Chp 1 Introduction to Logistics and Supply Chain Management

8/4/2019 Chp 1 Introduction to Logistics and Supply Chain Management

http://slidepdf.com/reader/full/chp-1-introduction-to-logistics-and-supply-chain-management 1/30

Prof. Deepak R. Gupta

1

AFTER THIS UNIT YOU SHOULD BE ABLE TO ANSWER FOLLOWING

QUESTIONS:

a. Concept Questions /Short notes Questions

1. Logistics

2. Logistical Management

3. Origin or genesis of Logistics

4. Military Logistics

5. Functions of logistics

6. Importance of logistics

7. Causes of bad logistics

8. Operating Objectives

9. Life cycle support

10. Reverse logistics

11. Commodities market

12. Supply Chain Management

13. Internal integration

14. External organization

15. „Co-operation is better than competition‟

16. Total Cost Approach

17. Logistical Competency

18. Logistical Mission

19. Role of planning in logistics management

20. Logistics interface with marketing

21. Inbound logistics

22. Outbound logistics

23. Importance of 3Cs

D. Review all the past university question papers. You should be able to answer questions from

the portion „Overview of Logistics function‟ as described below

1. What is the meaning and concept of logistics? Define Logistical Management.




2

2. What is the Importance of Logistical Management?

3. What are the Operational objectives of logistics? Explain.

4. What are Logistical functions? Explain

5. Comment on Logistical Interfaces with production & marketing.

ELEMENTS OF LOGISTICS MANAGEMENT

WHAT IS LOGISTICS?

Logistics is concerned with getting the products and services where they are needed and when

they are desired. It is difficult to accomplish any marketing or manufacturing without logistical

support. It involves the integration of information, transportation, inventory, warehousing,

material handling, and packaging.

The operating responsibility of logistics is the geographical repositioning of raw materials, work

in process, and finished inventories where required at the lowest cost possible.

The formal definition of the word „logistics‟ as per the perception of Council of Logistics

Management is the process of planning, implementing and controlling the efficient, effective flow

and storage of goods, services and related information from the point of origin to the point of

consumption for the purpose of conforming to customer requirements.

Mission of logistics is providing a means by which customer satisfaction is achieved. Art of

moving, lodging and supplying troops, supplies and equipment is logistics. Concept of logistics

has moved into business to move, lodge and supply inputs and outputs.

Logistics is practiced for ages since organized activity began. Without logistics support no

activity can be performed to meet defined goal. The current challenge is to perform logistics

scientifically in order to optimize benefits to the organization.

Logistics is a planning function of management. Logistics function is concerned with taking

products and services where they are needed and when they are needed.

Logistics ensures that the required inputs [what] to a value adding process are made available,where they are needed, when they are needed and in the quantities [how much] they are needed. It

also ensures that the outputs of the value adding process are made available where they are

needed when they are needed and in the quantities [how much?] they are needed.

There are many ways of defining logistics but the underlying concept might be defined as

follows: „Logistics is the process of strategically managing the procurement, movement and




3

storage of materials, parts and finished inventory through the organization and its marketing

channels in such a way that current and future profitability are maximized through the cost-

effective fulfillment of orders.‟

GENESIS OF MODERN LOGISTICS

Operation Research techniques like Value Analysis & PERT/CPM have their origin in the II

World War. Resources come under pressure in a war, like no other time and one is expected to

deliver results in spite of all odds. These trying situations forced the military planners to evolve

solutions to their problems. After the war these concepts traveled to business where resource

crunch is usual. In business there is no enemy, but there are competitors who pose threat to the

organizations survival.

Field Marshall Rommel‟s words that „………before they are fought, battles are won or lost by

quartermasters‟ speak about the importance of logistics.

There are several examples where battles are lost due to long & ineffective supply lines.

Logistics received great importance in military planning and subsequently became a very

important management function in the course of last 40 years.

