After this unit you should be able to answer following questions

A. Concept Questions & B. Short notes

1. Logistical strategy
2. Logistical planning
3. Logistical planning phases
4. Risk appraisal
C. Section II descriptive questions [10 marks each]
1.How logistical strategy is relevant to business? Explain
2.Enumerate various phases in logistical planning and explain any one
3.What is risk appraisal? What is its significance?
4. What logistical decisions reside at the core of logistical strategy? Why are they so
important?
5. What is logistical Strategy?
6. What are logistical decisions?
7. What is logistical system design & planning?
8. Explain planning methodology.
Logistical Strategy, Logistical system design and planning
[Ref. Logistical management, Bowersox, pages 523 to549]
What is logistical Strategy?
All organizations have to form their logistical strategy to deal with continuously
changing market conditions to be able to do business in competitive environment.
Logistical strategy is evaluating most cost effective methodology of distributing goods
to market while achieving service level objectives
Logistical strategy has at the core logistical decisions that are instrumental in success
of business. Formulation of this strategy requires careful assessment of the situation
and its analysis.
Logistical planning is arriving at such decisions by using scientific tools.
Following is a representative list of logistical decisions at the core of logistical
strategy
1. How many distribution centers are to be used and where should they be located?
2. What are inventory /service trade-off points for each distribution center?

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3. What type of transportation equipment should be used and how should vehicles be
routed?
4. Should we apply a new material handling technology in our distribution centers?
The above questions are complex and data intensive.
Complexity is due to the fact that large number of factors influence logistics costs and
potential alternatives are several. Data intensiveness is due to the large amount of
information required to finalize an alternative.
We are trying to establish a general methodology to assess the situation and identify
and evaluate alternatives that are strategic in nature. The process of logistical system
design and planning according to this methodology is in three parts as follows

Problem definition and planning

Phase I: During this phase of the methodology logistical problems needing strategic
decisions are studied in detail and documented along with the plan. This is called the
phase of problem definition and planning.
In this phase we have two major steps called Feasibility assessment and project
planning.
Feasibility assessment
Feasibility assessment is the study of current logistical situation with the purpose of
understanding the environment, process and characteristics for determining any
change that is needed. Process of evaluating the need and desirability for change is
referred to as Feasibility assessment.
Feasibility assessment consists of situation analysis, supporting logic development,
and cost benefit estimate.
1. Situation analysis [appraisal]: during this part of the feasibility assessment
performance measures and characteristics that represent logistical environment are
collected. This is made up of internal review, market assessment, competitive
evaluation and a technology assessment to determine improvement potential.
Internal review [self-appraisal]: this is assessment of current logistical processes.
This covers logistical resources like workforce, equipment, facilities, relationships,
information and historical performance, data availability, strategies, operations,

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tactical policies and practices. This review covers logistical processes as well as each
logistical function. This self-appraisal should carefully study each internal customer
and supplier in logistical chain and evaluate how each internal supplier is meeting the
expectation of his/her internal customer. Finally whether the value chain meets the
customer service levels. This review identifies the need for a change and thereby need
for redesign of logistical system.
Market assessment and competitive evaluation:
This is a review of external suppliers, customers and consumers [end users of product]
and also competition.
External suppliers: opportunities for bottleneck removal, value improvement, bench
marks in competition
external customers [organizations or entities downstream]: service levels,
bottlenecks and cost impact in improving service levels, customers measurement
criteria for our performance, bench marks in competition
consumers: purchasing pattern with respect to logistics, our capability to respond to
these purchasing pattern and the competition’s response to these pattern.
Technology assessment
Focus is on key logistical technologies like
a. Transportation vehicles, tracking systems
b. Storage systems, development of special storage equipment to utilize vertical
space with easy storage and retrieval.
c. Level of computerization.
d. Level of automation in material handling
d. Technology levels in packaging: materials, processes and machines used for
packaging represent technology levels in packaging.
2. Supporting logic development
a. Integrate the findings of situation analysis [SWOT analysis] for determining a
quantified current situation in logistical operations. This determines the urgency
and extent of the change required for reaching the objectives.
b. Determination of cost/benefit for detailed analysis. Based on the above a decision
is taken either to continue the analysis or abandon it as unnecessary.

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c. Developing necessary means and checks to ensure objectivity in analysis.
Analyst’s personal opinions should not cloud the analysis. Care should be taken to
avert sub optimization of individual functions.
d. Identifying right avenues for change. Based on the urgency and extent required
avenues are identified.
e. Preparing clear statements of potential redesign alternatives as per the avenues
identified for change.
f. Definition of current procedures and systems that are currently in use
g. Identification of most likely system change alternatives based on competitive
performance. Purpose is to do something that scores an edge over competition in
business.
h. Innovative approaches based on new theory and technologies. Chosen approaches
should be challenging without being impractical.
i. Development of flow diagrams for alternatives chosen to define and develop clear
cut logic. That is logically committing to paper recommended strategy with
benefits.
3. Cost benefit analysis
Expected benefits in terms of the following are quantified as result measure for
strategy.
a. Service levels improvement to increase the loyalty of existing customers and
attracting new business.
b. Logistical cost reduction. Reduction in logistical cost reduction is another benefit
which is two folds. One is one time cost reduction that is reduction of capital cost
like elimination of a warehouse. The other cost reduction is variable cost reduction
which prevents recurring expenditure. Relocation of a warehouse may cause such
savings.
c. Logistical cost prevention is proactively eliminating a cost that would have
occurred in future. Technology up-gradation in the planned change to prevent
labour cost in future.

