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DEFINITION OF LOGISTICS
According to the Council of Logistics Management (CLM) Logistics is the process of planning,
implementing and controlling the efficient and effective flow of goods, services and related
information from point of origin to point of consumption in order to meet customer
requirements.
1. Rapid Response: Rapid response is concerned with a firms ability to satisfy customers
requirement in a timely manner. Instead of stocking the goods and supplying on demand,
orders are executed on shipment-to-shipment basis. Here IT helps to postpone the
logistical operations to the latest possible time and then execute rapid delivery as when
needed by customer.
2. Minimum Variance: Variance is any unexpected event that disrupts system. Logistical
operations are disrupted by events like delays in order receipt, disruption in
manufacturing, goods damaged at customers location and delivery to an incorrect
location etc. Traditional solution to deal with variance was to keep safety stock or use
high cost transportation. Such practices were expensive and risky and thus have been
replaced by information technology to achieve positive logistics control.
6. Life-Cycle Support: Life cycle support is also called cradle-to-cradle logistical support.
It means going beyond reverse logistics and recycling to include the possibility of after
sale services, product recalls and product disposal. This means that firms must consider
how to make a product and its package (cradle) and the how to remake and reuse them (to
cradle). E.g. Cold drink industries use their glass bottle again and again whereas the cans
are reused in making pf paper dishes.
TYPES OF LOGISTICS
1. Reverse Logistics
Reverse logistics is also known as Product Recall. It may be defined as a process of moving
goods from their place of use, back to their place of manufacture for re-processing, refilling,
repair, and recycling or waste disposal.
1. Rigid quality standards- it is critical in case of contaminated products, which can cause
environmental hazard.
5. Product expiration.
The success of reverse logistics depends upon the efficiency of following subsystems:
1. Product Location: For product recall it is necessary to identify the product location in the
physical distribution system of the firm. It is difficult in case of consumer goods but
easier in case of industrial goods.
2. Product Collection System: After the product location is identified, product collection is
to be done through companys field force or third party.
3. Recycling / Disposal Centers: This may be companys plant, warehouse or any other
location. Called back products must be inspected before recycling or disposal etc.
4. Documentation System: Proper documents should be maintained at each level, this would
help in tracing the product location.
2. Inbound Logistics
All the activities related to the material movement till the dispatch of the products out of
the factory gate are called as inbound logistics activities.
Creation of value in the products depends upon availability of inputs on time. Making
available these inputs on time at minimum cost is the essence of Inbound Logistics.
3. Outbound Logistics
All the activities in which the value added goods are to be made available in the market
for customers are called as outbound logistics activities.
Success of the firm depends upon the supply of products to the customer on time.
Supplying the products of firm at marketplace at minimum cost is the essence of
Outbound Logistics.
Activities of distribution performance cycle come under the scope of Outbound Logistics.
They are order management, transportation, warehousing, packaging, handling etc.
In order to keep the costs of inbound and outbound logistics activities under control, an outside
agency appointed to perform these logistics functions is called Third Party Logistics.
2. Manufacturing of products.
Logistics functions are same domestically and globally but differ in four Ds i.e. distance,
documents, diversity in culture and demand of customer. In the global logistics distances are
longer, documentation is more extensive, and customer demand varies to satisfy cultural
differences within both, countries and regions. Developing strategies to respond to the 4 D
environment is the global challenge for logistics management.
There are some factors that facilitate globalization and necessitate global logistics and also some
barriers that continue to impede global logistics. Logistics management must balance the cost of
overcoming these barriers with the potential benefits of going global.
1. Economic Growth: After WWII there was a growth in industrial sector of developed
countries and their manufacturing and logistics productivity increased. This forces the
firm to expand their marketing into developing nations. Such expansion requires the
integration of global manufacturing with marketing through logistics.
3. Financial Barriers: This includes (i) difficulties in forecasting in the global environment
(ii) institutional infrastructure barriers result from differences in services offered by
banks, insurance firms, legal counselors etc.
MRP 1
Structure of MRP1
1. Master Schedule This is made up from sales forecast by marketing department and the
actual orders already received by the company. It indicates which product is required to
be delivered to the customer and when.
- The MRP software processes the data and releases the output for ready use of the management
in the following way:
1. For purchase components it releases Purchase Request, Purchase Order etc in the form of
soft copy
1. All the documents like purchase order, production order get ready as per required time.
2. All information is ready on the screen at any time, which is duly updated.
3. Making changes manually in Master Schedule is difficult task; this is done by MRP easily
and accurately.
