The Supply Chain

Management

Prof. V. P. Arora
Associate Professor

LOGISTICS

Logistics term is derived from Greek word Logisticos

meaning The Science of computing & calculating.
Dictionary definitions of Logistics
The branch of military science having to do with
processing,
maintaining
&
transporting
material,
personnel & facilities.
Webster defines Logistics as The procurement,
maintenance and transportation of military materials,
facilities and personnel.
Council of Logistics Management (CLM): Defines
Logistics is that part of supply chain process that plans,
implements and controls the efficient, effective flow and
storage of goods, services and related information from
the point of origin to the point of consumption in order to
meet customers requirements
Transportation adds
Place value to products /
services
Inventory maintenance
time value

According to IMF, logistics costs average about 12% of

worlds GDP.
Logistics: is about creating value for customers and
suppliers of the firms and the value for the firms
stockholders. Good Logistics management views each
activity in the supply chain as contributing to the process
of adding value.
Four types of Values in Products / Services
Form

Value

Mfg. creates

Time

Value

Logistics through

Place

Value

- Transportation
- Information flows
- Inventories

Possession

Value

Marketing, Engg. and Finance

Germans lost the battle not because of lack of

soldiers / equipment (they had more tanks than
Britishers) but because of Britain having better logistics.
Military Movement
Kuwait War
Iraq War

Military
Movement

Good Logistics by USA

2,00,000 troops deployed in 1 months in Iraq earlier
Vietnam conflict took 9 months
Treat soldiers as your customers
Pride for
food,
amenities

Also
equipment
reqd. to fight
70% of all jobs are in services in USA so logistics principles

Logistical Mission
1. To make available the right quantity of right quality
products at the right time & place in the right
physical condition.
2. To offer best possible customer service for core
competency.
3. To minimize total logistical costs logistical costs range
from 15% to 45% of the price of the product next to
cost of raw materials for most of the goods.
Operational Objectives of Logistics
1. Right Response
2. Right Quality
3. Right Quantity
4. Right Value
5. Right Cost Trade-offs
6. Right Information

Logistics Strategy
Three objectives
1.Cost reduction _____ variable costs with movement &
storage
2.Capital reduction _____ maximization of the return on
logistics assets (Shipping direct to customers, JIT supply,
etc.)
3.Service improvement ____ Revenues depend on
logistics services provided in contrast with competition.
Business Goals
Attack Strategies
Customer service Representatives

Logistics Planning tackles 4 Major Problem areas

Customer service levels

Facility location
Inventory decisions
Transportation decisions

The above decisions affect firms profitability, cash flow

and return on investment.
Services: TV channels
Three major events happening in one week
a.
Princes Diana killed in an automobile crash
b.
Mother Teresa died of heart failure in Calcutta
c.
Major bombing incident in Jerusalem
Three corners of the world --- also there is the
problem of allocating Air Time
- Directed CNN reporter from Paris to Middle East
- Hong Kong correspondents to Calcutta

Logistics Management
IT refers to designing, developing, producing & operating
an integrated system which responds to customers
expectations by making available the required quantity of
required quality products as & when required to offer the
best possible customer service at the least possible costs.
Trade off between total logistical cost & required
customer service level.
India spends nearly 13% of its GDP on Logistics as
compared to an average of 10% in developing economies.
Transportation & Inventory costs constitute over 50% of
value added in India.
Total Cost Analysis

The total cost analysis is essential in the development of

an integrated logistics systems design & acts as a key to
managing the logistics function
Total costs comprise of:
Inventory cost
Transportation cost
Storage & warehousing cost
Material handling & protective packaging cost
Order Processing cost
Information cost
Customer Service cost
Production lot Qty. cost

The Supply Chain

The supply chain (SC) encompasses all activities
associated with the flow and transformation of goods
from the raw materials stage (extraction), through to
the end user, as well as the associated information
flows. Materials and information flow both up and down
the supply chain.

Integrated Business Logistics Management (IBLM) and supply chain

management (SCM) are used interchangeably.

Logistics / Supply Chain is a collection of functional

activities (transportation, inventory control etc) which are
repeated many times throughout the channel through
which raw materials are converted into finished products
and consumer volume is added.

The life of a product, from a logistics view point, does

not end with the delivery to the customer. Products
become obsolete, damaged or non-functioning and are
returned to their source points for repair or disposition.
Environment
USA produces 160 million tons of waste each year
In Germany
Seller has the responsibility either for the recovery of the
spent materials and their repackaging & re-use or for
their deposal.
Packaging materials may be returned to the supplier due
to environmental regulations or economic considerations
to reuse them. This is

Reverse logistics channel.

Log Fac summarizes world class logistics performance for domestic
companies as:
a) Error parts of less than one per 1,000 orders shipped
b) Logistics costs of well under 5% of sales.
c) Finished gods inventory turnover of 20 or more times per year.
d) Total order cycle time of five working days.
e) Transportation cost of 1% of sales revenue.
Supply & distribution lines are lengthening with grater complexity
produce locally and sell internationally.
- Material & Labour costs may be reduced but logistics costs are
likely to increase due to increased transportation & inventory
costs.
- Outsourcing adds value but it requires careful management of
logistics costs.

Wal-mart used logistics as the core of its competitive

strategy to become the Worlds number one merchandise
retailer.

1987

Example

Wal mart

K Mark

Presence

Rural

Urban

No. of Stores

2X

Sales

$ 16 Billion

$26 Billion

Expansion

Outside small towns

Major cities

Concentration

Operations

Marketing &
Merchandising

Company vide computer system

Linking with cash registers

Quick restocking of goods

Investment on trucks & modern
distribution centers

Lowering prices

No depleted shelves & price

check delays

Law suit for

overcharging because
of no up to date
information

Present size

6Y

Selling Administrative
& overhead costs

17.3%
22.7%
went into Bankruptcy
& reorganization

Return on Logistics Assets =

Contribution to revenue logistics operating

costs
Logistics Assets

Goal (Long run)

Maximizing the cumulative return on investment
Components of good strategy
Addressing
- Customers
- Suppliers
- Competitors
- Company itself
eg. GE vision to be number 1 or 2 in each market & get
out if that is not possible
IBM Constantly reshapes itself to remain an effective
competitor
Logistics / SC strategy
Innovative strategies give competitive advantage
(i) Replacing Broken down machines

Objectives
a) Cost Reduction
b) Capital Reduction
c) Service improvement
Logistics / SC Levels Planning
- Strategic - Long Range
- Tactical
- Intermediate range
- Operational
- Short Range (hourly/ daily basis)
Operational Plan Inventories for each item
Strategic Plan Inventories not to exceed certain
value limit.
or
Achieve certain inventory turn-over ratio

Logistics Planning Major Areas

Major problem areas:
a) Customer service levels
b) Facility location
c) Inventory decisions
d) Transportation decisions
i) Higher service levels will lead to disproportionate
increase in costs.
ii) All product movements from/to & associated costs
from plant, vendor through intermediate stocking
points and to customer location.
iii) Perpetual inventory control
iv) Mode, size of shipment, routing & scheduling
All above decisions have impact on firms
Profitability
Cash flow

When to plan?
- Existing firm
- New firm
Factors affecting Planning
Demand
Customer Service / level
Product characteristics:
Product weight, volume, value, risk
Logistics costs

For high logistics costs, frequent replanning can result in

substantial cost reduction.
High Logistics cost = Industrial chemicals, food products
Low Logistics cost = Machine tools / computers
e) Pricing Policy
Changes in pricing policy under which goods are
purchased or sold will affect logistics strategy.
Guidelines for strategy formulation
Total cost concept.

Other Logistics System Trade Offs.

a) Setting the customer service level
b) Setting safety stock levels
c) Determining the number of warehouses in a logistics
systems
d) Setting the sequence of production runs for multiple
products
Multiple distribution strategies based on
Different customer service requirements
Different product characteristics
Different sales levels among multiple items

Not all products should be provided the same level

of customer service
Fast moving items
Medium volume items
Slow moving items
A mixed distribution strategy would have lower costs than
pure or single strategy.

Selecting the proper channel strategy

(i) Supply to stock
(ii) Supply to order
Supply to stock: Maximum efficiency is obtained
through
- Economic production runs
- Purchasing in quantities
- Batch order processing
- Transporting in large shipment sizes.
Supply to order: Set up for maximum responsiveness
- Excess capacity
- Quick changeovers
- Short Lead Times
- Flexible processing
- Premium transportation
- Single order processing

Measuring Strategy Performance: Three measures

are useful and if all them are positive, strategies are
probably working well.
i) Cash flow: Decrease inventory, cash is released which
can be used for various purposes.
ii) Savings: Reduction in costs because of no. of
locations of warehouses, inventory carrying costs etc. A
strategy that changes number of locations of warehouses
will
affect
transportation,
inventory
carrying,
warehousing and production / purchase costs. These
savings appear as a profit improvement.
iii) Return on investment: Ratio of Annual savings to
Investment required. It indicates the efficiency with
which capital is used. Good strategies show a return
greater than or equal to expected return on companys

Value chain of supply chain Management

In the value chain of SCM, the flow of goods & value are
in forward direction and flow of cash is in a backward
direction to keep total business system alive whereas flow
of information is in both directions for improvement of
total supply chain system.
Value Flow
Each participant in supply chain adds some value in the
goods or services received by him from his proceeding
member before making delivery to the next party. If a
product remains unsold due to late availability, its cost
increases & value decreases due to gradual decrease in
physical attributes.

Goods Flow
Goods or inventory flow from suppliers or vendors as raw
materials to producer. Better customer service with lower
inventory is the aim.
Cash Flow
Money paid for goods & services received by a supply
chain member
Information Flow
Flow is in both directions.
Backward flow facilitates:
-Quality Feed Back
-Customer Order & specification
-Procurement qty with specification & timings.
-Production & Dispatch planning

Forward information flow refers to:

-Availability of Goods
-Order processing & Management
-Order Status
-Transportation & shipping advices
-Quality Assurance
-Warranty Card
Delay in information flow costs:
-Higher Transportation Expenses
-Lost Sales
-Corporate Image

A speedier flow of goods from company to customer

leads to a speedier flow of cash from customer to
company
Supply chain effectiveness & Indian infrastructure
Key issues in supply chain
(i) Movement of Products
(ii) Movement of Information
(iii) Timing of Service
(iv) Total Logistics costs
(v) External & internal integration of activities

Indian Infrastructure Bottlenecks

- We have second largest Railway network in world
but average speed is 22 km vs 75 km in world
- Av. Speed on road is 25 km
- Not many reputed companies in third party logistics
management business
- 10,000 km of superhighway requiring huge funds
- Transportation & Distribution management business
has a long gap to be bridged
Three change engines in world
I. Automobile Revolution
II. Retail Revolution
III. Container Revolution

Contributions / Functions of Supply Chain

1. Minimizing Uncertainty
2. Reducing lead times
3. Minimizing the number of stages
4. Improving flexibility
5. Improving Process Quality
6. Minimizing Variety
7. Managing Demand
8. Delaying Differentiation
9. Kitting of supplies
10. Focusing on A category
11. Planning for multiple supply chains
12. Modifying performance measures
13. Competing on service
14. Moving from functions to processes
15. Taking initiatives at an industry level.