Logistical management includes the design and administration of systems to control the flow of

material, work in process and finished inventory to support business unit strategy

OVERVIEW OF LOGISTICS FUNCTION

Logistical History of India: India was a maritime power since about 300 BC, trading with several

countries of the world bringing prosperity home. Traders of Surat brought riches to the country by

extensive maritime trade. Like many of our excellent practices, logistical efficiency also faded

away over a period of time.

Some important logistical feats in history:

1. Berlin Airlift – 1945: A study in logistics. When the city of Berlin was blockaded by Soviets

and all supply lines were cut off, Americans planned and executed a major logistics operation

to feed the city from air.

2. Indians in the Gulf countries – 1991:




4

1n 1991, when gulf war broke out, Indian Government evacuated thousands of Indians from

the gulf countries and brought them home in a massive exercise employing Indian airlines

planes.

3. Operation Overlord-1945: Allies‟ invasion of Europe and subsequent victory in II World War.

4. American war of Independence

Keeping 12,000 soldiers armed and fed from England was a big task; British lost the American

war of independence due to bad logistics.

WHAT CAUSES BAD LOGISTICS?

a. Infrastructure: Bad roads, inefficient railways, poor communication lines, and congestion in

the ports.

b. Taxation: e.g. Octroi

c. Information: Inadequate information

d. Management: Poor management decisions

IMPORTANCE OF LOGISTICS

1. Logistics is the bed rock of trade and business:

• Without selling and or buying there can be no trade and business. Buying and or selling takes

place only when goods are physically moved into and or away from the market.

• Take away logistical support trade and business will collapse

2. Leads to customer satisfaction through superior customer service:

Organizational objectives of P [Productivity],Q [Quality],C [Cost],D [Delivery],E [Employee

Morale],F [Flexibility],S [Safety],H [Health],E [Environment] are set to meet customer

expectations of Q,C,D.

Q, C, S, H, E are parts of must be quality that a customer expects. Logistics addresses D, F

objectives which lead to customer satisfaction through superior customer service

3. Integrates logistical activities:




5

In conventional management environment, various activities of logistics work in isolation

under different management functions. Each pocket trying to sub optimize its objectives at the

cost of overall organizational objectives. Purchasing trying to purchase at minimum price at

the cost of what is needed by operations. Operations produce large quantities at minimum

production cost ignoring demand leading to doom inventory. Logistics function of

management brings all such functions under one umbrella pulling down inter departmental

barriers.

4. Competitive edge:

In the fiercely competitive environment logistics provides the edge. Due to technological

revolution most of the products are moving into commodity markets. In a commodity market

where price is controlled by competition, where there is no product differentiation in terms of

quality parameters like performance & reliability, where brands are almost irrelevant,

competitive edge is that of availability of product and service in terms of time, place and

quantity.

5. Logistics wins or loses wars

British lost American war of independence due to poor logistics

Rommel was beaten in the desert by superior logistics of Allies

6. Supports critical functions:

a) Interface with Operations:

Strong logistics support enables a company to move towards JUST IN TIME production

system for survival in a highly competitive market

b) Interface with marketing:

These days marketing a product is increasingly on the strength of availability and flexibility as

we discussed earlier. Stronger emphasis is on the last of four Ps of marketing [product, price,

promotion and place]. Logistics provides the interface between production function and

marketing function. Marketing is trying to sell the product in the market place. Logistics

makes the product accessible to marketing by acting as interface between the function that

produces it and the function that makes the consumer buy it.

This interface is gaining importance due to following changes that are sweeping the market

making many companies adopt JUST IN TIME production system.




6

c) Change in the Customer:

Demanding, knowledgeable, conscious of rights, lacking in brand loyalty, changes preferences

very fast, expects very high degree of service

d) Many products are moving towards commodities market:

Product differentiation in terms of quality of performance is vanishing and brands are losing

their magic. As a result of above we find that availability is an important determinant of

purchasing decision.