4. It prepares the reports related to inventory status, production outputs, latest sales figures.
5. MRP calculates and maintains an optimum-manufacturing plan, which will reduce cash
flow and increase profitability.
Closed-Loop MRP: When MRP extended to include feedback from vendors and production
operations it is called Closed-loop MRP
DRP
Distribution Resource Planning is concerned with the distribution of material, warehouses, and
transport arrangements. It is logically evolved from MRP and hence it is more recent concept.
DRP needs demand forecasts for each warehouse and their current inventory level. MRP is
concerned with inbound logistics whereas DRP is concerned with outbound logistics activities.
Benefits of DRP
1. Reduce distribution center freight costs resulting from coordinated shipments.
MRP DRP
Guided by production schedules Guided by customer demand
Under control of the firm Not under control of the firm
Operates in dependant demand situation Operates in independent demand situation
Coordinates scheduling and integration of Coordinates demand between outlets and supply
materials into finished goods sources
Controls inventory until manufacturing and Controls inventory after manufacturing and
assembly is complete. assembly of finished goods
Why has logistics recently been receiving more attention as a strategic function of the
organization? (May 2006) [61 of reference book]
A] Availability
Availability is the capacity to have inventory when it is desired by a customer. The most common
practice to achieve availability is to stock inventory in anticipation of customer order.
Availability is based on following three performance measures:
1. 1. Stock out Frequency: Stock out frequency is a measure of how many times demands
for a product exceed its availability. The aggregation of stock outs of all products
indicates how well a firm is able to provide basic service commitments.
2. 2. *Fill Rate: Fill rate measures the magnitude of stock outs over time. E.g. if a customer
orders 50 units and only 47 units are available, the order fill rate is 94 % (47/50). Just
because a product is out of stock does not mean that a customer requirement is going
unsatisfied. Before a stock out affects service performance it is necessary to forecast
customer requirements then to identify the product unavailability and to determine how
many units customer wanted. Stock out frequency and fill rate are inversely related
through order quantity. i.e. if a firm places larger order the stock out frequency will be
less and the expected fill rate will be higher.
3. 3. Orders Shipped Complete: It is a measure of time when a firm received the entire
inventory ordered by a customer. It indicates the potential times that customers will
receive perfect orders.
B] Operational Performance
1. Operational Speed: Performance speed is the interval between placement of order and
shipment arrival. Depending upon the logistical system design, the speed can be as short
as a few hours or as long as several weeks. In critical situation service can be performed
in a few hours by special delivery or on overnight basis. But every customer does not
need maximum speed if it results in increase in logistics cost.
- Product modification
- Product introduction
- Product phase-out
- Product recall
- Disruption in supply
C] Reliability
Reliability refers to logistics quality i.e. ability of firm to comply with levels of planned
inventory availability and operational performance. Reliability also includes firms capability to
provide accurate customer information regarding logistical operations and order status.
CUSTOMER RETENTION
Once a customer is own by a company, it must be retained such that customer keep coming again
and again. This depends on the Customer Service. For that the company has to motivate
employees and to reinforce the service concepts with top management.
Advantage:
4. If a regular customer were lost, then it would cost very heavily to generate new customer.
Methods:
5. Educate the customer about the market and value of the business
INTRODUCTION
Transportation is an essential and major sub function of logistics that creates time and place
utility in goods. Transportation management covers the area of Shipment Scheduling / Routing,
Frei1ht Cost, Carrier Selection, Shipment Tracking and Parcel Management. It helps us to make
the best use of available resources and keeps informed on all transportation process.
COST STRUCTURE
1. Fixed Cost
Fixed cost is the expenses related to the procedural part like cost of documents, salaries of
personnel, rent of the office etc. As per the product needs and the environments, loading and
unloading charges are included in fixed cost.
1. Variable Cost
Among all logistic factors variable cost consumes main expenses. It concentrates on the product
related and market related aspects:
- Size / Shape Transportation cost per unit weight decreases with the size of the consignment.
- Space filling capacity e.g. space-filling capacity of iron flat is more than that of chairs or
tables.
- Difficulties in handling e.g. product like electronic items like TV are difficult to handle since
they are easily get damaged.
- Distance to be traveled to customer The cost decreases with increase in the distance.
- Intra-mode / Inter-mode
- Freight Traffic
- Season Effect
FUNCTIONS OF TRANSPORTATION
1. Cost: It includes freight charges, warehousing, buffer stick, broker fees, custom charges
octroy etc. Generally cost per mile is considered which is should be economical.