Nature of logistics / Supply Chain Product

Product is composed of physical and an intangible part.
The intangible part is:
- After sales support
- Company reputation
- Communication to provide correct & timely
information
- Flexibility to meet individual customer needs
- Recovery to rectify mistakes
Classifying Products
- Based on use Patterns
- Consumer Products & Industrial Products
(A) Consumer Products
Convenience Products
Frequently Purchased
- Banking Services
- Many Foodstuffs

as well as distribution costs.

Customer service levels

have to be high to get patronage for products.

-Pepsi & Coca-Cola vending machines
-Public Telephones
Shopping Products
-Seek comparisons Price, Quality, Performance
etc.
-High Fashion clothes, automobiles, home
furnishings, medical care, etc.

Speciality Products
Buyers willing to expend substantial effort & wait like
custom made automobiles or management consulting
advice. Physical distribution costs are lowest & it needs
creating brand preference.
(B) Industrial Products
Industrial goods or services are directed to individuals or
organizations that use them to produce other goods or
services.

The Product Life Cycle

Products follow a sales volume pattern over time going
through four stages:
-Introduction
-Growth
-Maturity
-Decline

It has influence on distribution strategy

The 80 20 Curve

-Based on Paretos law

-Bulk of sales is generated from relatively few
products & useful in distribution planning.
-ABC classification also used for stocking points
inventories
Product Characteristics
Weight, volume, value, perishability, flammability,
substitutability, etc in various combination would be affect
needs.
-Warehousing
-Inventories
-Transportation
-Materials Handling
-Order Processing

i) Weight Bulk Ratio:

High weight bulk ratio (steel canned foods) show
good utilization of transportation equipment & storage
facilities. Low density (potato chips, lamp shades), bulk
capacity utilized much before weight

ii) Value weight ratio

Products having low value weight ratios (coal, iron ore)
have low storage costs but high movement costs as a
percentage of their sales price.

iii) Substitutability
Higher substitutability means a greater chance for lost
sales for a given average inventory, supplier can increase
speed & dependability of product deliveries to avoid lost
sales.
iv) Risk characteristics
-Perishability
-Flammability
-Value
-Tendency to Explode
-Ease of Being Stolen
These force restrictions on distribution system & increase
transportation & storage costs.

Product Packaging: There are various purposes for

packaging.
Changing product density & protective packaging are
areas that fall under logistics.
Product Pricing
Pricing is a complex decision making problem involving
economic theory, buyer behaviour theory & theory of
competition etc.
Geographic pricing methods
Since customers are spread over, total cost to distribute
varies with their location. Pricing categories could be fob,
zone, single or uniform, freight equalization and basing
point.

Fob Pricing
FOB stands for Free on Board
FOB Factory Means price is quoted at factory location.
FOB Destination Means that price
customers location or in the vicinity.

is

quoted

at

FOB factory price is a single price established at factory

location. Customers take ownership at that point & are
responsible for transportation beyond this point.
In
practice, customers might utilize the services of suppliers
because he is better equipped & can combine orders, etc.
Fob Destination or Delivered Price
This is price at customers location or in vicinity. In this,
transportation costs are already included in price. It
assumes that supplier can handle transportation more
economically. If buyer has large volume, it can secure
same rates as suppliers

Zone Pricing
Zone pricing reduces administrative complexity by
establishing a single price within a wide geographic
area. Any numbers of areas can be defined depending
on the degree to which company wants geographic
price differences.
Single or Uniform Pricing
This pricing method appeals to customers since same
price is charged everywhere (like books). In this case,
the distribution costs are averaged out.
Freight Equalization Policy
If two firms produce the product at the same price,
then competitive pricing is a matter of transportation
costs. If markets are not equidistant from each factory
location, the firm farthest may wish to absorb enough
of Freight charges to meet the price competition. This
practice is referred to as freight equalization.
Transportation as well as production costs across a
number of producing locations are averaged.

Basing Point Pricing

Basing point pricing establishes some point other than the
one from which the product is actually delivered as the
point from which to compute price. Firms may use single
or multiple basing points. It is applicable when
(i) Product has a high transportation cost relative to its
overall value.
(ii) Little preference among buyers as to the supplier of
the product.
(iii) Few suppliers & any price cutting leads to retalition by
rival firms.
From customers perspective, industries are located at
same points.
Incentive Pricing Agreements
(i) Quantity Discount
(ii) The Deal

Quantity Discounts
Economies of Scale pricing yiels lower cost per unit, due
to spread over of fixed costs. This has led many firms
to use purchase volume as a way of offering lower prices
to buyers and increasing the supplier sales.
The Deal
A selling company may like to reduce inventories,
maintain output levels, or encourage sales as the
motivation for lowering price.
Such companies offer
reduced product prices for a short time in exchange for
larger than normal purchase quantities from its
customers.
The buyer must weigh the effect of a larger than normal
buying quantity with its benefit of lower price against
common logistics costs of transportation, inventory
carrying & storage.

Logistics / Supply Chain Customer Service

Customers view the offerings of any company in terms of
price, quality and service and respond accordingly with
their patronage or lack of it.
Customer service, when utilized effectively, is a prime
variable that can have a significant impact on creating
demand and retaining customer loyalty
Logistics customer service for many firms is the speed
and dependability with which items ordered (by
customers) can be made available.
Common Customer Service Complaints
Late Delivery
= 44%
Product or Quality Mistakes
= 31%
Damaged Goods
= 12%
Frequently cut items
= 6%
Others
= 7%

The most important Logistics customer Service

Elements are:
- On Time Delivery
- Order Fill Rate
- Product Condition
- Accurate Documentation
Customer Service
(i) Pre Transaction Elements
- Written Statement of Policy
- Statement in Hands of Customer
- Organization Structure
- System Flexibility
- Technical Services

(ii) Transaction Elements

- Stockout Level
- Ability to back Order
- Elements of Order Cycle
. Time
. Tranship
- System Accuracy
- Order Convenience
- Product Substitution
(iii) Post Transaction Elements
- Installation, Warranty, Alterations, Repairs, Parts
- Product Tracking
- Customer Claims, Complaints etc.
- Product Packaging
- Temporary Replacement of Product During
Repairs.

Back ordering for out of Stock Item

- From Secondary warehouse
Order to plant stocks
Not Available
Production order
Delivery From Plant to Customer
- Marketing mix components of product, price,
promotion & physical distribution do not
contribute equally to market share.
Distribution, when it provides the proper levels
of service to meet customer needs, can lead
directly to increased sales, increased market
share & ultimately to increased profit
contribution & growth.

Service Effects on Customer Patronage

- 65% of firms business comes from its present
customers.

- on the average, it is approximately six times

more expensive to develop a new customer than
it is to keep a current customer. Thus, from a
financial point of view, resources invested in
customer service activities provide a
substantially higher return than resources
invested in promotion and other customer
development activities

Penalties for Customer service by purchase agents

against suppliers service.
Reduced volume of business

= 29%

Called in Salesman / Manager

= 26%

Stopped all purchases with supplier

= 18%

Discontinued Specific items

= 16%

Refused to purchase new items

= 9%

Refused to support promotion

= 2%

Thus companies have realized that:

(i) Due shift of power, dealers / Retailers have
become their business partners
(ii) Marketing acumen of intermediaries has to be
exploited to bring in competitive competency
(iii) Marketing Results depend on Dealer push.
(iv) Development of a new dealer is too expensive
than keeping a current one
(v) Firms major business comes from its present
customers.

Strategic Components
Corporate vision towards long-run customer services:
- Long run customer service objectives
- Continuous monitoring of environmental factors in
terms of opportunities & threats
- Appropriate allocation of resources to exploit
threats / opportunities

(i) Full assurance for the best return on investment (ROI)

to customers
(ii) Deploying customer friendly personnel eager to sort
out customer complaints & grievances, cooperation during period of need, willingness to
provide accurate information.
If customer
discontinues business, firm loses revenue, gross
margin immediately & has to spend heavily to find
new customers.
(iii) Continuous improvement in quality of customer
service by learning from past experiences of
defective delivery, improving operating systems to
achieve effective customer service.
Firms should continuously evaluate customer service
strategy formally & informally to ensure further
improvement.

Logistical Customer Service Components

(i) Availability of Components
- Normal qty. & specifications on regular & well
established basis
- Prevent stock out situation
- Handle extraordinary customer service requests
ii) Reduce Fixed Replenishment cycle Time
-Speedier delivery of goods so that less working
capital & space is required.
iii) Zero Defect Delivery of Product
- Right Quality & Quantity
- Right Documentation

iv) In case of Defective delivery, prompt reverse logistics

system be offered to earn goodwill.
v) Point to Point information
Prompt & Accurate information regarding
- Status of inventory
- Order
- Tentative shipping & despatch schedules
vi) Consistency: Ability to maintain normal logistics
system & meet unexpected situations.

Non Logistical Customer Service Components

These are basically value added services offered to a
specific customer or a group of customers depending on
individual requirements
1. Financial support to customers especially for
infrastructural developments. It leads to
A) Motivate customers for qualitative outcomes of
marketing
B) Better service facility to ultimate users eg.
Refrigerated display units by firms.
2.
Offer credit facility especially during high demand
period.
3.
Arrange training for customers & their sales force
regarding technical know how of the products.
4.
No tagging of new product with supply of premium
products. Also, not too long waiting.
5.
In warranty supported products, certain
discretionary powers assigned to customers to settle

6.

If the company has exclusive territory operation

norm, it should be properly followed.

80: 20 Rule
80% profit comes from 20% customers
80% costs recovered from 20% customers
Total customer cost should include:
(i) Inventory carrying costs
(ii) Costs incurred in Reduction of replenishment cycle
(iii) Costs involved in reverse logistics in case of defective
delivery:
. Movement of Defective Return Goods
. Cost of Rectification, Re-documentation & Redelivery
(iv) Costs for continuous evaluation of system
(v) Fixed costs involved in development of information
system, communication & logistical infrastructure

GAPS Analysis for customer service Measurement:

Three researchers defined service quality is a function of
expectations Performance gap & also, service quality as
the degree and direction of discrepancy between the
customer service perception & expectations with the help
of GAPS MODEL.

Service Quality GAP: On left hand side represents

customers assessment of service quality.
The four gaps on the right hand side represent
organizational shortfalls that ultimately lead to customer
perceived service quality gap. These organizational gaps
are:
1. Market Information GAP
The companys incomplete or inaccurate knowledge of
customers service expectations.
2. Service Standards GAP
The companys failure to accurately translate customers
service expectations into specifications or guidelines for
employees.

3. Service Performance GAP

Lack of appropriate internal support systems (e.g.
recruitment, training, technology, compensation) that
enable employees to deliver to service standards
4. Internal Communication GAP
Inconsistencies between what customers are told the
service will be like & the actual service performance (e.g.
due to lack of internal communication between the
service promisers such as sales people) and service
providers (such as after sales service representatives)
The focus of above research is more on internal
organizational gaps evaluation whereas from Logistical
perspective of core competency the focus should be on
marketing intermediaries specifically.

