though the initial investment is very high In India it is used for oil transportation by all public and private sector petroleum refineries Currently 27% of the petroleum products ( petrol, kerosene and diesel) are moved by pipelines over a distance of 6,350kms in India The cost of moving oil by rail or road increases every year but with pipeline it is just the opposite Ropeways In India more than 16% of the geographical area is hilly where ropeways is used largely They have the following advantages 1. They cause the least damage to the ecology 2. Inaccessible hilly areas can be reached in short times 3. Other modes of transportation are uneconomical 4. Bulk material can be moved over short distances Mainly used in Sikkim, Meghalaya ,Mizoram ,Himachal Pradesh and Uttar Pradesh Choice of Transportation mode The mode selection depends upon the product characteristics and customer service requirements Raw materials whose unit value is less is transported in bulk through cheaper modes of transport rail;sea High value items are required faster and in small quantities-road ; air The decision lies on three parameters namely Cost-But not at the cost of business Speed- The speed at times is more crucial than the cost of service for better service levels Reliability- this is related to the ability of the carrier to deliver the shipment in good condition within the stipulated delivery timeframe to the customer

Other factors which help in deciding Availability- it depends upon the existing infrastructure and the ability to reach the said locations Capability- the ability to accommodate the cargo in terms of size , weight and quantity for transportation to its destination Frequency- the no of scheduled trips between locations Factors influencing freight cost Volume- with the economies of scale the cost of operations is distributed over large volumes resulting in lower per unit cost of cargo movement Distance-The variable cost is directly proportional to the distance travelled-fuel and maintenance Product Density- has two dimensions of weight and volume and the limitations of the carrier plays a role Product shape - mainly referred to as ODCs plays a role in the cost of transportation Product Type- The nature of the product decides the special conditions of transport like temperature controlled vans .May need special containers like tankers or vans specifically designed against theft Market Dynamics- Rates are fixed by agents and not truck owners , supply demand ratio in a particular structure, odd and difficult routes Calculation for transportation The weight of the package is considered as actual weight or volumetric weight whichever is higher Volumetric Weight in kilograms= Width x Length x Height in centimeters / 6000 For Sea-freight shipments the measure is in cubic metres(CBM) CBM Calculation Formula : Length (centimeter) x Width (centimeter) x Height (centimeter) / 1,000,000 For Air- freight the measure is in kilograms(KGS)

It is a support function and largely helps in adding value to the products apart from the storage Kitting Sorting & Sequencing Labeling Packaging Transportation Consolidation Product Modification Warehouse Options For acquiring space , the following are the three options Private Warehouse-refers to the facility under the firm owning the products. 1. Ideal when product needs specific handling 2. Volumes handled are high and hence justified 3. A high degree of control over operations is required Public Warehouse- For general cargo and provides market penetration but poor control over operations -CWC-467 warehouses-111custom bonded 5

6 Contract Warehouse- product specific warehouses or outsourced facility of a service provider Warehouse Site Selection Revolves around two major factors Cost Service The other factors for the site selection are Infrastructure- approach road ; power , manpower availability. Market- customer proximity or closeness to consumption centers for better service levels Access- effects primary transportation costs Primary transportation cost- has an impact on the product cost and will influence the frequency of trips Availability- Space availability and cost may lead to move away from metros which adds on transportation Product-Perishabililty , FMCG products Regulations-explosives ; DGR goods the storage site is guided by the govt.regulation Local levies- sales tax and octroi disparities to be considered Warehouse decision model Following factors need to be checked upon Product-the nature of the product will decide the type of storage-temp controlled FDA regulation Characteristics- value density will help decide on the investments to be made. Objectives-volumes will justify private warehouses and for seasonality public or contract storage can be used. Strategic decisions- layout ;material handling systems and storage schemes will depend on financial resources , objectives and payback period Tactical decisions- reduction in order cycle ; efficiency in material handling , packaging to reduce damages, level of CS to be offered Operational decisions- increase operations efficiency and reduce operating costs No of warehouses- financial and managerial skills to manage product varieties and volumes and market Warehouse Options- will depend on volumes and customization required Warehouse Costing Fixed cost 1. Rent 2. Capital costs 3. Salary wages of employees 4. Utilities Variable costs 1. Repair and maintenance 2. Material handling cost 3. Transportation 4. Packaging In general the ratio of the fixed cost varies from 25-45% of the total cost of the warehousing operation. Inventory carrying cost is not included in the warehouse cost