2. Transit Time: It is the time from the shipment of goods to the receipt of goods at the
destination. It should be as less as possible.
3. Speed: Methods of working for the delivery of goods to the customers place should
ensure the on time delivery.
4. Safety: Safety of goods at every level from start to the end of delivery should be ensured.
Proper packaging should be done to avoid any damage to quality or quantity of goods.
5. Claims Record: Claims against damages, pilferage or theft of goods should be available.
Though the supplier gets money back but the customer remains unsatisfied in such cases.
6. Responsiveness: Transporter has to respond the changing needs of the supplier and he
should be able to handle various products.
7. Capability: Transporter should be in a position to deliver the goods at any remote areas.
He should have large number of geographic service points.
MODES OF TRANSPORTATION
1. Airlines
Air transport is mainly used for international transport and in emergency rather than in normal
times.
Advantages:
4. It overcomes the hassle and cost of setting up depots and service centers overseas.
6. Makes test marketing easy Products can be shipped directly from the factory
Disadvantages:
2. Water Transport
This mode of transportation is the link between countries separated by water. Water transport is
classified into deep-water transportation and inland water transportation on lakes, rivers or
canals.
Advantages:
1. Water transport has low capital costs and low operating costs.
2. Heavy and bulk goods of large quantities are transported by this mode.
Disadvantages:
5. Shallow water vessels like diesel-towed barges are flexible but are limited by their range
of operations and speed.
3. Railways
Advantages:
Disadvantages:
1. Unreliable mode especially for high value goods and directly usable consumer goods.
4. Rail network needs a high capital investment due to right of way, switching yards, and
terminals.
4. Roadways
Advantages:
Disadvantages:
1. Higher operating costs due to fuel requirement and higher labor requirement.
2. Occasional fuel shortages leads to delay in delivery.
3. Strikes of carriers due to disputes with government making the transportation idle.
6. Restrictive permits for licenses imposed by the government all over the country.
Pipeline
Pipeline mode of transportation facilitates the movement of liquids like oils; crude petroleum
products and water etc. In India more than 5,000 km of pipeline exists for crude and petroleum
products. Slurries, gases, vapors and solids in powder form are also transported in pipelines.
Advantages:
1. Pipelines are reliable mode pilferage and loss of product is not possible.
4. Pipelines operate all the time except when it is shut down for maintenance.
Disadvantages
1. Highest fixed costs due to lying of pipeline but lowest operating costs.
INTERMODAL TRANSPORTATION
Intermodal transportation is the use of more than one mode of transport to move a shipment to its
destination. Intermodal movements combine the cost and service advantages of two or more
modes in a single product movement. Benefits of long haul, short time & flexibility are
optimized for achieving overall cost reduction
Depending upon the type and amount of goods, time of delivery, and prices following three
Intermodal combinations are available:
1. Piggyback: It is coordination between railways and road transport. It is also called as
TOFC (Trailer on Flatcar) or COFC (Container on Flatcar). In piggyback the motor
carrier trailer placed on rail flatcar, which moves the trailer by rail for a long distance.
Then the motor carrier moves the trailer for short distance for deliveries. Here the
placement of trailer on a railcar can lead to damages.
2. Fishy back: It is coordination between waterways and road transport. In fishy back the
truck or trailer rides on the ship for small portion of its journey. This service is provided
in coastal waters between Atlantic and Gulf ports.
3. Birdy back: It is coordination between airways and road transport. In birdy back the
major portion of journey is covered by airways then the cargo is transported by trucks or
trailers.
4. Others: Water and railways, air and railways, air and waterways, pipeline and water,
pipeline and roadways etc.
ICDs are dry ports at a distance far away from the shoreline and handle all the import export
formalities. This a large warehouse where exporter books his cargo and completes all export
formalities. Then ICD moves the containers to natural seaport. The customs department, shipping
companies, handling agencies, banks, customs house agents and clearing and forwarding agents
are all based at the ICDs.
Advantages / Uses
1. Connect major ports to hinterland i.e. land deprived of natural deep-water ports because
of geography.
3. Performing activities like weighing, inspection of scales, damages and safety stickers.
5. Increase the export potential of industries in the hinterland and also simplifies import of
goods by hinterland.
3. 3. All Shipping via CDC Suppliers send the supplies to Central Distribution centers
and distribution center caters the needs of retailers.
4. 4. All Shipping via CDC Using Milk Runs Suppliers send the supplies to CDC and
from CDC to large number of suppliers.
5. 5. Tailored Network - Tailor made network as per the company needs. One model for
some logistical mission and another model for some other mission.