Major Gaps
Major gaps have a direct impact on customer satisfaction
as well as on performance and are crucial for loyalty &
can effect sales revenue. Corrective actions are required
at most appropriate time & ignorance / non-action can
cost the company in a big way.
GAP 1
This results into wastage of resources
GAP 2
Any discrepancy will have a negative impact on corporate
image & customer motivation towards trade & business
GAP 3
This results in lower commitment and loyalty of
customers towards qualitative results of marketing
GAP 4
This Gap adversely affects volume of sales & market
share.

Minor GAPS
These gaps will not have immediate impact with regard to
wastage of resource, customer loyalty, motivation, sales
volume, market share, etc. & can become major factors if
proactive actions are not taken for prevention.
Gaps analysis can be used to conduct comprehensive
service quality audit to identify discrepancies & bring
about improvements
Customer Service Strategic Management
Keeping customers satisfied firms need a proactively
designed & strategically managed customer service
portfolio so as to sustain a competitive advantage in the
long run.

Step 1
Corporate vision about customer service
Top management must be the driving force for
reinforcement of expected levels of customer service &
provide adequate resources & continual encouragement.
The corporate vision should include:
(i) Written statement of service policy & its circulation to
customers.
(ii) Adequate recognition to customer profitability in terms
of return
(iii) Transparency & uniformity in operations
(iv) Commitment for long term association
(v) Proper monitoring of service for continuous
improvement.
Step 2 Present customer service strategy
Measure the discrepancies, validate it & find reasons
behind poor performance so that corrective actions can be
taken.

Step 3
Customer service needed for Product /
Competitive Advantage
With increasing competition, superior quality of service is
required. Also there is demand uncertainty, seasonality,
shorter life cycles requiring customer service standards
eg. Demand for tractor is maximum during October
November if not met, it will lie in stock till march april.
Step 4
strategy

Development of new customer service

Two aspects to be considered.

(i) Prevailing customer service standard in industry
offered by competitors.
(ii) Service expectation of customers there has to be cost
benefit analysis.

Step 5 Implementation of new strategy

An effective implementation policy should incorporate:
(i) Objectives & goals of the new strategy should be well
defined, communicated to customers as well as to all
people concerned with implementation & operational
performance.
(ii) Necessary resources should be allocated in time along
with plans & policies.
(iii) If required, proper re-structuring of organization be
carried out.
(iv) Simplification for speedier logistics functions.
(v) Training & Education of all concerned executives &
employees.
(vi) Time frame for implementation.

Step 6
Evaluation & Appraisal for continuous
improvement
(i) Spotting out points of deviations in the strategy so as
to take corrective actions in time.
(ii) Prevent wastage of resources in the wrong direction.
Establish
CSMC: Customer Service Monitoring Cell
FCSS: Formal Customer Satisfaction Survey
CC: Customer Conference
IIWC: Informal Interaction with customers
CFS: Customer Feedback System

Impediments
strategy

to

an

effective

customer

service

Sometimes, Sales people misuse customer service by

committing faster delivery to obtain order for achieving
higher targets. This requires speedier mode of transport
as well expediting production. This can disrupt other
customers orders & the logistics costs increase.
Many companies have no effective customer service
strategy.
Warren Blanding identified following
Costs of Customer Service

Hidden Eleven

1. Misdefining customer service

2. Overlooking customer profitability
3. Using unrealistic customer service policies
4. Failing to Research
5. Blurring Customer Service Costs
6. Misusing customer service as a sales incentive
7. Blurring lines of Authority
8. Equalling the Number of warehouses with customer
service
9. Adding Bodies Rather than systems
10.Employing
personnel

under

trained,

11.Misreading the Sellers Market.

under

compensated

LOGISTICS INFORMATION SYSTEM

Role of Information in
- Increased focus on Reducing Response Time
-

Redesigning Business Processes and their

continuous improvements

- Streamlining Logistical activities across supply

chain to reduce costs & improve efficiency
- High valued supply chain relationships
-

Enhanced customer services for competitive

advantage

- Attainment of a global standard and access to

world market

Logistical Information
- Must flow Internally among various deptts. Such
as purchasing, manufacturing, marketing, finance,
accounting & logistics, etc.
- As well as between company and its suppliers,
transporters,
forwarders,
warehouses
and
customers for
1.Handling customer orders
2.Production Planning
3 Materials requirements planning
- Distribution requirements planning
- Finance & Sales Forecasting
Logistical Information System (LIS)
LIS is a set of computer hardware & Software that
gathers, organizes, summaries and reports any
information for use by managers, customers &
others

A General Logistics Information System

A general LIS design consists of four distinct elements
(i) The inputs
(ii) The Database & its associated manipulation
(iii) The Outputs &
(iv) The Resources

Integrated Information Technology (IT) Solution

for Logistics & Supply Chain Management
Most of the Corporate Enterprises are investing in a
probable integrated IT infrastructural solutions for L &
SCM in terms of
- Computer Hardware
- Software
- Connectivity by Electronic Data Interchange (EDI)
- Bar Code System (BCS)
- Enterprise Resource Planning (ERP)
- Internet
- Extranet
- Intranet

Electronic Data Interchange (EDI)

EDI is an inter organization computer to computer
exchange of standard Business documents in a
structured & Machine processable format with the
objective to eliminate duplicate data entry & to improve
the speed and accuracy of the information flow
Enterprise Resource Planning (ERP)
ERP is a computerized integrated business process of
the organization used by firms to derive competitive
advantages in the production, distribution & financial
areas. Although there have been differences but of late
ERP & L & SCM softwares are fast converging

Benefits of ERP
i. Improving Productivity & Enhancing a competitive edge
by optimizing use of all its resources.
ii. Bringing about a trade off between demand & supply.
iii.Bringing together all who work/deal with suppliers,
customers & third-party logistics Providers.
iv.Ensuring a smoother flow of inventory & information at
all levels and between all parties, coupled with ready
access of up-to-date information.
v. Reducing the replenishment cycle time & hence capital
lock-up.
vi.Ensuring a
flexibility.

high

level

of

customer

service

with

vii.Overall organizational look-ahead capability & control.

Benefits of Intranet, Extranet & Internet

i. Better
collaboration
by
means
of
real
time
communication of information between functional
deptts of the firm, suppliers, customers, third party
logistics service providers, etc.
ii. Reduced transaction costs, communication costs &
response time across the supply chain.
iii.Bringing about a proper balance between demand &
supply resulting into lower inventory level and
prevention of stock-out position.
iv.Enhanced supply chain relationships, which ultimately
lead to developing strategic capabilities for competitive
advantages.

Emerging Technologies in Logistics & Supply Chain

Management
The following three emerging technologies promise to
expedite the flow of goods
i) Voice Systems
ii) Memory Buttons
iii) Radio Frequency (RF) Tags (Transponders)

(i) Voice Systems

Voice recognition frees warehouse workers hands
Each unit had to be trained to recognize individual
users speech patterns
Voice Template to be created for every word an
individual uses during dialogue with computer
Helps low skill workforce to interact with computers &
maintain high picking & receiving levels
In future, consignees will be able to pick up phone &
check shipments status while on the other end would
not be a person but a computer using a voice
recognition system

ii) Memory in a Button

In addition to bar codes, several pages of information can
be stored in a button, which a reader must physically
touch to extract the same. These are portable data
bases.
This technology can also be used by motor
carriers and private fleets to keep main tenance records
on individual vehicles.
iii) Radio Frequency (RF) Tags
A more promising alternative to bar codes are RF tags
which communicate data via radio waves to a reader
typically connected to a host computer system. Data is
coded into tags & there are active & passive tags.
Active variety has the power to send signals while
passive relies on reader to initiate communication.
Tags can be read only where data cannot be altered
and read write version, which is more expensive, data
can be changed easily like floppy disk, etc. These tags

In USA, fleet operators have begun looking at

transponders as a low cost alternative to satellites for
shipment tracking. Strategic sites like customer sites
would be equipped with readers which would scan each
time vehicles entered a distribution centre.
These are used as portable data bases which manifest
information shipper, content, consignee & would be
valuable in speeding up border crossings with customs
authorities, RF tags are useful in tracking & traffic
control. Bar code labels would be applied to individual
boxes & read write tags would be on pallets, trailers &
containers in warehouse.

Transportation
To reduce logistical costs & improve customer service
capabilities, corporates need - expectations from
transport industry
Reduction in Transit time for minimization of
inventory cost
Less damages, en-route handling & pilferages for
minimum insurance charges

Curtailment of protective packaging costs

Point To Point information regarding the status
of the shipment.

For efficient supply chain performance, transportation

plays a strategic role because of:
i.Ensures speedier & timely physical movement of goods
from point of inception to point of consumption.
ii.It creates core competency by preventing stock out &
customer annoyance
iii.It provides protective storage during transit
iv.It ensures cost-efficient & better customer service
v.Improves logistical capabilities of corporates & results
in harmomous supply chain relations.

Elements of Transportation Costs

i. Tariff of transport mode
ii. Transit Time cost
iii. Obsolescence and deterioration costs
iv. Proactive packaging costs
v. Transit insurance cost
vi. Miscellaneous costs: Like local taxes, octroi, toll taxes,
etc.

Modes of Transport
Modes of Transport

Air

Surface

Water

Inland

Overseas

Road

Rail

Pipeline

Multi-Modal Transport
Multi-Modal / Inter Modal Transportation is the use of
more than one mode of transport for the movement of
shipment from the origin to its destination. Inter-modal
operators use multiple to take advantage of inherent
economies of each & thus provide integrated service at
the lowest total cost
Basics

Rail

Roads

Water

Air

Piggyback

Fishyback

Tranship

Airtruck

Inter Model Transport System

Piggyback
-Most widely used
-Co-ordination between railways & roads
-Called Trailor on Flat Car (TOFC)
Or
Container in Flat Car (COFC)
-Very popular from 1960s in USA & 1980s onward
in India.
Fishyback
-Boxes loaded on trailor on road and re-loaded on a
ship & vice-versa at destination
-Widely used in Export / import freight Cargo

Trans-ship
-Co-ordination between railways & waterways for
bulk movement of freight cargo.
Air Truck (Birdyback)
Exchange of Containers/Boxes between Air & Road
Carriers.
Containerization
A metal box / case that resembles a trailor without
wheels measuring 8 feet / 8.5 by 20 feet / 40 feet
although larger containers are becoming more common.
20 feet container has become standard unit (TEUs
twenty-foot equipment units). 40` container equates to
two TEUs. Goods of any kind are packed into a container
& moved by truck or rail or to sea port & at destination,
process is reversed.

