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Chapter 15

Market Logistics & Supply Chain


Management

SDM – Ch 15 Tata McGraw Hill Publishing 1


Learning Objectives
• Principles of materials management, logistics
and supply chain management
• Logistics interface with other functions
• Inventory management principles and systems
• Warehousing management fundamentals
• Transportation management practices
• How IT enables the logistics function
• Understand about the performance
measurement of the logistics function

SDM – Ch 15 Tata McGraw Hill Publishing 2


Materials Management
• Materials forms the largest single cost item in
most manufacturing companies – needs to be
carefully managed
• Materials management function includes
planning and control, purchasing and stores
and inventory control
• Materials management is the precursor to
logistics and supply chain management
Logistics……
SDM – Ch 15 Tata McGraw Hill Publishing 3
Logistics Defined
• Logistics means having the right thing, at
the right place, at the right time
• The procurement, maintenance, distribution
and replacement of personnel and materials –
Webster’s Dictionary
• The science of planning, organizing and
managing activities that provide goods or
services – Logistics World, 1997

SDM – Ch 15 Tata McGraw Hill Publishing 4


Logistics
• Functions: planning, procurement,
transportation, supply and maintenance
• Processes: requirements determination,
acquisition, distribution and conservation
• Business: science of planning, design and
support of business operations of
procurement, purchasing, inventory,
warehousing, distribution, transportation,
customer support, financial and human
resources
SDM – Ch 15 Tata McGraw Hill Publishing 5
Scope of Logistics
• Choice of markets
• Procurement
• Plant location and layout
• Inventory management
• Location and management of warehouses
• Choices of carriers, mode of transport
• Packaging decisions
• Relevant to all enterprises: manufacturing,
Government, Institutions, service
organisations
SDM – Ch 15 Tata McGraw Hill Publishing 6
Components of LOG
Management
Logistics Activities
Input Output
Customer service
Demand forecasting
Distribution •Marketing
•Natural
Communications Orientation
Resources Inventory control (competitive
(land, facilities Materials handling
Advantage)
Equipment) Order processing
Parts and service support •Time and
•HR
Plants and warehouse selection Place utility
•Finance Procurement •Efficient move
•Information Packaging
Return goods handling to customer
Salvage and scrap disposal
Traffic and transportation
Warehouse and storage

SDM – Ch 15 Tata McGraw Hill Publishing 7


Links and Flows
General material flow/ service flow

Information flow

Information flow

Customer’s Supplier’s
Customer Lead Firm Supplier
customer supplier

General cash flow

Outbound / Downstream logistics Inbound / Upstream logistics

SDM – Ch 15 Tata McGraw Hill Publishing Source: ICFAI 8


Logistics and Marketing
• Interface on:
– Product design and pricing
– Customer service policies
– Sales forecasts and order processing
– Inventory policies and location of warehouses
– Channels of distribution and despatch planning
– Transportation to reach products to customers
• Production wants larger production runs to
minimise time spent on set up changes on the
machines. Marketing wants smaller runs of a
variety of products.

SDM – Ch 15 Tata McGraw Hill Publishing 9


Source: Michael Porter

The Value Chain


S Company Infrastructure
U
P Organisation, people, methods
margin
P
Systems & technology
P
O
R Procurement
T

Inbound Outbound Marketing Service


Operations
logistics logistics & sales

margin

SDM – Ch 15 Tata McGraw Hill Publishing 10


Primary activities
Logistics Plan Outline
• Internal analysis (current position)
– Organisation
– Human resources
– Transportation
– Relations with internal customers
– Quality of product
– Quality of Service
• External / situation analysis
– Competitor logistics performance
– Trends
– External environment / economy
– Public, private and contract warehouse
– Public, private and contract carriage

SDM – Ch 15 Tata McGraw Hill Publishing 11


Principles of Logistics Excellence

Strategic Operational

Link logistics to corporate Focus on financial


strategy performance
Organise comprehensively Target optimum service levels
Use the power of information Manage the details
Emphasise human resources Leveraging logistics volumes
Form strategic alliances Measure and react to
performance