Milk Run
Milk Run is a transportation network, in which Suppliers send the supplies to CDC and from
CDC to large number of suppliers. Milk Run reduces out bound transportation costs by
consolidating small shipments.
CROSS DOCKING
Cross Docking is a new logistics technique used in the retail and trucking industries which
means receiving goods at one door and shipping to the other door almost immediately without
putting them into storage.
Advantages / Objectives
TERMINAL DELAYS
Delays which take place at terminals due to documentation problems, congestion, poor unloading
facilities etc. Influence vehicle turnaround time. Adds cost to transportation, as vehicle is
unutilized. E.g. at sea port or airport cargos can get stuck.
Definition of LIS
LIS is an interacting structure of people, equipment and procedures that together make relevant
information available to the logistics manager. LIS is a part of Management Information System.
Objectives of LIS
Importance of LIS
4. Receipt of feedback from external sources (supplier, service providers and customers)
Information Functionality
The organization has different functional levels. Each level has different needs of information.
1. Operating level It is the lowest level. Generally data gets generated here which is
transferred to further level to take decision in the form of information.
2. Control level Here the efforts are to be taken to improve efficiency of the operating
level by analyzing the information.
3. Decision level Here the manager has to evaluate the information to see the operations
and customer needs are equalized
4. Policy level Manager has to decide the policy on the basis of factors warehouse,
transportation system etc.
Benefits of EDI
3. Reduced clerical efforts in data entry, filing, mailing and related tasks.
7. Decreased operating cost by reduction of labor and material cost associated with paper
work and telephone fax expenses.
Mission of logistics management is to plan and coordinate all those activities necessary to
achieve desired levels of service and quality at lowest possible cost.
To match the changing environment in the logistics due to the changes in the markets,
competitors, suppliers and technology, there is a need for a systematic planning.
1. Availability of Land
2. Manufacturing Facility
4. Access to Transport
6. Climate
7. Availability of Workforce
8. Union Activities
9. Political Pressure
DEFINITION OF INVENTORY
Inventory may be defined as usable but idle resource. Inventory management is the job basically
done for maintaining the stock.
NEEDS OF INVENTORY
2. Dealing with uncertainty of demand: The customer demand may increase suddenly, in
such case an inventory of finished goods will act as a buffer against the uncertainties in
demand.
3. Buying or producing in batches: When the demand for a good does not require its
continued production, it is produced in batches. Thus during the period when the good is
not being produced, demands are met from the inventory which is accumulated from the
batch production.
4. To meet seasonal demand: When the demand is seasonal it may become economical to
have inventory during period of low demand to ease the strain of peak period demand.
5. To take quantity discount: Inventories may also be built up take advantage of price
discounts, as hedge against anticipative price rise in the future.
7. Stock built up for Scale of economy: Inventories may also be maintained to get the
economy of scale so that total cost due to ordering, carrying and backlogging are
minimized.
TYPES OF INVENTORY
Average RM
2. Work-in-Process Inventory
Work in Process ITR = Cost of Manufacture
Average WIP
PIPELINE INVENTORY
In any manufacturing organization the material undergoes different stages of processing from the
supplier place to the buyers place. These stages are called pipeline. There is no problem when
material moves from one department to another, but material waiting anywhere is not good.
Indian industries have longer pipeline, as the organization is more sophisticated. Longer the
pipeline, longer the time material waits. The value is added on the material only at stages where
it is being processed, but no value is added where it waits. So it is referred as waste.
Storage of material at any stage, inspection of any kind, packing, rejection, rework and lead-time
etc. are the operations to be eliminated. That is exactly done in the process of JIT. These
activities add to the cost of product and not to the value of the product. The customer is not
willing to pay for these.
1. Period in which the material is under the process on machine. Value addition activity.
2. Total period when material is kept in any form / place in the organization.
LEAD TIME
Lead Time is an interval between placement of order and delivery of material. It is a measure of
logistical performance. Logistic manager should ensure minimum lead-time so that the material
arrived as soon as possible. Local supplier needs the shortest lead time while the out of town
supplier requires much longer lead time. Lead-time also varies from supplier to supplier and
even same supplier will have different lead times for a given item at different times. Variations in
lead are one of the most difficult logistical problems.
ROL is that inventory level at which an order should be placed to replenish the inventory.
ROL = Lead Time x Average Usage
SAFETY STOCK
Safety Stock is a component of average inventory that takes care of short-term fluctuations in
lead-time and consumption.