Major Features
-Used repeatedly for packaging & transport
-Specially designed to protect goods from
breakages & pilferages
-Equipped with fittings for easy handling from one
mode to another mode of transport
Major Advantages
Logistics cost reduction by:
i. Speedier Transportation
ii. Lower inventory cost due to reduction of transit time.
iii.Lower insurance charges due to less chances of
damages, pilferages, deterioration, etc. during transit
iv.Minimum handling, etc. during transit or en-route
handling
v. No protective packaging requirement
vi.Less Documentation

Selection of Transportation Mode

Factors to be considered:
i. Strengths & weakness of company in terms of
marketing, financial & production resources.
ii. Market
characteristics

competitive
scenario,
geographical structure, etc.
iii.Companys products in the eyes of customers to bear
stock-out situation.
iv.Product features & suitability to various modes of
transport weight, size, shape, etc.
v. Quantity to be transported each time
vi.Distance to be covered
vii.Total transportation cost of various modes of
transportation

viii.Carrier performance in terms of

-Speed
-Availability
-Frequency
-Reliability
-Safety
-Versatility
-Claim Settlement Procedure
-Logistical Service Capabilities
For example Hyndai is utilizing Railways for 30% of
transportation needs saving Rs.6 lakhs/month.
Chennai to Delhi by Rail = 5 days, by Road (trucks) =
7 days

Aspects for Transport Related Decisions

1. Economic Factors
2. Shippers Factors
3. Carrier Factors and
4. Alternative Pricing Strategies
Economic Factors
-Distance (Cost Directly Related)
-Volume (Affects per unit cost)
-Density (Weight & Space Aspects)
-Stowability (Product Dimension affecting vehicle
Space utilization)
-Handling (Loading / Unloading specific facilities)
-Liability (Risk covered by carrier during transit)

Shippers Factors
Minimization of total logistical costs in terms of
transportation, inventory, information, facility costs as
well as maximization of customer responsiveness
capability
Carriers Factors
-Cost of Procurement of vehicle
-Fixed operational costs like salaries of drivers,
attendants, vehicle insurance, registration & road
taxes
-Trip related cots such as cost of fuel, labour,
road permit, toll tax, etc.
-Value added service costs such as tracking of
shipment, point-to-point information, doo -todoor delivery, express cargo facility, bar coding
edi, cash management, etc.

Alternative Pricing Strategies

It is a trade-off between the cost of service rendered by
the carrier & time value of service to the shipper.
i) Cost of Service Strategy
A rate based on cost plus a profit margin (build-up
approach) widely used in case of competitive
environment.

ii) Value of Service Strategy

Transportation charges based on value of service required
by shipper transportation of high-value goods and
shorter and fixed replenishment cycle time assured by
firm.
iii) Combination Strategy
Establishment of transport price between cost of service &
value of service maximum. Widely used. Minimum &
max. rates should be known for negotiation purposes.

Warehousing & Distribution Centres

In the present day competitive scenario of explosion of
choice, no company can bear a stock-out situation as a
large number of alternative products are available with
additional features. Also, demand cannot be precisely
determined & physical attributes of inventory items be
preserved. Warehouse is more of a switching facility &
less as a storage facility.
Inventories are maintained to:
i. Improve supply-demand co-ordination
ii. Better customer service & responsiveness
iii. Market Dominance
iv. Lower overall logistics cost
Channel members provide storage, make push efforts &

Storage, Warehouse & Distribution Centre

Storage: Prior to finished products
Warehouse: Storing finished goods
Distribution Centre: Warehouse related to market & are
situated near to markets. These serve regional markets,
process & regroup products into customized order,
maintain full line of products, consolidate shipments from
different production points, etc.
Types of Ware Houses
1. On the basis of ownership
2. On the basis of services

On the Basis of Ownership

Private Warehouses
Public Warehouses
Parameter

Public Warehouse

Private Warehouse

i) Operating Costs

Higher due to inclusion of

profit

10% to 25% lower if in

sufficient volume

ii) Initial Investment

None

Large Facility, equipment,

trained personnel

iii) Control

Good

Direct responsibility over

personnel & procedures

iv) Risk

Minimal

Risk of obsolescence due to

change of technology or
demand

v) Tax Advantages

No

Depreciation Allowance

vi) Economies of Scale

Possible

Dependent on Company
Volume

vii) Consolidation of
shipments

Possible

None

viii) Storage & handling costs Know exact charges for

decision making

Generally only estimated

B) On the basis of services

Bonded Warehouse : Till import duty paid
Field Warehouse: In premises of a factory for bank
borrowing.
Cold Storage : Preserve Perishability
Distribution Warehouses: Nearer to market for final
products. Also called distribution centres.
Buffer Storage Warehouses
At strategic locations with adequate transport &
Communication facilities in huge quantities & sent to
distribution warehouses
Export & Import Warehouses
Near Ports where international trade is undertaken &
provide transit storage facilities.

Functions of Ware-Housing
Economic Functions &
Operational Functions
Economic Functions
Consolidation:
Receives & Consolidates goods from different plants &
dispatches to customer in single shipment.
Break Bulk
Transshipment of goods from production plant in bulk
quantity by low rate volume shipment (Railways) to
distribution warehouse & then reshipment in small
quantities to different customers (in road transport,
etc)

Stockpiling
Seasonal storage of goods to select businesses
(Agricultural Products, woolen garments, etc) to serve
round the year to support marketing efforts for
regular / smooth availability
Value-added Services
Like packaging & labeling for specific orders and thus
keeping basic product to required level.

Operational Functions
-Receiving Goods
-Up-to Date Recording of Goods
-Storing at appropriate place & in Minimum area.
-Preserving physical attributes
-Proper handling during loading / unloading
-Order receiving, processing & filing
-Arranging assortment of goods
-Dispatching of Goods
-Preparation of documents pertaining to
transactions, records & advices
-Marketing intelligence as intermediary
-Other legal functions related to trade

Three Decisions
Centralized vs Decentralized Warehouses
Locations of the Warehouses
The cost of the Warehousing
1. Centralized Warehouses
(a) Strengths
Can Carry less inventory
No / less stock-out situation
Demand variations can be met at a short notice
Centralized control of inventory
Bulk Transportation is cheaper
Less warehousing costs

(B) Weaknesses
Distant markets demand can be met at short notice with
costly mode of transport
Loss of customer service advantage
Poor market coverage & control
Transport Cost will be maximum unless in bulk quantity
(2) Decentralized Warehouses
(A) Strengths
Market coverage will be maximum
Maximization of customer services creat a high level of
loyalty & goodwill.
Transportation Moderate
Better Control over market intermediate

Weaknesses
1. Huge inventory investment
2. Huge warehousing development costs
3. Stock-out situation
4. Shortage of goods & replenishment from another
warehouse require additional transportation costs.

Factors for selection of number and Location of

Warehouse
1. Number of Geographical locations of the market
targeted by the firm.
2. Location & facilities of production centers.
3. Transportation infrastructure facilities determine
number & location of warehouses.
4. Nature & Quality of goods to be stored
5. Brand Loyalty among customers
6. Financial strength of the company
7. Change in the use of warehouse facility lease or sale
of buildings
8. Customer service as a means of competitive advantage

Elements of Warehousing Costs

i) Warehousing Infrastructural Development Costs
Costs of procurement of storage space:
Handling & Transfer cost
Administrative Cost
Costs incurred in direct and indirect physical facilities
ii) Working capital costs include the cost of working
capital involved in goods stored in warehouse as
inventory
iii) Miscellaneous Costs
Tax to be paid
Insurance paid for covering risks
The risk of product obsolescence or deterioration
Steps to be followed in Warehouse Design
Purpose of facility (Present & Future)
Layout of facility (Considering material handling system)
Warehouse space requirements and aisle lay out

Distribution Requirements Planning (DRP)

DRP is application of MRP Logic to Distribution inventories.
Distinction Between DRP &MRP is:
1. DRP deals with finished goods inventory whereas MRP deals
with dependent demand items for finished goods.
2. MRP operates in a demand situation controlled by enterprise
whereas DRP operates in an independent environment of
uncertain consumer demand which is not in the control of
enterprise.
3. Bills of materials are used in MRP whereas bills of
distribution (The network) are used in DRP.
4. DRP uses time-based order point to replenish network
whereas MRP applies time-phased logic to sub-assemblies &
components of products in bill of material network
5. DRP is an impulsion process from lowest levels to central
distribution centre whereas MRP is an explosion process
from the master production schedule to detailed scheduling

Logic of DRP
DRP anticipates the future requirements by forward
planning at all levels of a distribution network.
Periods of potential shortage can be identified early
enough to develop alternative plans.
To the net requirements, lead time is added to calculate
planned release date; which becomes the gross
requirement in the same time period for the parent
supply centre at next higher level

Benefits of DRP
(A) Marketing Benefits
1. Improved service levels that increase on-time deliveries
& decrease customer complaints.
2. Improved & more effective promotional & new-product
introduction plans.
3. Improved ability to anticipate shortages so that
marketing efforts are not expended on products with
low stock.
4. Improved inventory co-ordination with other enterprise
functions since DRP facilitates a common set of
planning numbers.
5. Enhanced ability to offer customers a co-coordinated
inventory mgt. service

Logistics Benefits
Reduced distribution centre freight costs resulting from
co-ordinated shipments.
Reduced inventory levels since DRP can determine what
product is needed & when.
Decreased warehouse space requirements because of
inventory reductions.
Required customer freight cost as a result of fewer
back-orders.
Improved
co-ordination
between
manufacturing for inventory.

logistics

&

Enhanced budgeting capability since DRP can effectively

simulate inventory and transportation requirements
under multiple scenarios.

Constraints of DRP
1. Due to dynamic environment, there is possibility of
forecasting error, which limits its effectiveness.
2. Inventory, planning requires consistent & reliable
performance cycle but its uncertainty reduces planning
system effectiveness.
3. Uncertainties such as delay in delivery schedule by
vendors by in-transit delay affect the efficiency &
effectiveness of DRP system.

Just-in-Time (JIT)
Advantages of JIT
1. Inventory levels are drastically reduced.
2. Process time, space requirement & set-up time reduced
considerably.
3. Elimination of waste by prohibiting:
-Over Production
-Waiting
-Undue warehousing & handling facilities
-Defective Production
4. Improved customer service and commitments bringing
competitive advantage
5. Improve productivity
6. Results through greater employees participation &
motivation.

Disadvantages of JIT
1. High risk is involved due to short-term planning & a
minimum level of inventory.
2. Suppliers of input materials need to be educated about
the quality by company.
3. Needs continuous & close evaluation and follow-up of
the whole process.
4. Needs establishment of long-term business partnership
with suppliers.
5. Not able to meet any unforeseen requirement /
demand.