7. Logistical costs:

For individual businesses logistics expenditures are 5% to 35% of sales depending on type of

business, geographical areas of operation, weight/value ratios of products and materials. This

is an expensive operation. Improvement in the efficiency of logistics function yields savings as

well as customer satisfaction

WHY SHOULD WE LEARN LOGISTICS?

HOW OR WHY DOES LOGISTICS BECOME IMPORTANT FOR MANAGEMENT

STUDENTS?

1. Impact of logistics on cost of creating and delivering of product to the customer.

Logistical costs can be as high as 20% to 25% depending on type of business.

2. Provides competitive edge to business.

3. Crucial to survival and prosperity in global trade and business.

4. Many products have short life cycles.

5. More & more logistics experts are going up the hierarchical ladder.

6. Leads to the concept of supply chain management.

7. Logistics is important in the Indian market due to the sweeping changes, which are taking

place.

a. Competition: Internal as well as external

b. Shift from seller‟s market to buyer‟s market

c. Changing customer




7

d. Expanding business, growing exports

e. Corporate Management‟s Shift towards modern management concepts like Lean

management, Just In Time, Total Quality Management etc.,

IMPORTANCE OF LOGISTICS MANAGEMENT IN INDIA

[Explain the growing importance of logistics management in India in today‟s

context……………Q4 2001]

I. Liberalization and opening our door to competition

II. Global business has long supply & distribution lines

III. Changing Indian customer, aware, demanding and less brand loyal

IV. Competition ensures that product differentiation in terms of quality is difficult

V. Product life cycles are shrinking

VI. Our markets are shifting from sellers‟ to buyers‟

VII. Many consumer products are moving into commodities market

VIII. India is a large country. Large distances separate production and consumption centers.

Essential commodities have to travel from Food Corporation warehouses to consumers

through PDS.

IX. Logistics performance has not been impressive

X. Fruits and vegetables are grown at various places but do not enjoy access to market

WHAT ARE THE OPERATIONAL OBJECTIVES OF LOGISTICS? V. Important

Please note that this Q can be asked as one direct Q or as concept for any of the point.

1. Rapid Response:

Some companies measure this as response time to customer‟s order. On an average how much

time do we need to fulfill one particular type of customer‟s order in a year? This is a measure

of Rapid response

Logistics should ensure that the supplier is able to respond to the change in the demand very

fast. Entire production should change from traditional push system to pull system to facilitate




8

rapid response. Instead of stocking the goods and supplying on demand, orders are executed on

shipment-to-shipment basis. Information Technology plays an important role here as an

enabler. IT helps management in producing and delivering goods when the consumer needs

them. This results into reduction of inventory and exposes all operational deficiencies. Now

the management resolves these deficiencies and slashes down costs. [Concept of SMED and

KANBAN as practiced by JIT companies in Japan or elsewhere]

2. Minimum Variance:

Delivery objective of an organization, this can be measured as „On Time Delivery‟ or OTD. If

100 deliveries are made in a month/quarter/year how many reached as per the commitment

made to the customer? This percentage is OTD.

Any event that disrupts a system is variance. Logistics operations are disrupted by events like

delays due to obstacles in information flow, traffic snarls, acts of god, wrong dispatches,

damage in transit. Traditional approach is to keep safety stocks and transport the goods by high

cost mode. The cost of this approach is huge. Logistics is expected to minimize these events,

thereby minimize and improve on OTD

3. Minimum Inventory:

This is component of cost objective of a company. Inventory is associated with a huge baggage

of costs. It is termed as a necessary evil. Objective of minimum inventory is measured as

Inventory Turns or Inventory Turnover Ratio. Americans call this measure as turn velocity.

Logistics management increases these turns without sacrificing customer satisfaction. Higher

turns ensure effective utilization of assets devoted to stock. [Concept of single piece flow as

practiced by JIT companies in Japan or elsewhere]. Logistical management should keep the

overall well being of a company in view and fix a minimum inventory level without trying to

minimize the inventory level as an isolated objective.