1. Value of Item: Safety stock for high value items need be low.
2. Criticality of Item: Safety stock for critical items that affect the business need be high.
3. Lead Time: Longer the lead-time more is the chances of fluctuation and hence more is the
requirement of safety stock.
5. Availability of substitutes: Lesser safety stock can be kept for items where substitutes are
easily available.
6. Risk of Deterioration: It is better to have low safety stock where the cost of deterioration
is more than the cost of stock out.
Each item of inventory has its own criteria of importance, thus depending upon the type and
importance of the inventory there will be variations in the controls employed. This is the
selective control of inventories.
1. ABC Analysis
2. VED Analysis
3. FSN Analysis
4. P&Q System
ABC ANALYSIS
Principle: The basic principle of ABC Analysis is 10 percent of items hold 70 percent of value.
A category items account for 10% of item & 70% of the value.
B category items account for 20% of item & 20% of the value.
C category items account for 70% of item & 10% of the value.
1. Calculate the Annual Consumption Value (ACV) for each item by multiplying the
number of units with the unit price of the item.
5. Locate the items in the list for which cumulative ACV is 70%. Categories all the
previously listed items up to this item as A category item.
6. Locate the items in the list for which cumulative ACV is 90%. Categories the items listed
after A category item up to this item as B category item.
2. Safety stocks are kept low for the high value items to reduce total inventory costs.
3. Safety stock is kept much higher for low value items to prevent stock-outs.
Disadvantages:
1. It should be reviewed periodically so that changes in prices and consumption are taken
into account.
2. Importance is given only to the annual consumption value of items and not its criticality
for the production.
3. It does not apply to the dependent demand inventory, which is controlled by Material
Requirement Planning (MRP).
VED ANALYSIS
Principle: VED Analysis classifies items into three categories depending upon the consequences
of material stock out when demanded.
Vital items are the most critical which can cause stoppage of the production, if not
available, hence should be available in stock at large.
Essential items are quite critical whose non-availability may not adversely affect
production; hence a low stock of essential items should be available.
Desirable items do not have very serious consequences if not available but can be
stocked.
FSN ANALYSIS
Principle: FSN Analysis classify items into three categories depending upon the past
consumption pattern. Inventory policies and models for these three categories have to be
different.
Fast moving items are those which drawn frequently from stores.
Slow moving items are those which drawn only once or twice a year from stores.
Non-moving items are those which not at all drawn for the past two years from stores.
Features of Q-System
3. Reordering is done when the stock in hand is equal to safety stock plus the lead-time
consumption.
5. Maximum inventory will be equal to the safety stock plus order quantity.
6. This system is used for low value items where orders are placed infrequently.
Here the stock in hand is reviewed at periodic intervals and an order is placed which varies with
level of stock in hand. It is also known as Periodic Review System and Order Cycling
System.
Features of P-System
1. Review period is decided to minimize the sum of annual procurement cost and annual
inventory carrying cost.
2. Quantity ordered is decided depending upon the stock in hand, so that it will take care of
the requirement till the next review period.
4. This system is used for high value items needing a strict control.
EOQ is the technique, which solves the problem of the inventory management. It is the order size
at which the total cost; comprising ordering cost plus carrying cost, is the least.
The cost of carrying inventories is called Inventory Carrying Cost and the cost of purchasing
and processing the order is called Ordering Cost. One of the most important goals in materials
department is to strike the most economic balance between ICC and OC in determining order
quantity.
The graph shows the relation of the ICC and OC. As the order quantity increases the ordering
cost reduces. While the ICC goes on increasing with increase in the order quantity. But at a
certain stage it is equal to the OC. This is shown by the crossing two lines; this is known as
Economic Order Quantity (EOQ).
Formula
Q = _2BA_
PC
Q = Order quantity
A = Annual consumption
B = Order Cost
1. Demand of the material occurs uniformly over the period at a known rate.
4. Ordering cost is fixed and does not vary with the order size.
5. Carrying cost varies directly and linearly with the order size and expressed as percentage
of average inventory cost.
6. Lead-time i.e. interval between placing order and receiving inventory is zero.
7. Materials can be procured in any desired quantity; there is no any restriction of quantity.
8. Materials have fairly long shelf life; there is no fear of deterioration or spoilage.
Limitations of EOQ
1. The assumptions of EOQ may not true in real life, thus limiting the use of EOQ model.
4. Formula presumes that the usage of materials is both predictable and evenly distributed.
This may not be possible.
5. Ordering cost varies from commodity to commodity and the carrying cost can vary with
the companys opportunity cost of capital.