Order Processing
A customer order is the message that sets the supply
chain process in motion. Order processing starts with the
receiving of a customers order and ends with the final
delivery of goods to him along with the transfer of title.
Order processing is the key to the customer service &
satisfaction. Focus is on three key system outputs &
three system characteristics.
System outputs
-Responsiveness or speed in order-handling
fulfillment
-Lowest possible delivered costs for products or
services (in customers eye)
-Minimal wastage in the system (inventory holding
at various locations)

System Characteristics Targeted:

Continuous improvements of system (to handle demand
under a variety of conditions)
Proficiency (to guarantee right-the-first-time shipping or
invoicing)
Efficiency related to minimizing the handling of paper work
or products.
Functions of Order Processing
(i) Order Planning
Designing an efficient order handling system i.e. who
handles orders, whether centralized or decentralized
system, etc. order placed to visiting sales people or by
telephone, fax, mail order, e-mail or EDI (Computer to
computer order)

ii) Order Transmittal

Time between customer placing / sending an order &
selling receiving the order.
The need is real-time
customer responsiveness to ensure better customer
service & to minimize replenishment cycle time.
iii) Order Handling
Activities include
i) Checking completeness / accuracy of order
ii) Credit check by credit deptt.
iii) Recording of transaction by accounts deptt.
iv) Allocation of products by inventory deptt. & advice to
pick the shipment and update the firms master inventory
file.
v) Transportation of shipment from the warehouse by the
traffic deptt. Often, buyers also specify date by which
order should reach supplier should try to meet this
requirement

iv) Order Picking & Assembly

Giving instruction to a specific warehouse to
assemble a given order for a customer as per list of
customer order.
With the use of computers, in case of a stock-out
item, information is made available to order handling
deptt. so that original documents can be adjusted.
A picking list is prepared for outgoing order with
initials of individuals so that consignee can verify with the
packing list on receipt of order & verify all items.
v) Order Delivery
Transit time i.e when a carrier picks up the
shipment till it is delivered at customers place has a
direct & major impact on sellers total order cycle time or
customers replenishment cycle time. Hence proper load
planning & fleet management are essential functions of
total order processing system failing which, transportation
cost per unit will go up.

Significance of Order Processing

- A late or inaccurate delivery can cost a customer more
than the actual product cost.
- Researchers have shown that product quality, features
and price factors are relatively less important than
elements like
i) Meeting committed delivery date
ii) Intact delivery
iii) Correct documentation
iv) Accuracy in filling orders
v) Information regarding order-status
vi) Advance notice of shipping delays etc.
Significance of order processing is:

(A) Achievement of Required Customer Level

- State-of-order customer service generates additional

sales volume who passes on products to end users in
time.

- Shift of power to re-sellers due to increased competition

& firms view them as assets & business partners.
(B) Legal Significance

There should be transfer of title from seller to buyer as

goods move by raising invoice / bill in name of customer.
Other legal documents required are: shipping advices,
road permits, challans, packing slips, documents related to
payment of taxes & duties.

(C) Reduction of Order Cycle Time

Any reduction in order cycle time will require stream

lining of total system & elimination of unnecessary
administrative procedures in total order processing system
EdI would result in reduced order processing time, less
chances of error in processing, reduced inventory
requirements & less chances of stock-outs
(d) Point to point information

A firms ability to provide accurate & timely information

regarding status of order, availability of inventory, tentative
shipping & dispatch schedules, back, order status, etc are
critical measures. This would help customers to become
aggressive in market place & meet further delivery
commitments with the next level of customers/consumers.

Materials Handling
Tompkins & White defined materials handling as
A system which uses the right method to provide the
right amount of the right material at the right place, at
the right time, in the right sequence, in the right
position, in the right condition and at the right cost
Materials
handling
equipments
improve
productivity & in logistics, materials handling cannot be
avoided but only minimized.

Objectives of Materials Handling

Reduction in machine & order picking times
Reduction in overall replenishment cycle time by quick
marshalling & movement of goods.
Uninterrupted production & distribution schedules for
avoiding bottle necks such as loading and
unloading problems
Protection or goods from breakages/damages during
movements
Offer safety to workers and provide safe working
conditions ensure better
customer service &
satisfaction
Enhance productivity & efficiency by reducing handling
costs

Principles of Materials handling

The college industry council on
Materials handling has developed 24 materials handling
principles.
Orientation principle
Requirement principle
Integrated system principle
Standardization principle
Just-in-time principle
Unit-Load principle
Minimum travel principle
Space utilization principle
Ergonomics principle
Energy principle

11)Ecology principle
12)Mechanization principle
13)Automation principle
14)Flexibility principle
15)Simplification principle
16)Gravity principle
17)Safety principle
18)Computerization principle
19)Systems flow principle
20)Layout principle
21)Cost principle
22)Maintenance principle
23)Obsolescence principle
24)Team solution principle

Factors Affecting the Selection of Materials Handling

Equipment
The selection of materials handling equipment requires
consideration of and attaining of proper balance
between the following factors:
I. Production problem.
II. The capabilities of the handling equipment.
III.The human element involved.

The ultimate aim is to arrive at the lowest cost per unit of

material handled.
I)) The production problem factors are:
a) Volume of production to be attained
b) Class of materials to be handled
c) The layout of plant and building facilities.
For example, the handling equipment that can be
economically justified for the manufacture of 1000TV
sets per day would be entirely different from the haling
equipment needed in a plant manufacturing 20 steam
turbine generators a year because the production rate,
weight and class of materials needed are different.

II. Equipment factors to be taken into consideration

include the following:

1. Adaptability: The load-carrying and movement

characteristics of the equipment should fit the
material handling problem.

2. Flexibility: Wherever possible, the equipment

should have the flexibility to handle more than one
material (class or size)

3. Load capacity: Equipment selected should have

enough load-carrying characteristics to do the job
effectively.

4. Power: The equipment should have enough

power available to do the job

10.Speed: The speed of movement of the handling

equipment should be as high as possible, within the
limits of production process and plant safety.
11.Space requirements: The space required to install or
operate materials handling equipment is also an
important consideration.
12.Supervision required: The degree of automation in the
handling equipment decides the amount of
supervision required.
13.Ease of maintenance: Equipment selected should be
capable of easy maintenance at reasonable cost.
14.Environment: Equipment selected must conform to
environmental regulations.
15.Cost: The cost of the equipment (capita investment) is
an obvious factor in the selection. The various kind of
costs to be considered in addition to the initial
purchase price of the handing equipment are

i) Operating costs

vi Space cost

ii) Installation costs

vii Depreciation charges

iii) Maintenance costs

viii Salvage value

iv) Power requirements

v) Insurance requirements

Ix Time value of money

invested
x Opportunity cost.

What is meant by integrated materials management?

The complete integration of materials management
functions like materials planning, purchasing, receiving,
stores, inventory control, scrap and surplus disposal for
better operation of the system is known as integrated
materials management having following advantages: Better accountability
Better coordination
Better performance
Adaptability to computerized systems

The components of integrated materials management

are: Materials Planning
Inventory control
Purchase management
Stores management

Materials Planning
Sales forecasting and aggregate planning are the basic
inputs for materials planning. The different tasks under
planning are listed below: Estimating the individual requirements of parts.
Preparing materials budget.
Forecasting the levels of inventories.
Scheduling the orders and
Monitoring the performance in relation to production
and sales.

Inventory Control
This includes the following: ABC Analysis
Fixing economical order quantity
Lead time analysis
Setting safety stock and reorder level.
Purchase Management
The includes the following: Evaluating and rating suppliers.
Selection of suppliers.
Finalization of terms of purchase.
Placement of purchase order.
Follow-up
Approval of payments to suppliers.

Stores Management
The different tasks under stores are listed below: Physical control of materials.
Preservation of stores.
Minimization of obsolescence and damage through
handling.
Disposal and efficient handling.
Maintenance of stores records.
Proper location and stocking of materials.
Reconciling the materials with book figures.

Equipments
Materials Handling
i. Mechanized handling systems
a) Forklift trucks
b) Tow tractors
c) Cranes
d) Hand powered equipment

ii. Semi Automated handling systems

a) Automated guided vehicle systems (AGVS)
like mechanized tow tractor with trailer but with
no requirement of operator). AGVS use optical or
magnetic guidance system
b) Sortations: used in combination with
conveyors
The master carton must have a distinguishing
code
which are read by
optical
scanning
devices & automatically routed to desired
location
c) Robotics: Human like machine that can be
programmed by microprocessors & function as an
expert system capable of implementing decision
logic
in handling process.

iii

Automated handling systems

Automated Storage/Retrieval System

Product arriving at distribution centre is nonpalletized & is moved by conveyor into a pattetizing
machine, where unit loads are constructed before
being moved into a high rise stacker crane. One or
more radio controlled robot pallet movers are
used for lateral movement in conjunction with one
or more stacker cranes having storage rack Up to
67 high. Pallet loads are moved from this giant
filling cabinet into depalletizers from which individual
cases are moved on a pre-programmed
basis into
order picking chutes. Only where orders
comprising boxes of different shapes are
consolidated through manual labour for shipment by
truck to retailers

Basic Materials handling considerations

a)Type of products to be handled
b)Types of production systems
c) Types of buildings
d)Materials handling cost

MRP (Material Requirements Planning)

The main purposes of a basic MRP system are:
a)To control inventory levels
b)Assign operating priorities for items
c) Plan capacity to load the production system
Inventory

Order the right parts, components & materials

Order in right quantity

Order at right time

Priorities
Order with the right due date
Keep the due date valid
Capacity
Plan for a complete load
Plan an accurate load
Plan for an adequate time to view future load

The theme of MRP is :

Getting the right materials to the right place at the right time
The objectives of inventory management under an MRP system
are the same as under any inventory management. system:
a) To improve customer service
b) Minimize inventory investment
c) Maximize production operating efficiency.

Thus objectives of MRP are:

1)To improve customer service by meeting delivery schedules
promised and shortening lead times
2)To reduce inventory costs by reducing inventory levels
3)To improve plant operating efficiency by better use of
productive resources.

General over view of MRP

Basically MRP consists of a set of computer programs that
run periodically (once a week or once a month) to
incorporate
the
latest
schedule
of
production
requirements. MRP performs three important functions,
viz:
1)Order planning & control i.e. when to release orders
& for what quantity
2)Priority planning & control i.e. comparison of expected
date of availability with the need date of each item.
3)Provision of a basis for planning capacity require ments
& development of broad business plans.
MRP is applicable primarily to companies that carry out
the fabrication of parts and assembly of standard
products in batch quantities.

Operation of MRP system

PROCESSING
INVENTORY
STATUS FILE

MPS FILE

INVENTORY
TRANSACTIONS DATA

MRP SYSTEMS
PLANNED ORDER
SCHEDULE

BOM FILE

EXCEPTION REPORTS

BOM = Bill of material

or Product structure file
MPS = Master production schedule (specifies what end products to
produce & when)
Inventory status file

Net requirements for a period

=gross requirement for a period
(scheduled receipt for the period plus on
hand inventory at the end of the period)

INFORMATION FLOW FOR PLANNING & CONTROLLING WITH MRP

BUSINESS PLAN

CURRENT
CONDITIONS

PRODUCTION PLAN

FORECAST

TENTATIVE MASTER
PRODUCTION
SCHEDULE

ROUGHT CUT CAPACITY

CHECK

MASTER SCHEDULE

MRP Systems

INVENTORY
STATUS FILE

Buy ITEMS

PURCHASE ORDER

VENDOR FEED-BACK

PRODUCT
STRUCTURE FILE

CRP

Shop Loading
PRODUCTION
ACTIVITY CONTROL

Information Flow for planning & Controlling with MRP

CRP = capacity requirements planning
MRP system outputs
Two primary outputs
2. Planned order schedule
It is a plan of the quantity of each material to be ordered in
each time period. The order may be a purchase order on the
suppliers or production orders for parts & subassemblies on
production deptts.
2.