4. Movement Consolidation:

Transportation is the biggest contributor to logistics cost. Transportation cost depends on

product type, size, weight, distance to be transported etc. for transporting small shipments just

in time [reduction in inventory costs] expensive transport modes are used which again tend to

hike the costs. Movement consolidation is planning several such small shipments together [of

different types of shipments] by integrating interests of several players in the supply chain.

Generally, large shipment size and long distances reduce transportation cost per unit.

Movement consolidation shall result into reduction in transportation costs.




9

5. Quality:

If the quality of product fails logistics will have to ship the product out of customers premises

and repeat the logistics operation again. This adds to costs and customer dissatisfaction. Hence

logistics should contribute to TQM initiative of management. In fact, commitment to TQM has

made the managements world over wake up to the significance of logistics function. Logistics

can play a significant role in total quality improvement by improving the quality of logistics

performance continuously and continually.

6. Life Cycle Support:

[cradle to cradle logistical support- produce, pack (cradle) and repack (cradle)]. Logistics

function is expected to provide life cycle support to the product after sale. This includes

a) After sales service: the service support needed by the product once it is sold during its

life cycle

b) Reverse logistics [concept Oct‟03] or Product recall as a result of

- Rigid quality standards [critical in case of contaminated products which can cause

environmental hazard]

- Transit damage [leaking containers containing hazardous material]

- Product expiration dating

- Rigid laws prohibiting unscientific disposal of items associated with product [packaging]

- Rigid laws making recycling mandatory

- Erroneous order processing by supplier

- Reverse logistics is an important component of logistics planning

LOGISTICAL FUNCTIONS [components of logistics or elements of logistics]

[Functions of Logistics…short notes 2001]

1. Information Management

Management is appreciating importance of information as an element of logistics of late, now.

The role of information is vital in order processing. Quality of information is critical as error in

composition of information requirement creates potential disturbance in the supply chain.




10

Incorrect order processing due to erroneous information will result into product recall and

reshipment if the sales opportunity still exists.

Faster and quality information flow from customer to processor results into cost effective

logistics. Forecasting and order management are two areas of logistical work dependent on

information.

Forecasting is an effort to estimate future requirements to position inventory or assets devoted

to inventory. As forecasting becomes unreliable in a fast changing environment, control

strategies like JIT, Quick Response and Continuous Replenishment came into being. Now it is

the task of the logistics function to use information technology to strengthen operation control

and forecasting to the best advantage of the organization.

Leading firms typically have information systems capable of monitoring logistical

performance on a real time basis giving them the capability to identify potential operational

breakdowns and take corrective actions prior to customer service failure. In situations where

timely corrective action is not possible, customers can be notified in advance and thereby

taking the surprise out of forthcoming service failures

2. Inventory Control

Keeping the stock levels in such a position, so that neither stock out nor stock piling takes

place is Inventory control. While formulating inventory policies find out 20% of the products

marketed that account for 80% of the profit.

3. Transportation

Transportation is the most visible of all elements of logistics and high contributor to logistics

expenditure.

i) Costs of transportation are mainly as follows

a. Movement costs: money paid for moving material across geographical terrain

b. Preservation costs: money spent on preserving the material during transit

c. Cost of idle asset: inventory is unavailable for conversion during transit. This results into

costs for organization

d. Administration costs: money spent on administration




11

ii) Transportation is accomplished in three ways:

a. One‟s own fleet – private carriage

b. Contract with specialists on long term basis – contract carriage

c. Contract on individual shipment basis – common carriage

Expectations from transportation service are:

a. Minimum Cost – transportation costs are explained earlier

b. Speed: speed of transport means the speed with which goods reach the destination.

c. Consistency: consistency in speed is achieving the same speed over a long period of time.

Explanation to the above points:

Consistency reflects on the reliability of carrier. Any unexpected variance can play havoc with

logistics. Modern information technology has made continuous tracking of consignments

possible. This takes the element of surprise out. IT has helped logistics managers to seek out

ways and means to improve speed and consistency. What is becoming important is a

combination of speed and consistency.