SDM – Ch 15 Tata McGraw Hill Publishing 12


Alling & Tyndall
Logistics Focus Areas

Customer service related Operations related


Packaging Plant and warehouse site
Order processing location
Spare parts and service support Procurement
After sales Customer service Inventory control
support Materials handling
Demand forecasting Salvage and scrap disposal
Distribution communications Traffic and transportation
Return goods handling Warehousing and storage
Logistics may be confined to the company whereas SCM extends beyond

SDM – Ch 15 Tata McGraw Hill Publishing 13


Supply Chain Management
• Business context:
– Globalization of the market place
– Advances in technology
– Increasingly demanding, informed customer base
– Purchase decisions on dimensions of quality, price and
time
• Innovative supply chain:
– To meet customer driven challenges
– To reduce costs
– Improve service levels
– Enhance speed to market

SDM – Ch 15 Tata McGraw Hill Publishing 14


Supply Chain Integration
• Optimising the supply chain requires
supplier and customer involvement to
integrate processes, policies, systems,
database and strategies between
diverse trading partners

SDM – Ch 15 Tata McGraw Hill Publishing 15


Supply Chain Integration
Customer Analysis
Order Fulfillment
Purchasing/Supplier
Partnering

Integrated Inventory Management and


control
Storage & Supply Chain
Transportation Management

Demand & Lead


Manufacturing/ Time Management
Re-manufacturing/
Assembly
Materials
Inventory management…
SDM – Ch 15 Management
Tata McGraw Hill Publishing 16
Why Carry Inventory?
• Support production requirements
• Support operational requirements
• Maximize customer service – ensure
availability when needed – protect
against uncertainty
• Hedge against marketplace uncertainty
• Take advantage of order quantity
discounts
SDM – Ch 15 Tata McGraw Hill Publishing 17
Functions of Inventory
• Inventory serves as a buffer between:
– Supply and demand
– Customer demand and finished goods
– Requirements for an operation and the
output from the previous operation
– Parts and materials to begin an operation
and the suppliers of the materials
The shock absorber of business !
SDM – Ch 15 Tata McGraw Hill Publishing 18
Factors Which Drive Inventory
• Target service level parameters
• Lot sizing practices
• Safety stock and safety time
conventions
• Volume discounts and purchase
arrangements
• Seasonal build up needs
SDM – Ch 15 Tata McGraw Hill Publishing 19
Categories of Inventory
• Anticipation – built in anticipation of future
demand – peak season, strike, promotion
• Fluctuation (safety) – to cover random,
unpredictable fluctuations in supply and
demand and lead time – to prevent disruption
in operations, deliveries etc
• Lot-size – to take advantage of quantity
discounts, reduce shipping, set up and
clerical costs – also called cycle stock
SDM – Ch 15 Tata McGraw Hill Publishing 20
Categories of Inventory
• Transportation – pipeline or movement
inventories – to cover the time needed to
move from one point to another – factory to
distribution point for example
• Hedge – for materials where prices are
volatile
• Maintenance, repair and operating supplies
(MRO) – to support M and O – spare parts,
lubricants, consumables etc
SDM – Ch 15 Tata McGraw Hill Publishing 21
Types of Inventory
• Obvious….
– Raw materials
– Work-in-process
– Finished goods – of primary concern to
marketing
– Maintenance, repair and operating (MRO)
supplies
– In-transit, pipeline
Performance measures…
SDM – Ch 15 Tata McGraw Hill Publishing 22
Performance Measures
• Inventory turns = Annual cost of goods
sold /average inventory in value
• Days of sales = inventory on hand /
average daily sales