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d. Steering committee nominated to oversee the activities evaluate low hanging fruits
of situation analysis and benefits of long term nature to initiate detailed analysis in
next sub phase of feasibility assessment.
Project planning
This is the second phase of Phase I. This consists of statement of objectives, statement
of constraints, measurement standards, analysis procedures and project work-plan.
Statement of objectives
a. Quantified levels of service objectives [service levels] with cost levels to be
achieved after the service redesign.
b. Time frame for achievement
c. Identification of market and industry segments in which the strategy is going to
operate.
d. Fitting the service levels to budget ranges to ascertain viability of redesign.
Statement of constraints
Constraints as imposed by the top management on the planning process. Top
management imposes some constraints keeping in mind top management priorities
which may not be known to the analyst. Such constraints are made generally keeping
in mind capital investment made and ability of the organization to absorb change.
a. No changes in production facilities and their product mix assortment.
b. Some departments are kept outside the scope of redesign.
c. Specific organizational elements to be retained or not to be changed, buildings,
systems, procedures, practices.
Measurement standards
a. How cost components like transportation, inventory and order processing are
calculated.
b. Customer service measures and their calculations.
Analysis procedures
Techniques used for analysis, computer based or manual. Selection is based on need
and availability of data for analysis, software applications and algorithms
Project work-plan
Project work-plan specifies

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a. Scope based on alternatives & opportunities offered by feasibility assessment.
b. Resource requirement- financial and time
based on scope
Data collection and analysis
Phase II
Define Assumptions and Collect Data, Analysis of Alternatives
1. Define assumptions and collect data
This part of the II Phase consists of following tasks:
Define analysis approach & technique, define and review assumptions, identify data
sources, collect data and collect validation data
Define analysis approach & technique: Analysis approaches are analytical
[analytical techniques using numeric], simulation[simulation techniques using
computers], optimization[linear programme]
Define and review assumptions
Assumptions define key business characteristics, variables and economics of current
and alternative system.
Types of assumptions are: Business assumptions, management assumptions, and
analysis assumptions.
Business assumptions define broad environment in which logistical plan must
operate, like, market, consumer, product and trends. Business assumptions are outside
the scope of the firm.
Management assumptions
Defined by the firm, and include alternative distribution facilities, transport modes,
inventory levels and operating policies, fixed and variable costs.
Analysis assumptions
Analysis assumptions define the constraints and limitations to be understood to fit
problem to the technique.
Problem size, degree of analysis detail, and solution methodology are such
assumptions.
Identify data sources

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Sales and customer orders, costs associated with manufacturing and purchasing,
number and types of modes utilized for transportation, criteria for mode selection and
transportation costs.
Number and location of plants, product mix and production schedules.
Policies and costs associated with inventory transfer and reordering.
Warehouse operating costs, capabilities, product mix, storage levels and service
capabilities.
Future market data, data on competitor strategies for benchmarking.
Data collection
Collect the in relevant format for selected tool for analysis.
Sources of error
a. Misrepresentative period. Data picked from wrong span of time.
b. Ignoring data that does not reflect logistical importance [eg. customer pick up
volume]. The data apparently does not reflect logistical importance. Hence it get
ignored.
Collect Validation Data
Collect historical data to test the fit of analysis technique. If the fit is good
management confidence in this analysis is enhanced. This technique can be used for
further analysis.
2. Analysis of alternatives
Following are the tasks in this phase
Define Analysis Questions, Complete and Validate Base Line Analysis, Complete
Alternative Analysis, Complete Sensitivity Analysis
Define Analysis Questions
Analysis questions are those which address the most likely changes and their impact
on logistical performance. These questions represent options within options. Subsets
of options for evaluation without carrying out deep analysis at great cost. Eamples are
as below.
a. What happens if we remove distribution center I? What is the impact on service
levels? Similarly, DC II, DC III?
b. What happens if we change the location of DC I or DC II, DC III?

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c. What happens if alter mode of transport?
Complete and Validate Base Line Analysis
Current logistical performance is ascertained by using selected analysis tools. These
performance levels are compared with the results obtained from the analysis of
historical data that was collected in the sub phase of ‘collect validation data’.
Possible Sources of Error are identified and corrective action planned. If a good fit is
found the chosen approach stands validated.
Complete Alternative Analysis
Chosen alternatives are evaluated with validated approach. Evaluate alternative
options electronically or manually establish performance characteristics of each
alternative. Options should consider necessary changes in management policy.
Complete Sensitivity Analysis
Best option should be subjected to sensitivity analysis. Uncontrollable factors are
varied to assess their impact on the logistical situation. Sensitivity analysis
investigates appropriateness of the chosen ideal solution for different demand or cost
levels. Decision tree analysis is used to further short list alternatives.
Recommendations and Implementation - Phase III
Recommend top alternatives to management and formulate implementation plan.
Identify the best alternatives
alternative that meets desired service levels at minimum cost is the best alternative
identify and short list top two or three options for further analysis
Evaluate Costs and Benefits
Chosen alternatives may be
a. Expand existing facilities, expand existing facilities & add two more.
b. Expand existing facilities & add three more.
Carry out simulation analysis and find out cost additions and service level benefits of
each option. Most suitable alternative can easily be identified.
Develop a risk appraisal
a. Risk of not matching the assumption.
b. Demand changes taking place beyond assumption.
c. Risk of delays in system change over.

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External risks are competitive action. Internal risks include labour and productivity
considerations, changes in firm strategy and resource accessibility. Risks associated
with the chosen alternative are assessed and quantified using sensitivity analysis.
Financial implications are also evaluated.
Develop a Presentation
Identify, rationalize and justify suggested changes and prepare a presentation using
graphs, charts and flow diagrams.
Implementation
Define implementation plan at macro level and then in micro level. Schedule
implementation. Define acceptance criteria for evaluation of success.
Implement as per schedule with control.