Requirement of speed depends on type of industry. In some situations speed may not be

important. Then transportation service offering high speed increases cost. So logistics

managers have to strike a balance between service and cost. Three important aspects of

transportation are facility location, transportation cost and consistency.

Design of logistics system should consider total costs rather than elemental cost of

transportation

4. Warehousing:

Warehousing is holding material before dispatch after it is produced. Although warehousing is

conventionally considered to be a storage facility, it plays a much higher role from logistics

viewpoint. It is perceived to be a switching facility rather than a storage facility. Warehouse

ownership can be private, public or third party contract. Warehouse provides economic and

service benefits to the logistical system.

Economic benefits are Movement Consolidation, Break-bulk, Cross-dock,

Processing/Postponement & stock piling.




12

Service benefits are spot stocking, assortment, mixing & production support

5. Material Handling:

Material handling covers receiving, moving, storing, dispatching activities. It has an impact on

cost [capital as well as running], quality and safety. One of the principles of material handling

is minimum movement. Commonly used material handling equipment are forklifts, EOT

Cranes, hoists, pulley blocks, trolleys, railroad cars, conveyers, ropes and slings etc.

6. Packaging:

Packaging is done to make handling and transporting cost effective. It protects the product in

transit and handling. Packing is expected to facilitate lifting and moving by providing easy

access to forks or hooks. Packing is also expected to display universal symbols and other

instructions for handling. Eg. Pallets and containers, wooden boxes, wrapping etc.

Types of packaging: Consumer Packaging and Industrial Packaging

Consumer Packaging - There is no focus on logistics. Importance is given to marketing

appeal and packaging the finished product.

Industrial Packaging - Importance is given to logistics considerations handling and moving.

Individual parts are packed in cartons or bags and grouped together as master cartons. Master

cartons are grouped into units for handling. This concept leads to unitization and subsequently

to containerization.

HISTORY OF LOGISTICS AND SUPPLY CHAIN MANAGEMENT

1. Logistics Management and Supply Chain Management………Development of Logistics

and Supply Chain Management Concept[Logistics and Supply Chain Management by

G.Raghuram, N.Rangaraj. Page #15, The Management of Business Logistics by Coyle,

Bardi, Langlely Page # 13 ]

YEARS FROM 1950 – 1960: Importance of examining costs and benefits in physically

moving the goods to customers came into focus in post war1950s. We have seen earlier that

concept of logistics was born in the crucible of warfare and came into business after the end of

II world war. Idea of total system cost emerged during this period. Analyses of trade off

situations between costs of several activities, selection of modes of transport keeping total

system cost in mind are fallout of this concept. It can be understood that selection of water as a




13

mode of transport gives low transportation cost that will result into high transit inventory

adversely affecting total system cost.

Initially outbound logistics was in focus as value of the finished goods inventory is high.

A new management function called Physical Distribution Management emerged integrating

various activities on the outbound side like transportation, warehousing, packaging, customer

service etc.

Advent of electronic era of 1960s made information a strong component of physical

distribution management. Inbound logistics was still considered to be a concern of vendors and

did not receive the attention of management.

YEARS FROM 1960 – 1970: In 1970s strengthened by IT, physical distribution management

started looking into some aspects of financial management subsystems. Monitoring and

planning for efficient completion of cash cycle became attached to physical distribution

management. Around the same time importance of inbound logistics was appreciated. c. In

YEARS FROM 1970 – 1980: 1980s physical distribution management function came to be

called logistics management encompassing inbound and outbound logistics.

During this time this function started looking closely into logistical operations adopting

modern concepts like TQM & TPM to logistical operations.

YEARS FROM 1980 – 1990: This concept expanded, all up stream and down stream

organizations and activities were brought closer for mutual cooperation in order to gain

benefits of QCD. This idea of external integration is Supply Chain Management.

Definition: the management of upstream and down stream relationships with suppliers and

customers to deliver superior customer value at less cost to the supply chain as a whole.