6. Often inventory carrying cost and ordering cost cannot be identified accurately and
sometimes cannot be even identified.
7. Calculation of EOQ is time consuming and expensive. In many cases, the cost of
calculating EOQ exceeds the savings made by buying that quantity
JUST IN TIME
Kanban stands for Kan-card, Ban-signal. Kanban concept suggests that a supplier or the
warehouse should only deliver components to the production line as and when needed, so that
there is no storage in the production area. In this system, workstations located along production
lines only produce or deliver desired components when they receive a card and empty container.
6. Minimize waste.
Benefits of GT
SMED is a technique for performing setup operations in number of minutes expressed in a single
digit. Mr. Shingo revolutionized the SMED method since 1950 in Japan. E.g. Bottling industries
sometimes spend more than 20% of their planned production time on changeovers. These setup
and changeover times can be reduced significantly when the changeover SMED system is
applied.
4. JIDOKA (Automation)
Objective of JIDOKA
In any factory it is necessary to run all the equipments on continuous basis to get maximum
output. It is found that generally that does not happen. There is loss if any tool or machine is not
in use. Due to any reason like material not available or the machine is not working. In order to
avoid such losses TPM is implemented. For this purpose following steps should be taken.
Pokayoke invented by Shigeo Shingo in the 1960s. The term Pokayoke comes from the
Japanese words poka (mistake) and yoke (prevent). Pokayoke suggest that people are human
and cannot be expected to do everything like a machine, exactly the same each time. The basic
principles of Pokayoke advocate developing tools, techniques and processes such that it is
impossible or very difficult for people to make mistakes. E.g. a plate that must be screwed down
in one orientation only could have the screw holes in non-symmetrical positions so that it can
only be screwed in the right orientation.
Management of inventory is passed on vendor. Purchase order is redundant. Strong mutual stake
in each others business is a basic requirement. It is beneficial to both customer and supplier.
1. at right price
2. of right quality
3. in right quantity
6. at right place
- It is the link between the production unit and the customer directly or through the warehouses.
- Logistic cost based mainly on customer service. Better service and supplies provides economic
advantage to the customer.
- The suppliers logistic manager has to balance the high service level that the customer desires
and the belief that the supplier may gain from possible increased sales against the cost of
providing that services.
2. Sending Enquiries for Quotations: Purchase department invite suppliers to quote the
rates materials. For this purpose a standard format is used which is similar to a purchase
order, except that words such as this is only a request for quotation or this is a not a
purchase order are printed so as to ensure that the supplier does not construe the request
for quotation as a firm order.
3. Negotiating with Vendors to Fix the Price: If the presented cost does not match the
companys budget, the purchasing department can negotiate with the seller price and
terms are met with. Another method that can be adopted here is competitive bid method.
This method is widely used by governmental purchasing departments because of
statutory requirements but also applied by industrial purchasing department.
4. Preparation of Purchase Order and Placing the Order: Having selected the supplier
and the rates agreed, the buyer places the purchase order; expressing terms and
conditions. All orders should be in writing and should be on the buyers purchase order to
avoid possibility of level difficulties. When order is placed by telephone it is the practice
to confirm the order by sending the supplier a regular order.
5. Follow Up with Vendor: After the order has been placed, the purchasing department has
the responsibility of following-up of the order. Follow-up essentially holds the supplier to
his promise of delivery. A follow-up procedure is must when the costs or risks resulting
from delayed deliveries or non-deliveries are greater than the cost of follow-up
procedures.
6. Receipt of Material, Inspection and Storing the Material: The material should be
inspected properly, checked for its quality as well as quantity. In addition to this, it should
be reserved in a proper room in a disciplined manner, so it is easy to recover it at any
point of time.
7. Maintenance of Records: Purchase orders requisition and similar other legal contracts
and documents should be preserved. Since they constitute the authority on which the
purchasing department had taken its actions to a given item.
SUPPLIER SELECTION
While selecting the suppliers, the following factors must be taken into account:
What procedures does the supplier have for assuring on-time delivery?
What procedures does the supplier have for correcting delivery problems?
2. Price:
What procedures does the supplier have for quality control and quality assurance?
How much advance notification does the supplier give when changes are made in
products or services?
5. Flexibility:
How flexible is the supplier in handling changes in quantity, delivery schedules and
product or services design changes.
7. Location:
SUPPLIER EVALUATION
2. Technical Capabilities:
Can he provide assistance as to the application engineering?
4. Availability:
5. After-Sales Services:
6. Sales Assistance:
OUTSOURCING
Outsourcing is the contracting companys business process to outside service providers for
increasing firms profitability by primarily reducing overall operating cost and focusing on core
competencies.