Virtual warehousing Used by very large organizations operating in global markets with the help of IT systems Success depends upon the availability of Efficient transportation system Speedy communication and computing systems Networking facilities A real time tracking system Inventory software management Performance parameters Stock Turnover ratio-ratio of sales volume to the value of the stocks held in the warehouse ,the more the turnout better is the efficiency Warehouse cost to sales ratio-the higher the volume the lower the fixed cost of operations Warehouse cost per unit handled It is the total warehouse cost divided by the no of pallets or boxes Occupancy rate of warehouse space-it is the actual space used as a % of the total available space Warehousing in India The types of arrangements one normally sees Captive warehouses located in the manufacturing area Network of distribution warehouses at different locations by hiring space form private warehouses Network of stock points by hiring space from CWC or SWC Using godowns available with stockists /distributors /dealers at major market centers Warehouses in India do not operate on economies of scale . High rise, multistory and fully automated warehouses are very rare in India Cold chain infrastructure The available storage capacity in India is 6-7 % of the of the fruits and vegetable produce. Some issues High capital cost in setting up the facility Low returns with a longer payback period High Operating cost due to high power tariff High import and excise duties on cold storage equipment Warehouse Layout Design The following factors are to be taken into consideration Make the best use of the available space Use a unitised load system suitable for storage Minimize goods movement by proper storage area allocations Provide flexibility for changing future needs Provide safe , secure and clean working conditions The location of the stock directly effects the total material handling costs and space utilisation The following steps needs to be considered. Define the location for receiving and shipping functions Allocate separate area for slow, medium and fast moving 7

8 Define the locations of fixed obstacles like columns; staircases; washrooms etc. Leave minimum path for movement of people, material and handling equipments Space for material handling equipment and packing material

The following parameters need to be considered Item Turnover-minimum handling cost to throughput ratio Space utilization-space utilized to open space must be in the range of 70:30 to 70:25 Product Configuration-care to be taken for large items Product Characteristics-Shelf life of a product Good Housekeeping- directly effects productivity Safety and security-The layout should ensure safety of people , products and equipment during product storage Effective warehousing Points to be considered Maximum utilization of storage space Higher labour productivity Maximum asset utilization Reduction in material handling Reduction in operating cost Increased inventory turnover Reduced order filling time Warehousing functions Material Storage :the same has to be carefully planned considering variables like product categories ,product mix, product characteristics, expiry dates etc. Consolidation : this ensures cost saving on freight Break Bulk : its normally a trans shipment point where bulk orders are broken into small shipments as per order Cross Docking: here the larger shipments from multiple suppliers are broken into small shipments and consolidate again for mix bag. Mixing: small shipments are assembled to make the final product Postponement: Parts and components are kept on hold and final assembly is on hold till the order Packing: Packing-repacking is done as per the order received at the warehouse; additionally labeling is done Information handling function Need for a proper WMS for managing inventory. Goods Inwards Goods Outwards Stock outs Excess stocks Invoicing Warehouse expenses Transit damage and breakage Consignment Tracking Inspection and auditing needs to be done on an ongoing basis and recorded for review

Logistics Management
Logistics management while coordinating and optimizing all the logistics activities also integrates logistics with various functions like sales, marketing, manufacturing, IT and finance . It helps in design and administration of system to control the flow of materials, work in progress and finished inventory for profitable business Objectives of Logistics Management Inventory reduction Reliable Delivery Performance Freight Economy Minimum product damages Quick response Logistics Management-Challenges The logistics process is becoming more demanding and complex because of the change in the business environment in which it has to operate Escalating customer demand Cycle time reduction Globalization Restructuring Supply chain partnerships Environment awareness Productivity pressures Outsourcing It is a strategic approach with the following benefits; Helps focusing on core competencies Reduces infrastructure costs Helps reduce logistics costs drastically Better order cycle time. Wider geographical coverage Logistics Outsourcing To Wholesaler 2PL Integrator- 3PL Consultants -4PL 3PL or third party service provider External to the company and provide one or more of the entire logistic service portfolio. However there is an increased demand for Integrated logistics service provider in todays world Reasons for hiring 3pl services Reduction in risk and liability Value added service to the customers Source of process improvement Wider market coverage 9