Supply Chain Management looks beyond the confines of organizations to deliver value to the

end user at minimum cost. Supply chain is visualized as a pipeline through which products

from raw materials stage to the end user. Supply Chain Management is ensuring that this flow

is smooth and quick.

Henry Ford visualized the importance of this flow in early 1990s [L/M, Bowersox – page 88]

and expanded his business to cover raw materials, their deposits, forests, plantations and even

transportation activities like shipping lines. His business interests extended beyond the

frontiers. This diverse expanse of business gave him final control on the supply chain but

became nonviable due to labor problems and unwieldy bureaucracy. He realized that smaller




14

independent organizations were more efficient and cost effective in delivering value and

shifted his focus to a network of competent dealers.

IDEA OF SUPPLY CHAIN MANAGEMENT

Supply Chain Management aims at breaking down organizational barriers

a] to share sales information on „real time‟ basis that reduces inventories and need for

safety stocks. This is called supply chain compression resulting into inventory reduction

and larger inventory turns.

Example: Dell Computers considered to be leaders in computers business have recorded

50 inventory turns in 1997, IV Q, whereas Compaq could manage only 10 turns.

b] Smoothen the flow of information both ways [orders reaching the suppliers, and

products reaching the that results into reduced delivery time or reduction of lead-time

resulting into shortened cash-flow cycle

Ref fig.6

Particulars Logistics management Supply chain management

1. Scope Inbound logistics, in process

inventory [movement from one plant

to another], outbound logistics

[movement from one plant to

customer]

All players in the supply chain from

raw material source to finished

product consumer, vendors, their

vendors, supplier

organization[shipper],

Warehouses, service providers,

customers, their customers

2. How this is

created in

business?

By internal integration of logistics

functions handled by various

management functions within

organization

By external integration of roles of

various players in the supply chain.

2. Main

objective

Logistics cost reduction by

integrating resources across the

pipeline

Supply chain profitability by value

creation.

3. Definition Logistics is the process of Management of upstream and down




15

strategically managing procurement

and storage of material , part and

finished inventory [and related

information flow] through

organization and its marketing

channels in such a way that current

and future profits are maximized

through cost effective fulfillment of

order

stream relationships with suppliers

and customers to deliver superior

customer value at less cost to the

supply chain as a whole.

4. Origin A very old concept in military

planning.

As a logical extension of logistics

management

5. Focus L/M tries to take the product to the

consumer at minimum logistical cost.

Hence it is supply driven.

SCM focuses on value creation in the

supply chain. Hence this is customer

focused or demand driven.

2. BUSINESS FUNCTIONS OF LOGISTICS MANAGEMENT ……[physical distribution

management: logistical approach by K.K.Khanna – page # 13]

As discussed earlier logistics is a concept of military planners. But now it has found its way

into business.

I] Business logistics is planning, implementing and controlling efficient & effective flow and

storage of goods, efficient & effective flow services, and related information from point of

origin to point of use or consumption in order to meet customer requirements.

a. Food and agricultural products: We are familiar with warehouses owned by Food

Corporation of India. The government in these warehouses stores huge quantities of procured

food grains. These stocks are subsequently moved to outlets of Public Distribution System.

This is a logistical operation by Govt. of India in Agricultural Products Sector

b. Raw materials and finished engineering, chemical, pharmaceutical goods.

c. Consumer durable goods: Logistical Management is receiving attention in industry as many

consumer durable products are moving into commodities market.

II] Business logistics plays the role of facilitator for trade and business. It makes business

happen.




16

3. LOGISTICAL MISSION………[Logistics and Supply Chain Management by Martin

Christopher, Page # 13, Logistics Management by Bowersox Page #9]

Mission of logistics is to achieve business objectives by delivering desired quality of service at

the lowest total cost. This is nothing other than delivering QCD (Quality – Cost- Delivery)

expectations of the customer by planning logistical operations at minimum cost. This can also

be called creating customer value at minimum cost. The illustration below shows that

Logistical mission cuts across functional lines to achieve business objectives at minimum cost.