SDM – Ch 15 Tata McGraw Hill Publishing 23


Types of Inventory Systems
• Pure Inventory – when and how much to
order. RM procurement. Simple
manufacturing operations
• Production Inventory – finite production
rates. Demand fluctuation. Products compete
for manufacturing capacity
• Production – distribution Inventory –
compete for production capacity. Geographic
placement of inventory for best service of
demand
SDM – Ch 15 Tata McGraw Hill Publishing 24
Types of Classification
• ABC category – most common for all
• HML - high, medium, low - similar
• FSND – fast moving, slow moving, non-moving,
dead – spare parts / FG
• SDE – scarce, difficult, easy to obtain –
procurement / Spares
• GOLF – govt, ordinary, local, foreign source –
procurement / Spares
• VED – vital, essential, desirable – spare parts / FG
• SOS – seasonal, off-seasonal - commodity

SDM – Ch 15 Tata McGraw Hill Publishing 25


ABC Inventory Analysis
• Based on Pareto’s law:
– A – 20% items worth 80% of value
– B – 30% items worth 15% of value
– C – about 50% items account for 5% of the usage
• Classify items based on the above criteria
• Apply degree of control in proportion to the
importance of the group

SDM – Ch 15 Tata McGraw Hill Publishing 26


Inventory Related Costs
• Unit costs – basic value of the item carried
• Ordering costs – generating and sending a
material release, transport, any other
acquisition costs
• Carrying costs – capital, storage, obsolescence
• Stock-out costs
• Quality costs – non-conforming goods
• Other costs – duties, tooling, exchange rate
differences etc

SDM – Ch 15 Tata McGraw Hill Publishing 27


Approaches for Controlling
Inventory
• Continuous review:
– Safety stocks and forecasting methods
– Excess and obsolete inventory
• Part simplification and re-design
• On-site supplier managed inventory
• Use of supply chain inventory management
systems, Materials Requirement Planning,
Distribution Requirement Planning etc
• Automated inventory tracking systems
• Supplier – buyer cycle-time reduction
Warehouse management…
SDM – Ch 15 Tata McGraw Hill Publishing 28
Stores Management
Objectives
• Providing efficient service to users
• Reduce cost of carrying goods
• Providing correct, updated stock figures
• Controlling inventory
• Preventing damage to or obsolescence of
materials
• Achieve all of the above with good
housekeeping
SDM – Ch 15 Tata McGraw Hill Publishing 29
Functions
Warehouses

Material Customer Information Storage


handling service transfer function

Receive goods
Identify goods Temporary Permanent
Sort goods
Despatch to storage
Hold inventory
Recall, select goods
Marshal the shipment
Despatch the shipment
Prepare records and
advices
SDM – Ch 15 Tata McGraw Hill Publishing 30
Purpose of Warehousing
• To provide desired level of customer
service at the lowest possible total cost
• It is that part of the firm’s logistics system that
stores products (RM, Packing Materials, WIP,
FG) at and between point of origin and point of
consumption and provides info to
management on the status, condition and
disposition of items being stored
• Distribution warehousing relates mainly to FG
SDM – Ch 15 Tata McGraw Hill Publishing 31
Reasons for Warehousing
Service related Cost related
Maintain source of supply Achieve production economies
Support customer service Achieve transportation
policies economies
Meet changing market Take advantage of Quantity
conditions Purchase discounts and forward
Overcome time and space buys
differentials Least Logistics cost for a
Support JIT programs of desired level of customer
suppliers and customers service
Provide customers with the right
mix of products at all times
Temporary storage of materials
to be disposed or re-cycled

SDM – Ch 15 Tata McGraw Hill Publishing 32


Warehouses
• Support manufacturing
• Mix products from multiple facilities for
shipment to a single customer
• Break-bulk
• Aggregate
• Used more as a ‘flow-thru’ point than as
a ‘hoarding’ point
SDM – Ch 15 Tata McGraw Hill Publishing 33
Distribution Warehousing
• The objective is to set up a network of
warehouses closest to the customer
locations to service markets better and
minimise cost
• Could be C&FA s, depots or distribution
centers
• Macro location strategies:
– Market positioned
– Production positioned
– Intermediately positioned
SDM – Ch 15 Tata McGraw Hill Publishing 34
Distribution Center
• Warehouse designed to speed the flow
of goods and avoid unnecessary costs
• Speeds bulk-breaking to avoid inventory
carrying costs
• Helps to centralise control and co-
ordination of logistics activities
• Products can also be cross-docked
(one vehicle to another)
Market positioned..
SDM – Ch 15 Tata McGraw Hill Publishing 35
Market Positioned
• Warehouses located nearest to the final
customer
• Factors influencing are:
– Order cycle time
– Transportation costs
– Sensitivity of the product
– Order size
– Levels of customer service offered
Production positioned….
SDM – Ch 15 Tata McGraw Hill Publishing 36
In between…