10 4PL - Fourth party logistics service provider 4pl assembles and manages the resources, capabilities, and technologies of its own organization with those of complementary service providers to deliver a comprehensive supply chain solution Advantages of hiring 4pl services They cover the entire supply chain . Collaborative approach on a resource sharing basis. The integrators alliance are led by IT based and not asset based service providers The arrangement is flexible. Steps to be followed in selection of a service provider Define logistics problem High logistics cost Longer order cycle time Increased customer complaints Reverse logistics Route selection Logistics integration Identify the problem area Transportation Warehousing Packing Inventory Material Handling Storage Establish objectives Cost reduction Performance cycle compression Customer complaints reduction JIT delivery Freight Optimisation Route selection Inventory carrying cost Search for Service provider and solicit proposals Proposal evaluation and Selection Credentials Logistics infrastructure Experience and customer base Technology base Cost of service Reliability Government liaison Formation of partnership based on. Switching costs Existing Channel Integration Degree of control Legal aspects



E-Commerce Logistics-An emerging trend

It means commercial transactions through the electronic media It involves using network and communication technology for all internal and external activities in the value delivery chain of a business process Products and service are displayed in digital form on company websites Types Business to Business (B2B) commerce- Business transactions between two organizations Business to Customer (B2C) commerce- Interaction between organization and the customer directly The main enablers of e-commerce are Internet and EDI technologies making the world a global village in the true sense Logistics The back bone of e-commerce-Facilitates and executes physical flow of goods There are basically two modes of delivery Direct to the customer through LSP Through the dealer nearest to the customer locations Manual operations have no scope in e-commerce logistics operations. E-commerce Logistics Solutions They use the following design considerations Online facility for organising and tracking shipment Online order status and documentation Online despatch documentation and service Auto reminder for payments Seamless interface with existing CRM or ERP system Online alert for critical information through sms/e-mail MIS reports on past data analysis ,delivery history etc E Logistics Structure and Operations Order Processing: Helps select more than one product; offer credit facility/part payment/online or daily processing Inventory Management: Online monitoring and delays to be communicated to the customer Order Execution: Order to be executed passed onto the vendor with details electronically and assigned to a LSP Shipping: Choice of carrier is online along with despatch schedule Tracking and Tracing : Status available on the website Payments: Through Credit/Debit cards . The system generates online invoices/delivery notes/credit terms. Transaction security: Electronic fraud check systems and control applications in place Order postponement, cancellation, substitutions: Incase the inventory is not available the customer needs to be informed and offered substitutes/postponement Reverse material flow: In the event of dissatisfaction the product return policy needs to be in place and executed by the LSP of the vendor



Logistics Resource Management It is a new IT tool providing a software for automating, planning, managing and optimizing ecommerce logistics activities. It provides information on the following: Cross Border regulatory compliance Total landed costs(including,taxes,duties,levies) Alert notification in exceptional situations Track goods movement Support carrier selection and negotiation Provide route and lane optimisation E-business and the distribution network Response time physical products longer , e-products like music or forms shorter Product variety- larger than a brick and mortar store Product Availability- is very high..demand can be forecasted Customer experience- easy access , no business hours Faster time to market-Immediate availability Order visibility- Very high-IT plays a very big role Direct Selling-less of channels give cost advantage Flexibility in pricing,product portfolio and promotions

Global Logistics
The need for Global logistics arises from.. With advancements in information and communication the world has become a global village. For global trade cargo needs to be moved physically across national boundaries. Three focus areas of Global Logistics are: 1. Domain knowledge 2. Connectivity with international cargo carriers 3. Documentation Transportation In Global Logistics mainly Air or Sea mode is used In the Indian subcontinent across India,Nepal,Bhutan and Bangladesh road transportation can be used Within Europe Rail network is used largely cause of the availability of an efficient train network For mode selection the following is considered 1. Location of Market 2. Cost of transportation 3. Speed 4. Reliability of mode used Insurance In domestic movement carriers take responsibility In sea cargo carriers do not take the responsibility and the shipper goes in for marine insurance which are of two types 1. Open blanket coverage 2. Special coverage (one time)-relatively expensive