Changes in planned orders i.e. modification of previous planned

orders.

The secondary outputs are:

1) Exception reports which list items requiring management attention
to control
2) Performance reports regarding how well the system is operating e.g.
inventory turnovers, percentage of delivery promises kept and stockout incidences.
3) Planning reports such as inventory forecasts, purchase commitment
reports, etc.

Capacity Requirements Planning (CRP)

The process of reconciling the master production schedule to the
available capacities of production deptt. (viz. machine & labour
capacities) over planning horizon.
MRP Computational Procedure

INVENTORY
STATUS FILE

ORDER RELEASE
REQUIREMENTS (ORDERS
TO BE RELEASED NW)

MPS FILE

MRP PROCESSING LOGIC

BOM
FILE

PLANNED ORDERS
(FUTURE)

Closed Loop MRP

When the material requirements planning (MRP) system has
information feed-back from its module outputs, this is termed as
closed-loop MRP.
A system built around material requirements that include the
additional planning functions of sales
& operations (production
planning, maser production scheduling and capacity requirements
planning). Once the planning phase is complete and the plans have
been accepted as realistic & attainable, the execution function
comes into play. These include the manufacturing control functions of
input-output (capacity) measurement, detailed scheduling &
dispatching as well as anticipated delay reports from both the plant &
suppliers, supplier scheduling, etc.
The term Closed loop implies that not only is each o these
elements included in the overall system, but also that feed-back is
provided by the execution functions so that the planning can be kept
valid at all times.

Closed loop MRP System Showing Feed Back

Closed loop MRP System Showing Feed Back

PRODUCTION PLANNING

MASTER PRODUCTION SCHEDULING

MATERIAL REQUIREMENTS PLANNING

CAPACITY REQUIREMENTS PLANNING

REALISTI
C
NO
W
YE
S

EXECUTE
CAPACITY PLANS
EXECUTE
MATERIAL PLANS

Manufacturing Resource Planning (MRP-II)

Through closed-loop system, the initial intent of MRP II system was to
plan & monitor all the resources of a manufacturing firm
manufacturing, marketing, finance and engineering. The second intent
was to simulate the manufacturing system.
MRP II is applicable to any manufacturing organization regardless of its size, location, product or process.
MRP II is a management process for taking the business plan
and breaking it down into specific, detailed tasks that people evaluate,
agree upon and are held accountable for. it involves all deptt. Both
materials & time requirement (CRP) are integrated within MRP system
(MRP-I).
Beyond this, MRP-II has been coined to Close the loop by integrating
financial, accounting, personnel, engineering & marketing information
along with the production planning & control activities of basic MRP
system. MRP II is the heart of corporate management information
system

MRP-II-An Integrated System Of Planning & Control

BUSINESS PLAN

MANUFACTURING

PRODUCTION PLAN

ROUGH-CUT
CAPACITY PLAN

PURCHASING
MASTER
PRODUCTION
SCHEDULE

MATERIAL REQUREMENTS
PLAN

ENGINEERING
MARKETING
FINANCE

DETAILED CAPACITY
PLAN

ACCOUNTING

SHOP FLOOR CONTROL,

PURCHASE CONTROL

Manufacturing: Materials, capacity

production schedules
Purchasing: vendor order
Engineering: process & product design

Marketing: Sales order, delivery

projections
Finance: Capital requirements
Accounting: Bills payable & receivable

LOT SIZING IN MRP SYSTEMS

Lot sizes are part quantities to meet requirements for one or
more periods. For parts produced in-house, lot sizes are
production quantities of batch sizes & for purchased parts,
these are quantities ordered from the supplier.
Four Lot Sizing Techniques
1. Lot for lot (L4L)
2. economic order quantity (EOR)
3. Least total cost (LTC)
4. Least unit cost (Luc)
Lot For Lot (L4L)
Most Common technique.
Sets planned orders to exactly match the net requirements.
Produces exactly what is needed
Minimizes carrying cost

Does not take into account set-up costs or capacity

limitations.

EOQ
It balances set-up costs & holding (inventory carrying)
cost. In EOQ model, either fairly constant demand must
exist or safety stock kept to provide for demand
variability. EOQ model uses an estimate of total annual
demand. The set-up or order cost and annual holding cost
(carrying cost for the whole year)
EOQ =

2 x Annual Demand x ordering cost per order

unit Price x inventory carrying charges (%)
3. Least Total Cost
The least total cost method (LTC) is a dynamic lot sizing
technique that calculates the order quantity by comparing
the carrying cost and the set-up (or ordering) costs for
various lot sizes & then selects the lot in which these are
most nearly equal

4. Least Unit Cost (LUC)

This is also a dynamic lot-sizing technique that adds
ordering and inventory carrying cost for each trial lot size
and divides by the number of units in each lot size,
picking the lot size with the lowest unit cost.
This method give more complete analysis & would
take into account ordering or set-up costs that might
change as the order size increases, if ordering/set-up
costs remain constant, lowest total cost method is most
preferred because of simplicity

Purchasing And Sourcing Management

In global competitive scenario, purchasing &
sourcing
management
has
gained
importance since outsourcing of materials
have become need of the hour for
sustainable growth & competitiveness

Nature & scope

The type of activities most frequently carried out are:
1. Commodity analysis
2. Market research
3. Purchase order tracking & follow-up.
4. Determination of needs & specifications for internal
customers
5. Transmitting fore casts of future needs to suppliers
6. Supplier performance measurement (on-going
exercise)
7. management of supplier quality
8. contract management & negotiation
9. management of inbound/out bound transportation
10.Price / cost analysis

It is a cross-functional process of firms various activities

such as engg., quality, design, Mfg, marketing,
accounting and their integration with external
organizations like vendors, in-bound transporters, etc.
Some major activities include:
i. Supplier identification
ii. Supplier evaluation and selection
iii.Supplier management
iv.Supplier development & improvement
v. Supplier integration into on-going Processes

Importance of purchasing
It has tremendous scope for cost curtailment, quality
improvement, reduced replacement cycle time with
small inventory, developing and maintaining reliable &
competitive suppliers, cooperating & integrating with
other functions.
1.Quality: Life time sourcing programmes with tier-I
vendors so as to have economies of scale along with
commitment to keep quality high (Bajaj Auto -60%
components outsourced)
2.Cost
3.Supplier relationship
4.Low inventories & smooth flow
Reduce inventory cycle time without stock-out with IT
achieve on time delivery, time to market & efficient
use of resources for survival of firms

Interface with other functions

Purchasing must understand the needs of the ultimate
consumers so that suppliers relationships can be developed.
Production, marketing & logistics constitute the primary
value creation chain in most firms.
Purchasing process trends for improved Productivity
Purchasing process contributes significantly in value-Addition
to the organization & should continuously improve
purchasing productivity to improve overall logistics
productivity through following steps:
i) Management techniques for relationships
Value analysis
Standardized items
Stockless purchasing but availing volume discounts

I. Information systems replacing paperwork

II. EDI, Bar Coding, ERP, internet, etc
III.Shift of R & D to suppliers
IV. Outsourcing to third parties
To take advantages of economies of scale, skills or
technology, outsource to concentrate on core
competencies

Contemporary sourcing & supplier management

i. Quality of suppliers
Total quality management of goods supplied by a
vendor to meet buyers (company) expectations
Supplier responsibilities:

Supply goods as per specifications, quality in a

timely & reliable manner

Use of statistical process control (SPC) to ensure

consistency

Small & continuous supply

Zero defects in terms of right assortment, correct

documentation & right quantity, etc

Supplier categories
Qualified suppliers by firms audit team
Certified suppliers: Goods shipped are 100% fit for use.
Comprehensive cost measurement
Purchasing is increasingly being measured in terms of
total cost including scrap & production yields, long-term
warranty costs, shipping & transportation terms, re-work
& other costs associated with low quality and external
failure costs once the product is in customers hands

Creating & Maintaining supply relationship

The traditional three-bid & price driven approach to
buying-acentury old practice has been replaced. Firm are
increasingly seeking supply relation ship such as product
modifications, delivery & other specific needs a more
co-operative type of relationship has begun & not just
the price. Supplier provides many products & services as
per long-standing agreement & both firms gain benefit in
market at the expense of outsiders ( rather than of each
other) taking care of critical, product, technology or
services.

Best Practices in Supplier/Vendor Management

Vendor rationalization by tiering of vendors
Long-term contractual relations improvements
Vendor selection on non-price criteria
performance & quick response capability

like

past

Quick response and minimum replenishment cycle time

Extensive use of IT for quick information sharing
Transfer of technology & managerial skills
Minimum
number
component/material

of

vendors

for

same

Local sourcing
Continuous performance measurement of vendors &
communication of the same to them
Shared cost reduction drive

Protective Packaging

Introduction
Protective packaging has a great impact on the cost
and productivity of a logistical system. It can optimize
logistics and supply chain efficiency and effectiveness.
Packaging affects the cost of every logistics activity.
Transport and storage costs are directly related to the size
and density of packages.
Logistical functions
Packaging can optimize logistics
efficiency and effectiveness by:

and

supply

chain

Reducing the weight and space requirements for

material handling and transit,
Ensuring product quality en route through the logistics
system and supply chain, and
Selling the product.

Hence, the major functions of packaging in logistics and

supply chain are to provide containment, protection,
utilization and communication. However, logistical
packaging provides no great value of its own but adds
value only as its function in a logistical system.
Containment
Products must be contained before they can be
transported from one location to another. Packaging
provides space in which a product is contained.
Protection
Packaging protects its contents on its route form
the manufacturer to the consumer and even during its life
with the consumers. It protects the products from spoil,
discolour,
loss
of
fragrance,
damage,
break,
contamination, or physical deterioration of the product.
Take.
Product Characteristics + Logistics Hazards =
Package Protection

Utilization
The utility function of packaging relates to how
packaging affects the productivity and efficiency of the
total logistical system. All logistical operations like truck
loading, storage in warehouses and warehouses order and
picking productivity are affected g package utility
Communication
The communication function of protective packaging
is gaining importance due to wide and extensive use of
the logistical information system.

Forms Of Protective Packaging

The logistical/protective packaging materials and forms
include:
Wood pallets, crates, blocking and bracing;
Corrugated fibreboard boxes, dividers, inserts and
dunnage;
Solid fibreboard slipsheets and boxes
Multi-wall paper bags and drums;
Steel cans, pails, drums, and straps;
Steel racks and cages;
Fabric (burlap and woven plastic) bags and blakets;
Low-density plastic film shrink-wrap, stretch-wrap
bags, and barriers;
High-density plastic boxes, slipsheets, and pallets;
Plastic strapping; and
Plastic foam custioning and dunnage for fragile or

Summary
Packaging is an art of designing and producing the
package for a product with the objective to create demand,
provide protection and convenience in handling. In the logistics
and supply chain management perspective, packaging is
required for protection and identification of goods in their
journey in a supply chain network. Thus, the major functions of
protective packaging are to provide containment, protection,
utilization and communication.
For maximization of logistical productivity and efficiency
along with growing concern about environmental responsibility,
today, firms are widely using film-based packaging, blanket
wrapping and returnable containers. In order to have an
appropriate packaging policy, for the attainment of both
marketing and logistics objectives, strategists have to choose
form among five alternatives, namely; packaging changing,
family packaging, multiple packaging, reuse packaging, and
ecological packaging, after taking into consideration various
factors pertaining to consumers, resellers, company, economy,
and logistic and supply chain management.