Objectives of Outsourcing
Process of Outsourcing
Outbound logistics plays an important role in selling the product of the company through the
distribution system. Relation of logistics with 4Ps of marketing can be explained as follows:
2. Product: Size and shape of the product are quite important for logistics. Weight/volume
ratio plays very important role in deciding economics of logistics.
3. Promotion: Logistics Manager and Marketing Manager need to work closely in deciding
promotional strategies for the product in order to manage inventory needed to match sales
triggered by promotional activities in the market.
RESPONSIVE ORGANISATION
The competitive scenario at marketplace necessitated the logistics organization to be responsive.
It seeks to put customer at the center of business and design new systems and procedure to
improve the response. Logistics organization should change its systems:
3. From products to customers: emphasis on customer value and not on brand value.
1. Procurement Cost
2. Inventory Cost
3. Warehousing Cost
5. Packaging Cost
6. Transportation Cost
Activity based costing is based on the concept that the expenses need to be assigned to the value
adding activities rather than to budget unit. It suggests that business activities are made up of a
series of activities that consumes costs.
Advantages
1. It provides information about cost drivers and the relationship of these drivers with
resource consumption.
2. It gives more accurate picture of the expenses and helps managers to make strategic
decisions about costs.
Mission based costing seeks to identify unique costs that are generated as a result of specific
logistic activities with a mission to achieve certain objectives in a specific market. It is the
logistic costing which can identify the total costs of meeting a desired mission.
OBJECIVES
Elements
A] Financial Measures:
1. Return on Investment: It indicates whether the investment made in logistical assets like
warehouse, material handling etc. is paying dividends.
2. Productivity: It is a relationship between the goods and services produced and the amount
of input utilized by the system.
3. Time: It indicates the systems efficiency in terms of response time, lead-time, on time
product shipment, etc.
The main objective of external performance measures is to understand, maintain, and monitor
customer perspective.
Elements
1. Customers Perception: Customers feedback on delivery, reliability, and responsiveness
of the company needs to be regularly obtained to achieve competitiveness in logistical
operations.
3. Benchmarking:
BENCHMARKING
History
In the late 1970s When the Japanese competitors Canon and Mitsubishi etc. entered into US
market, the Xerox Company pioneered the process of benchmarking its manufacturing costs
against these competitors. This concept has become widely accepted in the late 1980s.
Steps in Benchmarking
1. Identify the items to be benchmarked and define them categorically i.e. never take
broad subject area.
2. Create a benchmarking team and define rules and responsibilities of each member.
3. Trace out the benchmark partners, who may be a world-class benchmark leader,
articles from magazines or newspapers, publications of consultancies, trade literatures.
4. Identify the data collection process from different sources such as postal surveys, direct
interviews, questionnaire, and research through Internet etc.
5. Finalize the benchmark study, after analyzing all the data discarding the irrelevant and
inaccurate data. Compare your companys strength and weaknesses with those of
benchmarking partners. If you find any performance gap between yours and the
benchmarking partners, fill that gap.
6. Implement the findings into the task force of predetermined operation, function or
service.
CHAPTER 20 WAREHOUSES
DEFINITION OF WAREHOUSING
Warehouse is a location provided with adequate facilities, where bulk shipments are received
from production centers, which are then broken into small order size for shipment to the
customers as per their requirement.
OBJECTIVES OF WAREHOUSING
WAREHOUSING DECISIONS
1. Type of Warehouses
2. Location of Warehouses
3. Size of Warehouses
4. Layout Warehouses
5. Number of Warehouses
TYPES OF WAREHOUSE
1. Private Warehouse
These are the warehouses owned by the company for their exclusive use of storing the goods
manufactured or traded by them for onward selling in the market.
Advantages:
Disadvantages:
2. Public Warehouses
These are the warehouses hired from other agencies for storing the goods for a specific period of
time by paying agreed rent. E.g. Central Warehousing Corporation (CWC)
Advantages:
1. Generally located near ports and market place and thus has fixed periodic operating cost
3. No permanent liability.
4. Adjustments as per season are possible.
Disadvantages:
3. Contract Warehouses
It is a specialized form of public warehouses managed by Third Party Logistics companies for
providing total warehousing services by paying the agreed charges.
Advantages:
2. No permanent liability.
Disadvantages:
4. Co-operative Warehouses
These warehouses are owned, managed and controlled by co-operative societies. They provide
warehousing facilities at the most economical rates to member of society.