13 The shipper has to specify the kind of protection General Average Shared by all the parties Particular Average-Specific Insurance cover 1. Fire and sea peril- cause of unusual forces of nature 2. Free Of damage insurance- covers the total actual loss of cargo 3. Named perils includes fire and sea perils plus additional as named 4. Fire and sea perils with averages - not necessary that the vessel is stranded , sunk , damaged by fire or collides 5. All risk insurance-The most comprehensive insurance Air shipments also needs to insured but is not as comprehensive as marine insurance Packaging Logistical packaging needs to withstand varying storage , transit and handling conditions It has to comply with the shipping regulations of the countries of origin and destination The following needs to be taken care of 1. Weight-the weight of the packaging adds to the gross weight of the shipment and hence over design to be avoided 2. Should be able to take care of all types of material handling and hence unitization like palletization is recommended with shrink wrap 3. Pilferage and theft-codes should be used to mark the contents 4. Containerization - provides extra safety to the products but the right container should be used for the kind of cargo Intermediaries -They are two types Freight forwarders who help in 1. Traffic Operations - Choosing the right mode and carrier 2. Initiate or organise the documentation from the shipper 3. Custom clearance of the cargo as per regulations at the port of origin 4. Customs clearance and documentation at the port of arrival 5. Cargo movement and handling at the port of entry and destination They charge on the following Freight cost /Port charges/Cost of documentation They help the shipper in reserving space on an airline/shipping vessel Custom house brokers-They basically assist in documentation, movement of cargo to Custom bonded warehouses , inspection and clearance Documentation Either in paper form or in digital form using EDI it is necessary for control on movements of goods and currency flow in and out of the country 1. Export license - permit allowing the goods to be exported 2. Commercial Invoice-it details the goods , prices, duties , taxes etc 3. Certificate of origin- declaration prepared by the exporter to identify 4. Inspection certificate-issued by an inspection agency appointed by the govt stating the goods are in good condition prior to export 5. Insurance certificate-document issued to provide insurance 6. Packing list- lists the no of pieces , contents, weight and measurement of each item in the consignment 7. Dock receipt-proof of delivery received at the dock or warehouse 8. Airway bill- for receipt of goods made by the air-carrier 9. Bill of lading- for receipt of goods meant for sea transportation. 13


Introduction to SCM
Logistics v/s Supply Chain Management . SCM Definition A Sequence of events and processes that take a product from DIRT TO DIRT Ultimate Supplier Ultimate Source Plan , Source, Make, Deliver and Return Integrates supply and demand management within and across companies Five major trends that make SCM critical Increased variety Shorter Product Life Cycles Higher level of outsourcing Globalization Changed Power equations in chain Components of SCM Plan Strategy for managing all resources that go towards meeting customer demand for a product or service Source Choosing suppliers that will deliver the product or services Setting pricing, delivery and payment processes and matrix for monitoring the performance Make Making schedule for production, testing, packaging and preparation for delivery and setting matrix for monitoring and control Deliver Coordination of receipt of order from customers, developing a network of warehouses, carriers to get the product to the customers, invoicing and getting payments from the customers. Return / Reverse Flow Setting up mechanism for getting defectives and surplus products from customers. May also involve collecting products at end of the life cycle, recycling, packaging Historical evolution of the Supply Chain Product Variety: Single variety Wide variety Customization Chain Ownership: Vertically Integrated firms Long term partnerships with chain partners Long term partnerships with loosely held networks Supply Chain Performance in INDIA SCM Challenges for the FMCG sector Poor Infrastructure Complex taxation Structure Complex Distribution Structure Smaller pack sizes Dealing with counterfeit goods Emergence of modern retail chains 14

15 Decisions in a Supply Chain Design decisions Activities to be carried within and what to be outsourced Process of selecting entities/partners to perform outsourced activities The nature of these relationships transactional or long-term Capacity and location of various facilities Operations decisions Involves tactical decisions which have a horizon of 3months -1year Operations decisions which have a horizon of 1day -1 month Demand Forecasting Procurement Manufacturing Inventory Management Transportation Management Customer Order Processing Distribution Relationship management with partners in the chain

Supply chain strategy and performance measures

Customer Service and Cost Trade offs As a business strategy the firm decides the market segment in which it wants to operate and the level of customer service it wants to offer. The supply chain strategy includes issues of cost that the firm has to incur to provide targeted level of customer service. A firm has to focus on the efficiency frontier which represents the best attainable compromise between cost and service. Customer service Supply Chain Order delivery lead time Responsiveness Delivery reliability Product Variety Product Availability Returnability Push-Pull Boundary of the Supply Chain Processes prior to the customer order point are Push based processes based on forecasting. Processes after the customer order point are Pull based processes which do not have any uncertainty since they are against customer orders Three types of supply chain Make To Stock In MTS Supply chain the push pull boundary is at the end of the chain and all processes are managed with the push approach Make To Order In MTO supply chains all processes are managed using the pull approach and the push pull boundary is located at the beginning of the chain Configure To Order In CTO supply chains the push pull boundary is usually positioned after component manufacturing