ORGANISATION FOR LOGISTICS & SCM

An efficient & effective logistics organisation is a vital part of an
enterprise in strategic management. There is no single best
org. structure for logistics & SCM, with the growing nature &
scope of logistics & SCM in the overall performance of
enterprise.
Over the years there has been change in logistics
organizational structure from being a part of various functions
like manufacturing, finance & marketing to a core function.
While designing org. structure, firm need to follow
certain principles of organization like unity of command, span
of control, authority & responsibility, line & staff relationships,
centralization & decentralization etc. The various factors like:
Size of organization
Corporate structure & strategy
The role of logistics & supply chain management
In the overall value-addition activities, availability of IT
infrastructural resources and environmental uncertainty

Evolutionary Trends of Logistics & supply chain

organization (Organisation of Development)
Prior to 1950, logistics functions were generally viewed
as supportive functions & scrattered throughout the org.
structure without cross-functional co-ordination resulting
in repetition & duplication of work & wastage of resources
Between 1950 & 1960, firms started experiencing
difficulties in market place mainly due to increase in
competition & recession of 1958.
The evolutionary trend and transformation in logistics &
supply chain organization is shown in fig 13.1

Independent functional structure

Emphasis was on production related problems. Fig. 13.2
indicates a traditional org. structure of early stage of
industrial revolution.
Limited internally integrated functional structure
Between 1950 & 1960, firms started experiencing
difficulties in market place mainly due to increase in
competition & recession of 1958, This
compelled firms to control, costs for survival, Material
management & Physical distribution management
functions were created with org. structure in Fig. 13.3
Fully internally integrated functional structure
With liberlazition of economies of world, continued
inflation & significant increase in price of fuel, etc. forced
organizations to reduce costs and there was further

Externally Integrated Process Functional Structure

The beginning of 1990s revolutionized total business
functions. In view of IT, JIT, MRP, DRP etc. there was mass
scale globilisation of market. There was shift from functional
structure to process structure so as to achieve quick
response to customers. Org. structure adopted was to have
smooth cross-functional co-ordination & approach.
Virtual supply chain org structure
Links customers directly to suppliers & even suppliers
suppliers so that suppliers can respond on a real-time basis
to the changes in the market & a vendor managed
inventory (VMI) system can be developed. This org.
structure enables firms to capture benefits of integrated
logistics system without command & control of org.
structure.
(Virtual Implies an underlying existence without a formal
recognition)

Organizational choices
i. Informal
ii. Semi formal
iii.Formal
Informal Organization
No change in existing organization structure and
reliance is on co-recon or persuasion to accomplish coordination & co-operation among those who are
responsible for them.
Budget, sometimes, can be a disincentive to co-ordination
between key activities like transportation, inventory
control & order processing, etc although budget is a
major control device. A possible incentive system could
be to encourage cross activity participation is to
establish number of cross-charges or transfer costs

Semi Formal organization

The supply chain co-ordinator is assigned to co-ordinate
projects that involve supply chain and cover other
functional areas. This type of structure is called Matrix
Organization. SC co-ordinator shares decision authority
& accountability with activity area manager & may even
assist in co-ordinating logistics activities among member
firms of supply chain beyond the boundaries of his firm.
Matrix organization is a choice between informal & highly
structured one but there can be conflicts because lines of
authority & responsibility get blurred

Formal organization

The formal organization establishes clear lines of authority &

responsibility for logistics / SC.
Organisational orientation
Organization design can follow three corporate
strategies
process, Market and Information
i. Process Strategy
Achieve maximum efficiency in moving goods from raw
materials state through work in-process and on to a
finished goods state. Focus is on activities that give rise
to
cost. Activities such as purchasing, production
scheduling,
inventory, transportation and order
processing will be
collected & managed collectively
ii. Market Strategy
Firms pursuing market strategy have a strong customer
service orientation. Both sales & logistics co-ordination
are
sought by putting these under the same executive.
The
organization structure is likely to span across
business
units to a high level of customer service of course. However,
Logistics costs may not be held at
their lowest level.

Information strategy
Such firms have a significant downstream network of dealers
and distribution organizations with substantial inventories.
In order to secure information, the organistion structure is
apt to span functions, divisions and business units and even
traditional legal boundaries of channel members
Mixed strategies often exist within the same firm. A variety
of designs will appear for essentially similar firms.
ORGANISATINAL POSITIONING
Organizational choice & orientation are first considerations.
Next comes, positioning of logistics activities for most
effective management.
Positioning concerns where to place these activities in the
organization structure which is decided based on:
i. Decentralization vs. centralization
ii. Staff vs. line
iii. Large company size vs. small

DECENTRALISATION VS. CENTRALISATION

A centralized organization group logistics activities at the
corporate level for serving all product groups. The
centralized form is to maintain close control over logistics
activities and to benefit form optimum utilization of
equipments. The forward haul of one divisions products
might be back-haul for another which is not possible in
case of de-centralisation similar efficiencies can be gained
through shared ware-housing, shared purchasing &
shared data processing. Decentralization, however allows
quicker & more customized logistics to customer needs.
Decentralisation makes sense if product lines are
distinctly different in their marketing, logistics and
manufacturing characteristics & only few economies of
scale can be found. Computerized data processing has
helped centralized order processing & inventory control.
Fig 15.5

STAFF VS LINE
An advisory organization (consulting role) is good when
i. A line organization would cause unnecessary conflicts
among existing personnel.
ii. Logistics activities are less critical than selling, producing &
other activities.
iii. Planning is relatively more important than administration.
iv. Logistics is considered as a shared service among product
divisions.
v. The logistics staff is located near top management. In fact,
some corporate level logistics staff wields more authority
than many divisional heads of line.
Large vs. small
The small firm does not benefit from volume purchases &
shipments. As does large firm. Organizationally, the small
firm has some form of centralized organization since no
product divisions might exist. Also, logistics activities may
not be so clearly defined & structured.

Alliances & Partnerships

Some firms share their logistics capabilities with other firms
or to contract for logistics activities to be provided by
specialized agencies called third-party providers (3PLs)
Benefits of Logistics partnering are:
Reduced cost & lower capital requirements
Access to technology & management skills
Improved customer service
Competitive advantage such as through market penetration
Increased access to information for planning
Reduced risk & uncertainty
Maximum benefits are derived by way of reduction in
transportation / distribution costs & freed-up capital in noncore areas.

Also there is reduction of manpower

The primary risk is loss of control over critical logistics
activities that may result in potential advantages never being
realized.
Alliances: (Sharing of logistics resources) A logistics alliance
is built on trust, sharing of information, specific goals to
achieve, operating ground rules for each partner and exit
provisions for each partner. Although, there are benefits yet.

The following concerns are to be addressed:

Loss of control over logistics channel
Fear of being written out of logistics picture
Concern about logistics failures & no direct way to handle
Adequate checks & balances not available
Difficult to identify economies
Inadequate reporting system
When partnering, sharing of profits may be difficult to
identify
Not enough trust to try
Partners may not be viewed equally
Difficulty of brining in trust & good faith

Contract Logistics
A primary motivation for a company to outsource some or all of
its logistics activities is that third party provider is more
efficient since logistics is its primary business, while logistics
is not the core competency of the buying firm. The most
noted negatives to using 3pl were lack of understanding the
clients business and over-promising service capabilities.
Barriers to maintaining a successful long-term relationship
are
i. Mis alignment of company cultures
ii. Change in leadership at either the 3PL or the user
iii. Unreasonable expectations of the out-sourced relationship
iv. Lack of good information

Partnering Through Collaboration

Partnerships among supply chain members occur as
information is shared for their mutual benefit these partners
collaborate to achieve their own organizational objectives,
lower cost from reduced inventories & improved customer
service due to higher fill rates. Collaboration improves supply
chain performance by reducing uncertainty associated with
demand & lead times.

Inter Functional Management

Although organizing logistics activities as integrated function
reduces conflicts amongst logistics activities, yet an
additional area creates conflicts with other functions.
Logistics Marketing Interface
Customer Service
Order entering and processing
Packaging
Retail Locations

Logistic Operation interface

Plant Location
Purchasing
Production scheduling
Without co-operation, there is no guarantee that an
optimum balance will be achieved between
transportation,

Inter Organizational Management

The supply & distribution policies of the firms (any one firm) in
the distribution channel can affect the performance of other
firms in the channel. The question is whether some advantages
can be gained by viewing the channel as single entity or Super
organization and managing it for benefit of all members. The
superorganization is a group of firms related through their
business processes and mutual objectives, but who are legally
separate. They share a common interest in the individual
decisions made by each, since the decisions of other firms can
affect their performance & vice-versa. The co-operative efforts
can yield proportionately greater returns to each member &
these are distributed fairly.
(Refer cost curves for buyer, seller & supply chain)

Managing The Conflict

Managing the super organization is not the same as managing

within the confines of the firm. The reliance is more on
bargaining and tacit arrangements than on formalized
structural relationships. Four steps are required.

i. Establishment of metrics for identifying boundary-spanning

opportunities & measuring performance due to co-operation
ii. Ways
of
sharing
superorganization

relevant

information

among

iii. Application of strategy for conflict resolution.

iv. Method for distributing gains achieved form co-operation &

maintain the coalition.

II.

Need For Metrics

Uncovering cost saving / service-improvement
opportunities in the supply chain from managing across
company boundaries & quantifying them require an
accounting system. Multi-enterprise accounting would
need to report such costs as inventory holding,
transportation, order or production setup, product storage
& handling. Channel members must be able to evaluate
the effect of their decision-making on their performance
as well of their members. Many of the metrics that firms
use internally for their managerial purposes need to be
extended to their supply chain partners.
Information Sharing
A. Each firm to adjust its controllable variables so that
optimum profits are achieved and need inputs information
& its impact on profits of each member.
B. It reduces uncertainties among autonomous members
and contributes to their continued voluntary cooperation.

III

Distribution of Benefits
Equitable redistribution of the benefits achieved through
co-operation by coalition is important. So that members
remain in coalition.
Strategic
Transfer

for

Conflict

Resolution

Formal

A formal transfer mechanism is one where a productflow variable under the control of one channel member
can be altered in such a way to influence the action of
another member to cause the system wise optimum to
be achieved.
Other mechanisms are less direct &
obvious that is informal. Two major & distinct informal
mechanisms, power & trust can be used in a supply
chain. Power can be used if he is a monopoly supplier.
Additional forms of power are:

Reward Power:

Buyer as a preferred customer guaranteeing

faster & easier transactions or guaranteed
service regarding quality, availability and
delivery time.