LOCATION OF WAREHOUSE
1. Cost Warehouse may be located near production plant to reduce operating cost.
2. Customer Service Warehouse may be located near market to serve the customer well.
8. Availability and cost of basic infrastructure i.e. power, water, gas, sewerage etc.
5. Statutory requirements
NUMBER OF WAREHOUSES
Square Root Law states that the total inventory in a system is proportional to the square root of
the number of warehouses.
Law: The law determines the extent to which inventory reduces by reducing the number
warehouses. Provided that the total customer demand remains constant.
L = L1 _W2_
W1
Assumptions:
(May 05)
WAREHOUSE
DISTRIBUTION CENTER
Material handling is a process of movements of raw materials, WIP and finished goods
within a facility most efficiently at the lowest possible cost.
OBJECTIVES OF MHS
SCOPES OF MHS
CLASSIFICATION OF MHS
1. Manual System
Manual handling of materials is done when the weight of materials is low and distance to be
traveled is less. It is the cheapest option for material handling.
2. Mechanical System
Mechanical handling of materials is done when the weight of materials is high and distance to be
traveled is more. It is the safest option for material handling.
1. 1. Forklift Trucks: They are lifting devices, can move loads both horizontally and
vertically.
2. 2. Cranes: They are drag devices, either floor mounted or overhead mounted.
4. 4. Carousels: several bins on an oval track keep rotating. The operator can choose
required bin to pick from. The system saves space and reduces walking time and
distances.
3. Automated System
Automated handling of materials is done when the weight of materials is very high and distance
to be traveled is more as well as the warehouse space is limited. It is the best and efficient option
for material handling.
2. Robotics: It is a human like machine that can be programmed to perform one or series of
activities.
3. Automated Storage and Retrieval System: It has following merits and demerits.
Merits ARS:
2. Increase in productivity
Demerits of ARS:
1. Automatic Guided Vehicle System (AGVS): It is as driverless vehicle that are controlled
by computers for task assignment, path selection, and positioning.
PRINCIPLES OF MHS
4. Unit Load Principle: Load should be of uniform size to have smooth material flow.
PACKAGING
Packaging though an integral part of logistics, also affect marketing and production function.
Packaging helps in promotion of products and size, shape, material of the package affects
production labor efficiency.
1. Cube Minimization: Reducing the space occupied by the product to cut the freight
charge. E.g. Round containers, oval shaped containers and square shaped bottles, etc.
1. Weight minimization: Reducing the weight of the consignment to fully utilize the
capacity of the truck. E.g. Liquids are packed in plastic bottles rather than glass bottles.
2. Apportionment: Grouping goods into convenient unit for distribution. E.g. mangos in
boxes, milk bags in crates.
3. Facilitating handling & using: fruit juices in tetra packs, handling and consumption by
users
4. Convenience: Facilitating handling, storage & reuse. E.g. ink cartridges for printers,
reusable corrugated boxes, bottles and refill packs.
5. Communication:
1. Products Packaging: Packaging the products itself, e.g. soft drinks are packed in cans.
1. Master Cartons: Packaged products are packed in larger cartons to facilitate quantity
handling.
2. Unit Load: Master cartons are consolidated into a single large unit to facilitate
transportation, protection and storage. It involves Unitization or Palletization.
Unitization / Palletization
Unitization is a concept where size shape, weight, volume of the items is considered and master
cartons are placed to form a single larger unit. E.g. bottles in crates, steel sheets in coils, etc.
Types of Pallets
1. Wooden pallets used commonly but break and disintegrate.
5. Corrugated fiberboard slip sheet provide cushion effect to the unit load
Contenerisation
Benefits of Containerization:
1. Standardized containers helps in saving on packaging materials and labor for packaging.
Types of Containers:
1. General Cargo Containers for general cargo like garments metals etc.
2. Refrigerated Containers for food items that require cold storage like fish, meat.
3. Insulated Containers for items that require airtight space like fruits and vegetables.
4. Ventilated Containers for items that require fresh air like coffee seeds, tea leaves.
5. Flat Containers They have only flat base with no walls, used when cargo the cargo is of
odd size or very heavy like trucks.
6. Liquid Containers They have main holes for loading and unloading of liquid cargo like
milk, oil.
7. Gas Containers They have fixtures to fill or empty liquefied gas. E.g. Liquid oxygen.
Polarisation
CHAPTER 22 SUPPLY CHAINS MANAGEMENT
CONCEPT OF SCM
OBJECTIVES OF SCM
ADVANTAGES OF SCM
For Customers
For Company