16 Supply Chain Performance Measures The Supply Chain Council has developed the SCOR model (Supply Chain Operations Reference ) as the industry standard to measure the impact of supply chain performance on business performance As per the SCOR model the measures fall under the following broad categories Cost Assets Reliability Flexibility

Managing material flow in supply chains

Inventory It is the second largest item after fixed assets in the balance sheet of a manufacturing company. It makes business sense to hold on to the inventory only when the benefits of holding the inventory exceeds the cost of holding it Inventory needs to be managed to better cash flow and inventory reduction leads to increase in profits and better ROI In todays world Material Requirement Planning( MRP), Distribution requirement planning(DRP) or JIT systems are preferred to maximize return on inventory Inventory Management It is a strategic logistic function aimed at achieving low cost and higher level of customer service. Inventories are held in the following categories Raw material and components-Procurement side Work in Progress- manufacturing Finished Goods- at source and distribution centres Maintenance ,repairs and operating supplies Pipeline or in transit inventory Poor Inventory management is a result of inaccurate forecasts and excess production Finished Goods Inventory Three types Non-excise paid goods at the plant warehouse Inventory in transit Channel inventory The nature of inventory risk varies within the channel 1. Manufacturer-has very high risk-has high volumes 2. Distributor-Risk factor is restricted to non moving items 3. Retailer-Very low risk since doesnt stock for long Inventory Functionality Balancing supply and demand The products are manufactured in advance in anticipation of demand and kept in stock for supply Periodic variation For seasonal products the raw material needs to be stored for the rest of the year Scale economics Products are manufactured in dedicated factories to drive economies of scale and stocked for distribution to consumption centers as per demand 16


Reasons for carrying inventory Meeting production requirements- Raw materials ,components and parts for finished goods. Even in JIT ,inventory is managed for contingencies Supporting operational requirements Inventories are required for repairs ,maintenance and operational support Customer service considerations Replacement of spares for trouble free operations, for managing after sales service Hedging against future expectations To take care of increasing prices or material shortages Inventory related costs Inventory Costs funds blocked for inventory Carrying Costs-interest charges on working capital Ordering Costs-Cost of paperwork, communication etc Warehousing Costs-The cost related to holding the product during storage Damage, pilferage and obsolescence costs The material stored carries the risk of damage/pilferage Exchange rate differentials-incase of imported inventories The Bullwhip Effect It is the phenomenon of variability in customer demand not conveyed properly Because customer demand is rarely perfectly stable, businesses must forecast demand to properly position inventory and other resources. Forecasts are based on statistics, and they are rarely perfectly accurate. Because forecast errors are a given, companies often carry an inventory buffer called safety stock". Bullwhip Effect is a problem in forecast-driven supply chains. One way to control is to establish a demand-driven supply chain which reacts to actual customer orders. Methods intended to reduce uncertainty, variability, and lead time: Vendor Managed Inventory(VMI) Just In Time replenishment (JIT) Strategic Partnerships Eg: Wal-Mart stores transmit point of sale(POS) data from the cash register back to corporate headquarters several times a day. Inventory Control Techniques ABC Analysis Items are classified as per the usage value A-Costs 60-70% of the inventory cost-10% of the items B-Costs 20-30% of the inventory cost- 20% of the items C-Costs less than 10% of the inventory cost-70% of the items This helps is financial evaluation for ranking and comparison of inventories Hence an A class item will need more attention than a B class followed by C class VED Analysis Related to Vital, Essential and Desirable inventories Basically deals with the criticality of the item In addition there is an ABC-VED analysis which considers both value and criticality of the item High value and critical items are continuously reviewed and ordered in low quantities while low value and least critical items are periodically reviewed and ordered in large quantities 17