Production Positioned
• Warehouses located close to the production facilities
or supply sources
• Not the same level of customer service as the earlier
one
• Serve as points of aggregation / collection for
products made in a number of plants
• Factors influencing are:
– Perishability of raw materials
– Number of products in the product mix
– Assortments ordered by customers
– Transport consolidation rates ex; FTL

SDM – Ch 15 Tata McGraw Hill Publishing 37


Intermediate Positioned
• Mid point locations between the final
customer and the producer
• High customer service levels possible even if
products made in number of units

• Other macro approaches look at cost


minimisation or cost and demand elements to
maximise profitability
Transportation management….
SDM – Ch 15 Tata McGraw Hill Publishing 38
Transportation
• Very important in the Logistics function:
– Movement across space or distance adds value to
products
– Transportation provides time and place utility
• Role of transportation includes:
– Provides opportunity for growth under competitive
conditions
– Deeper penetration into markets
– Wider distribution means greater demand
– Can influence product prices favourably

Principles….
SDM – Ch 15 Tata McGraw Hill Publishing 39
Transportation Principles
• Continuous flow
• Optimise unit of cargo - stackability
• Maximum vehicle unit – capacity utilization
• Adaptation of vehicle unit to volume and nature of
traffic
• Standardisation
• Compatibility of unit load equipment
• Minimum of dead weight to total weight
• Maximum utilization of capital, equipment and
personnel

SDM – Ch 15 Tata McGraw Hill Publishing 40


Process….
The Selection Criteria
• Environmental analysis: shipper, carrier,
government regulations, public influence
• Deciding objectives
• Selecting mode
• Select transport type within the mode
• Define functions of transport
• Evaluation and control – customer perception /
satisfaction, best practice benchmarking

SDM – Ch 15 Tata McGraw Hill Publishing 41


Cost Factors
• Can be product related or market related.
• Product related: density, stowability, ease or
difficulty of handling and liability
• Market related: competition, location of
markets, Government regulations, traffic in and
out of the market, seasonality of movements
and impact on customer service
• Five prominent modes:
– Road, rail, air, water and pipeline.
– Sixth one is use of Ropeways
SDM – Ch 15 Tata McGraw Hill Publishing 42
Customer Service Factors
• Consistency, dependability
• Transit time
• Coverage – door-to-door for example
• Flexibility in handling a range of
products
• Loss and damage performance
• Additional services provided
Reverse logistics…
SDM – Ch 15 Tata McGraw Hill Publishing 43
Comparison of modes……

Reverse Logistics
• Movement of goods from the market or
customer back to the company
• The need:
– Increased awareness of the environment
– Stringent legislation
– For some it is part of the business
– Profitability of dealing with scrap, surplus
• Surplus, obsolescence can result due to:
– Over optimistic sales forecasts, change in product
specs, errors in estimating material usage, losses
in processing or overbuying based on incentives
SDM – Ch 15 Tata McGraw Hill Publishing 44
Advantages of Rail
• Economy – more so for goods over
long distances
• Efficiency of energy
• Reliability – not affected by weather
conditions

SDM – Ch 15 Tata McGraw Hill Publishing 45


Disadvantages
• Uneconomical for small shipments and
short distances
• Not suitable for remote stations
• Costly terminal handling facilities
• Inflexible time schedules

Road transport…..