Expert Power:

Seller providing training, information or

problem solutions.

Referent Power: Sellers brand name can be used for

advertising.
Trust:

One party has confidence in exchange

partners reliability & integrity. Trust is
central to achieving co-operative problemsolving.
A
major
precursor
is
communication which is formal & informal
sharing
of
meaningful
and
timely
information.
Another precursor of trust is shared values
i.e. common economic goals.

However, none of the above methods can guarantee conflict

resolution or force a particular channel member to perform in a
particular manner that will benefit the channel as a whole.
These are some guidelines.

Logistics / Supply Chain

Control Model & Control
Systems:

Supply Chain control process is one of

comparing actual performance to planned
performance && initiating corrective
action to bring the two closer. Auditing
provides the necessary information.
Control Process frame work
The basic need is because of uncertainties
that alter plans performance. There could
be one time, extraordinary occurrences
(strikes fires, Floods, etc) and also
changes in economic conditions,
technological changes, shift in customer
attitudes, etc. that has not been foreseen.

A Logistical / Control Model

Management control process
mechanism called thermostat.

could

be

compared

to

Standards & Goals

The control function requires a reference standard against
which logistics activity performance can be compared. The
manager, consultant or a computer program compares
performance with standard which could be a cost budget, a
customer service target level or a contribution to profit.
Type of Control Systems
1.Open loop
2.Closed loop
3.Modified Feed-back
In modified control system, the manager may at times
substitute for the decision rules.
He can over-ride the
automatic decisions based on customer service complaints,
inventory cost reports, marketing promotional announcements,
transportation service charges and production schedule
changes. This adds flexibility but also acts as a safety valve

Control System Details

i.Tolerance of the system for error
a.

The nature of system response

b.

The setting of goals

c.

The nature of control information

i. Error Tolerance
The best control system is one that will detect fundamental
errors.
ii. Response
Mass determines the rate at which needed change can be
made. If inventory levels are to be raised, time required will
depend on at what rate production levels can be changed.
Information time lags are a second important factor in the
pattern of response.

respective information system, or possibly a more

responsive production and delivery system, will need to be
designed.
Process response is also influenced by the form in which
corrective action is taken.
Two modes of control are
common. The most popular is the on-off, or two-position,
mode.
When an error is detected, full and constant
corrective action is taken until it is observed by the monitor
that the desired level has been reached. If the mass of the
system and information lags are great, the on-off control
mode promotes overshooting of the desired process
performance level.
The proportional control system is the second familiar
control mode. Corrective action here is in direct proportion
to the observed error. When the error is great, so is the
change in the input level to the process to reduce the error.
As the error is reduced, so is the change in process inputs.

Two modes of control are common

i.On Off or Two position Mode
ii.Proportional control system
Control In Practice
Decision support systems such as budgets, service targets,
profit centre concepts, etc. are used.
A. Budgets
Widely used & serve as reference standard & ensure the
profitability of the company through cost control.
B. Service Targets
The customer service target focuses on the revenue side of the
profit equation.
Approach is reasonable in cases where
product sales are highly service-sensitive e.g. low-valued,
highly substitutable products.

Profit Centre Concept

Since logistics function employs capital, incurs cost and adds
value by distribution, it is treated as a separate business entity.
It is difficult compared to A & B above because of pricing the
services. Once prices are fixed (like transfer prices), logistics
manager can improve profits in any way. Top management
reviews performance periodically.
Control Information, Measurement & Interpretation
An effective logistics control system requires relevant & timely
information or function performance through audits & various
logistics reports.
Audits: Establish new reference points for comparison to make
it effective.

Total Function Audit

Evaluation of all personnel
Organizational structure
Overall network design
Substantial changes in demand, customer service,
product characteristics, logistics costs & pricing policies
can
indicate the need for strategy revision.
Demand: Shifting demand patterns require re-location of
warehouses. Growth of few percentage points only indicates
re-planning may be economical.
Customer Service
The costs of transportation, warehousing, inventory carrying
and order processing rise disproportionately as service levels
are increased. Replanning is required when service levels are
changed due to competition, policy revisions or arbitrary
service goals different from original.

Product Characteristics
Logistics costs are sensitive to product weight, volume, value &
risk. These characteristics can be altered through package
design or finished state of the product during shipment &
storage.
Logistics Costs
The amount spent by a firm on logistics often determines how
often its strategy should be replanned. If costs are high, small
changes in inventory carrying costs and transportation rates
can make reformulation of logistics strategy worthwhile.
Pricing Policy
There are various types of pricing decisions and any change in
delivered arrangement (Transportation included), the supply
firms incurs transportation charges. This can add warehouses &
inventory cost to logistics system.

Inventory Audits
Cycle counting (Peretual system) should be used. Inventory
audits are essential in inventory systems to avoid disparities
between inventory records & actual inventories.
Freight Bill Audits
Errors in rates, product description, weights & routing are few
of many errors. Companys traffic deptt. can audit these. It
can be done by outsourcing on commission basis for checking
details.
Bench Marking to other Firms
Costs & customer service data sought for similar business.
Other data are inventory turn-over ratios, on-time delivery
statistics & logistic activity costs etc.

Other Audits
Warehouse space utilization
Transportation fleet utilization
Inventory policy performance
Productivity Reports
Logistics cost to sales
Activity cost to total logistics cost
Logistics cost to industry standard and / or average
Logistics cost to budget
Logistics resources - budget to actual (Rupees, Lobour hours
etc.)

Contingency Plans
If there are dramatic changes in activity performance level like
warehouse is shut down due to fire, when computer failure
renders computerized inventory control system inoperative,
when labors strike, changes in availability of transport services,
the companies customer service is severely zeopardised.
Minor adjustment will be of no avail.
time for replanning.

Major changes require

Many companies develop contingency plans to take care of

such shocks.
Contingency plans represent pre-determined
courses of action to be implemented when a defined event
occurs.

COLD CHAIN
The term cold storage refers to a refrigerated chamber for
storage of perishable commodities such as fruits, vegetables,
fish, eggs, meat, dairy products etc.
In these storage
structures, the temperature is controlled so that the stored
perishable products may not deteriorate in quality. In cold
storage the temperature is maintained in the range of 1 to
10oC and in freezers the temperature is at sub-zero level.
Due to inadequate cold storage infrastructure in the country,
the post harvest losses of agricultural perishable products like
fruits and vegetables is to the extent of 33-35 per cent.
Currently the available capacity of cold storage in the country
is 9.7 million tones (6-7 per cent) as against fruit and
vegetable production of 127 million tones in the country. The
other users of the cold chain infrastructure are the
pharmaceutical, processed food products, fast food, and
floriculture industries. Road-blocks in the development of cold
chain infrastructure in India are:

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

There is huge potential for cold chain as a service industry in

India.
Immediate measures need to be taken by the
government to boost the cold storage industry.
Stored Cold and Fresh
Snowman Frozen Food Limited, a joint venture between
Hindustan Lever, Amalgamated Food, and Mitsubishi, operates
a cold chain in India for marine products, processed food
products, and fruits. Each of their cold storage facilities have
storage capacity of more than 1000 mT. are built at the cost of
Rs. 3.5 crore and are equipped with ultra modern storage and
material handling facilities. They operate chillers at 2o c and
freezers at 10o 18o C. for different product applications.
The cold supply chain is a multi-billion dollar business with
more companies in Asia now positioning themselves to be part
of the industry. The growth of retail sector throughout the
region has driven the demand for cold storage facilities, and
3rd Party Logistics (3PL) companies focusing on cold storage
and distribution.

For the Asia Pacific region, this industry is still in its infancy,
although one can see changes quickly being implemented
traditional wet markets being replaced by new super- and
hyper-markets; life styles and eating habits changing; and as
Asian economies grow more affluent, retail spendings set
record highs. However, the cold supply chain industry falls
behind other industries when it comes to the provision of
modern warehouse systems and logistics.
Cold-storage
For a start, the investment cost to build and run a cold-store
can be up to 10 times higher than the cost of running an
ambient temperature warehouse. Since variables such as
higher operating costs are inevitable, the common approach is
to try to reduce the initial set-up outlay. Further, space
optimization and higher productivity due to using modern
storage systems will pay for themselves with lower running
costs and increase profit margins.

Cold-stores in the retail trade and food processing industries

carry a wide variety of products that are time sensitive with
limited shelf life. Thus, stock rotation is a fundamental
requirement in the industry. With the high costs of building and
running a cold store, it is essential that storage solutions offer
maximum volumetric utilization.

BULL WHIP EFFECT

AND SUPPLY CHAIN
The phenomenon of the bullwhip effect in
the supply chain occurs when information
about demand becomes increasingly
distorted as it moves upstream in the
manufacturing process. This distortion
leads to excessive inventory throughout
the system, poor forecasts, insufficient or
excessive capacities, product
unavailability, and higher costs generally.

 The bullwhip effect distorts demand

information within the supply chain, with
different stages having a very different
estimate of what demand looks like. The
result is a loss of supply chain
coordination. Each stage of the supply
chain is trying to optimize its local
objective and, accordingly, takes actions
that ultimately result in a poor
performance of the entire supply chain.

 Another traditional business that leads to

the bullwhip effect, is batching order at
certain times of the month or year.
Companies make a practice of batching it
saves time and money.
Yet another cause of the bullwhip effect, is
a practice known as gaming intentionally
presenting manufactures offer bargains,
retailers stockpile inventory and dont order
again for months. This is not the way to
keep the supply chain running smoothly.

 A final strike against the bullwhip

effect, would be to minimize price
incentives. When manufacturers
offer bargains, retailers stockpile
inventory and dont order again for
months. This is not the way to keep
the supply chain running smoothly.
The bullwhip effect in various
components of logistics and supply
chain are as follow:

Manufacturing Cost
The bullwhip effect increases the
manufacturing cost in the supply
chain mainly due to a variation or
gap in the real quantity demanded
and quantity for which order placed
by the customer. The result in
increased variability, either in
building excess capacity or in
holding excess inventory, both of
which increase the manufacturing
cost per unit product.

Inventory Cost and

Replenishment Lead
Time

There is an increase in the inventory cost

and a replenishment in the lead time in
supply due to bullwhip effect, mainly as a
result of variability in demand. There are
mainly due to the fact that the firm has to
maintain a highest level inventory than the
required one, also having impact on
dispatch schedule for finished goods by the
firm for component / raw materials to be
supplied to the firms because available
capacity and inventory level might not
meet the order quantity, resulting into
higher replenishment lead time.

Transportation Cost
Within the supply chain,
transportation cost increase due to
bullwhip effect, which is mainly due
to a significant fluctuation in the
transportation requirement over a
period of time. This has an impact of
raising transportation cost due to
requirement of maintenance of
surplus transportation capacity to
meet high demand period
requirement.

Product Availability
The bullwhip effect decreases product
availability. Due to a lack of trade-off
between the actual demand and order
quantity, firms will always face problems
of stock out at some selling points,
whereas over stock at others, resulting
into both loss of sales and increase in the
cost of the product.
Thus, the bullwhip effect reduces the
profitability of a supply chain immediately
and conflicting relating to long run.