SAP Analysis Scarce ,Available and Plenty analysis The ordered quantity is governed by the scarcity factor The limitations in supply or obsolescence in the near future helps make a procurement decision FSN Analysis Fast ,Slow or Normal Analysis Determines the consumption pattern of each item Inventory Planning Models Economic Order Quantity (EOQ) It is based on the following assumptions Demand is known and is constant There is no lead time for resupply The cost of ordering per unit is same irrespective of volume It considers two opposing costs Reducing the inventory reduces carrying costs Smaller lot sizes will increase the cost of ordering EOQ = 2DS/HC Q=order quantity in units; S=Cost of placing an order D=avg. in annual consumption in units; H=% of inventory cost C=cost per unit Total Ordering cost = (Demand/ EOQ amount) x cost per order Inventory carrying cost = (EOQ amount/2) x (Unit price x Carrying cost %) Avg Inventory=(Maximum Inventory-Minimum Inventory)/2 Order Quantity=Difference between High Inventory and Low inventory levels Re-Order Point The minimum inventory level at which one needs to place an order-also considers the performance cycle Lets see the formula for reorder point now Basic reorder formula if demand and performance are certain R=D X T R = Reorder point in units;D = Average daily demand in units T = Average performance cycle length in days If safety stock is needed to accommodate uncertainty the formula is R=D X T+SS R = Reorder point in units;D = Average daily demand in units T = Average performance cycle length in days SS = Safety stock in units Inventory Planning Models Material Requirement Planning It is done in inbound material movement based on production requirement and scheduling It is suitable for both Push type of supply chain - Elaborate MRP rolled back to create supplier schedule with inventories types, quantities and delivery dates Pull type of supply chain-Based on actual demand which is transmitted quickly in the supply chain for faster production and distribution 18


Distribution Requirement Planning Uses the latest IT tolls to control inventory in the distribution system It allocates inventory from the mother warehouse based on Demand pattern; Safety Stock Provision; Order quantity; reorder point; average performance cycle length The major benefits of using DRP are Improvements in Customer Service level Effective marketing efforts for high stock items Decrease in inventory levels resulting in reduction in carrying cost/warehouse space/transportation costs Just In Time(JIT) The activity should not take place unless there is a need for it Prerequisites for JIT Buyer-seller partnership Online communication and information sharing Commitment to zero defects from both sides Frequent and small lot size shipments The main barrier to the successful operation of the JIT system are Organization Structure Organization culture Technology differentials at the buyer and supplier ends Reluctance in information sharing Kanban It is an information system to support JIT inventory in manufacturing operations. It means signboard or label and is used for communication in the inventory system A kanban is attached to each box containing a fixed no of parts as they go to the assembly line It is used in the process logistics for the movement of parts and components on the shop floor The philosophy behind Kanban is use one by one Inventory policy Guidelines Basically depends on placing inventory in Centralized better control Decentralized increases operating cost but improves service levels . Service levels are defined as follows Order cycle time Case fill rate Order fill rate



SCM Applications-Network Design and Operations

Network Design & Operations The most imp issue is to allocation of volume to plants and plants to markets Supply chain is a network of nodes and linkages Nodes represent conversion points or storage points or demand points Linkages represent transportation activities through which material flow happens Network design focuses on the location of nodes for plants and storage points for given customer nodes and network operations focus on identifying the optimal linkages between plants and markets. Unlike other decisions a network design decision is strategic in nature and has long term implications which are not easy to reverse Strategic Role of Units in the Network Offshore Plant To take advantage of the low cost of material or labour in the region Sever Facility Objective is to supply products/services to specific national or regional markets Outpost Plant This allows a firm to access tacit knowledge, which is generally an advanced cluster in any specific industry Source Plant The main reason is for low cost production.It might start of as an offshore facility but with technical and managerial capability might be upgraded to being a source plant Contributor Plant A server plant over a period of time when it attains responsibility of processes engineering and supplier development becomes a contributor plant Lead Facility Creates new processes, products and technologies for the entire network. It becomes a hub performing critical value added activities. Supply Chain Mapping The method used to capture the current supply chain processes is called supply chain mapping Existing supply chain processes can be classified on the following dimensions: Value Addition Curve At every stage in the activities/processes associated with the conversion of raw-material stage to the end the FG value gets added to the product Point of Differentiation It is a point where the product gets identified as a specific variant of the end product. It is the point where the process makes an irreversible decision Customer Entry point in the supply chain The point at which customer places an order is the customer entry point All the orders done before the CEP is based on forecast which lacks accuracy