SDM – Ch 15 Tata McGraw Hill Publishing 46


Road Freight Advantages
• Through movement – direct from consignor to
consignee, no transshipment
• Flexibility – routes and loading routines can
be easily altered, operate day and night
• Less capital costs – for own fleet + immunity
from industrial action
• Fast turn-around – if articulated units like
tractors and trailers are used
• Minimum delays

SDM – Ch 15 Tata McGraw Hill Publishing 47


Disadvantages
• Susceptibility to weather and road conditions
– in spite of the best protection
• Unsuitability for heavy loads – rail transport
more economical for bulk loads
• Unsuitability for long distances – again the rail
telescopic rates are more favourable

Air transport….

SDM – Ch 15 Tata McGraw Hill Publishing 48


Air Transport Advantages
• Faster mode
• Reduction in cost particularly inventory
• Broad service range
• Increasing capabilities
• Disadvantages:
– High cost
– Weather affects flight conditions
– Limitations on heavy consignments
SDM – Ch 15 Tata McGraw Hill Publishing Water transport……49
Water Transport
• Advantages:
– Mass movement of bulk
– Lowest freight cost
– Preferred for long haul of low value commodities
• Disadvantages:
– Not for quick transit
– Suitable for certain types on commodities only

Pipeline….
SDM – Ch 15 Tata McGraw Hill Publishing 50
Pipeline Movement
• Advantages:
– Reliable, continuous, all weather transport
– Low energy consumption – hence low cost
– Low maintenance and operating costs
– Underground, no space problem
– Can traverse difficult terrain
– Minimal transit losses
– Operation round the clock, safe
– Economies of scale – double the throughput for
only 30% additional cost
• Disadvantage is in the investment cost
Ropeways….
SDM – Ch 15 Tata McGraw Hill Publishing 51
Ropeways
• Advantages:
– In hilly or inaccessible areas
– Long and circuitous routes with streams / deep valleys
– For commodities capable of movement in ropeway
buckets
– Short haulages of less than 50 kms
– Areas where other carriers are uneconomical
• Disadvantages:
– Heavy investments
– Limitations on size and quantity of haul

How to decide on the right carrier?


SDM – Ch 15 Tata McGraw Hill Publishing 52
Carrier Selection
Traffic Related Shipper related Service related
Length of haul Size of firm Speed (transit time)
Consignment weight Investment priorities Reliability
Dimensions Marketing strategy Cost
Value Network of Customer relationship
Urgency production and Geographical coverage
Regularity of distribution Accessibility
shipment Availability of rail Availability of special
Fragility sidings vehicles / equipment
Toxicity Stockholding policy Monitoring of goods
Management
Perishability Unitisation
structure
Type of packing Ancillary services –
System of carrier
Special handling bulk breaking, storage
evaluation
required
SDM – Ch 15 Tata McGraw Hill Publishing 53
Chart of Relative Merits
Parameter Weight Rail Road Air Water Pipe Rope
age line way
Speed 30 5 6 8 4 3 3
Versatility 10 6 8 5 6 3 2
Reliability 20 6 8 5 5 7 4
Availability 10 7 8 5 6 3 2
Continuity of 10 6 7 5 5 8 3
service
Distribution cost 20 4 5 6 6 7 8
Total score 10 5.4 6.7 5.1 5.1 5.1 4.0
Overall ranking 10 2 1 4 5 5 6

SDM – Ch 15 Tata McGraw Hill Publishing 54


Key Learnings
• Support to customer service has evolved from
materials management to logistics and to
supply chain management
• Production and marketing are the two internal
customers of Logistics
• Logistics also has a direct impact on the
financials of a company
• Three important functions of logistics are
inventory management, warehousing and
transportation
SDM – Ch 15 Tata McGraw Hill Publishing 55
Key Learnings
• Inventory directly supports customer service but
also adds to the cost and has to be managed
carefully
• Warehousing provides the place utility and works as
a balance between production and meeting
customer needs
• Transportation supports the place and time utility
and uses different modes to reach the products to
the consumer
• Modern day supply chains integrate the operations
of a firm, its suppliers and customers

SDM – Ch 15 Tata McGraw Hill Publishing 56

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