Information Technology in SCM

IT plays the following functional roles in an SCM 1. It supports frictionless transactions by mapping orders, manufacturing , inventory, procurement, transportation and WMS. 2. It helps in collaboration by focusing on cooperation from partners and customers via the internet. 3. IT based decision support systems(DSS) helps aid better decision making through supply chain planning. 4. It helps companies to measure their SCM performance through BI(Business Intelligence)analysis and reports IT in Supply Chain Transaction Execution ERP provides capabilities to organizations to enable tracking of information across business functions through a single comprehensive database. The database collects data and feeds data into modular applications supporting virtually all business functions. When new information is entered in once place related information is automatically generated Application modules map of enterprise systems In addition to ERP the following are some of the supply chain execution systems Procurement Applications- enable supplier discovery process , purchase order process and keep track of parts , specifications , prices and supplier performance Inventory management systems - it controls the day to day activities of material management operations dealing with stocks ; goods receipt , goods inspection , goods issue etc Manufacturing execution systems- keep track of manufacturing data such as capacity yield , work in process and machine status Transportation execution systems- assist in the task of monitoring the effectiveness of vehicle fleet . information regarding vehicle activities(miles travelled , tons carried, idle time ,fuel used etc is collected Warehouse management systems- receipt of goods , storage locations , picking list, order packing, issuance etc. Order track and trace- to help fast , smooth and accurate information about order status Point of Sale Tracking System (POS)-it provides instant record of transactions enabling replenishment of goods in real time.

Supply Chain Restructuring Supply Chain Process Restructuring

Postpone the point of differentiation By moving the POD a bulk of the activities can be carried out using the aggregate level forecast than the variant level Alter the shape of the value added curve Shift the value addition as late as possible by which one will be in a better position to respond to unforeseen changes with the least cost. Advance the customer order point 21

22 Move from a MTS to a CTO supply chain , since the point of differentiation takes place after the customer order one does not have to prepare a variant level forecast Postponement Strategy Advantageous in the following situations High level of product customization Existence of modularity in the product design High uncertainty in demand Long transport lead time Short lead time for postponed operation High value addition in postponed operation Different tariffs for components and finished goods in different markets Only disadvantages at time could be loss in scale of economies of operations and loss of control of the postponed operations Restructuring the SCM architecture There are two different ways in which architecture gets restructured Restructure flow in the chain Differential material flow for different variety of goods Restructure placement of Inventory A supply chain consists of processes and inventory nodes. Process could be either conversion or transportation process and has a set time and cost Where to place the inventory is a strategic decision

Outsourcing-Make v/s Buy

Primary Activities Inbound Logistics ; Operations;;Outbound Logistics ; Sales and Service Secondary Activities Procurement ,IT , HR management and firm infrastructure management Each of these activities must be evaluated before deciding on outsourcing IDENTIFY CORE PROCESSES-here invest in people , equipments and R & D The best way to identify a firms core process are the business process route and the product architecture route The Business Process Route 1. Customer Relationship - new + existing 2. Product Innovation new products and services 3. Supply Chain Management Order Fulfillment HP and High end pharma - focus on Innovations Nike and Benetton- focus on CR and brand building Wal-mart and Dell focus on SCM Another option is to look within an activity and outsource The Product Architectural Route 1. The focus is on sub-systems and components 2. By keeping the strategic sub-systems internal the firm can offer differentiated products and can avoid commoditization 22

23 3. Even one outsources a strategic sub-system one should retain the knowledge of its architecture in-house 4. It is very imp to have a knowhow of the impact of internal and external environments on market demands and supply risks

Economies of scale through outsourcing Can be achieved in Manufacturing or Logistics Activities Higher Volume Spreading fixed costs over large volume of operations Higher volume helps in choosing efficient technologies Pooling of Buffer capacities and inventories Learning Curve effect Alternatively if a firm has huge volumes it might internalize Eg - Walmart has enough volumes to own a fleet of trucks All automobile manufacturers assemble vehicles internally Other Elements Agency Cost- Internal cost of control and co-ordination of internal supply Transaction Cost 1. Search and Information Costs 2. Bargaining and contracting costs 3. Policing and enforcement costs 4. Cost incurred because of loss of control Incomplete Contracts Relation- specific assets Leakage Of Strategic Information Poor Co-ordination Linking Supply Chain & Business Performance Cost Reduction Reducing Inventory; reducing logistics expenses; reducing direct material expenses, reducing indirect material expenses Improving revenue and profitability Selling higher margin products ; achieving higher market share ; reducing lost sales; attacking new markets; decreasing supply time to market Improving Operational efficiency Reducing procurement expenses; increasing assets utilization ; delaying capital expenditure Reducing working capital Reducing Inventory, reducing accounts receivables