Logistical mission is a set of goals to be achieved at a particular type of market for a particular

Mission

A

Mission

B

Mission

C

Customer servicegoals [QCD]

At market type A

Customer service

goals [QCD]

At market type B

Customer servicegoals [QCD]

At market type C

Transportation Warehouse

Functional Inputs to Logistical Management

M/H




17

type of product. Naturally this is responsive to competition. Hence logistical mission is to

achieve above goals at minimum system cost. Focus is on mission rather than on isolated

functions. Mission of logistics is providing a means by which customer satisfaction is

achieved.

4. ROLE OF PLANNING IN LOGISTICS MANAGEMENT

Role of planning is central to logistics management

Mission of logistics management is to plan and coordinate all those activities necessary to

achieve desired levels of service and quality at lowest possible cost.

Logistics is fundamentally a planning concept that seeks to create a frame work through

which needs of the market place can be translated into a manufacturing strategy and plan

Logistics makes one plan, integrating various resources of the organization that replaces

traditional concept of planning in pockets

5. LOGISTICS INTERFACE WITH MARKETING…………………………[Logistics and

Supply Chain Management by Martin Christopher, Page # 37,]

Interface is a common wall or surface between two objects, concepts or functions. It can also be

common area/areas of performance or interest. Outbound logistics plays an important role in

selling the product of the company as it moves the product through the distribution system to the

customer. Hence it is called the other half of marketing. In several instances making the product

available at the right time at the right place itself is the key to successful selling. A student of

management very well knows four Ps of marketing. We have already seen the role of logistics as

far as „Place‟ is concerned. It is quite interesting to see the interface with respect to other Ps as

well.

Price: Logistics enables marketing to quote a competitive price by providing discount

opportunities on account of Transportation cost savings. Logistics Manager can plan the size of

the consignment confirming to the most economical schedules published by transportation service

providers to save transportation costs. If order size matches with the favored size the benefits are

substantial. Logistics Management has to balance inventories to tackle anticipated price-triggered

sales.

Product: Inputs of logistics manager are quite important as far as the size and shape of the product

are concerned. Size and shape of the product can make logistics nightmarish, thereby adding huge




18

amount of costs. Weight/volume ratio plays very important role in deciding economics of

logistics.

The story of Gillette is well known logistical circle. The low weight, unwieldy floor display

proved to be a very expensive logistical operation. While consumer packaging provides sales push

in a retailers shop, it can make industrial packaging difficult due to its shape and ability to protect

the contents. Product and its packaging is a common area from the point of view of logistics.

Promotion: Logistics Management is required to manage inventory needed to match sales

triggered by promotional activities in the market. Marketing Management & Logistics

Management need to work closely in deciding promotional strategies for the product. Promotional

strategies may be push or pull type. Logistical problems may be faced in either or both, but being

aware takes the punch away from the blow!

Place: Marketing decision to distribute the product directly to retailers or through wholesalers has

a great impact on logistical operations. Demand placed by wholesalers is more streamlined as

compared to retailers. Logistical management of retailers‟ demand often requires time sensitive

transportation methods which are expensive.

In addition to the four Ps, customer service is another area where marketing & logistical

mangements have to work closely to effectively beat the competition.

6. INBOUND & OUTBOUND LOGISTICS

[What do you understand by inbound and outbound logistics? Explain with

examples……………Q5[a] May‟03]

Inbound Logistics

Creation of value in a conversion process heavily depends on availability of inputs on time.

Making available these inputs on time at point of use at minimum cost is the essence of Inbound

Logistics. All the activities of a procurement performance cycle come under the scope of Inbound

Logistics.

Scope of Inbound Logistics covers transportation during procurement operation, storage, handling

if any and overall management of inventory of inputs. Several activities or tasks are required to

facilitate an orderly flow of materials, parts or finished inventory into a manufacturing complex.

They are sourcing, order placement and expediting, transportation, receiving and storage. Overall,

procurement operations are called inbound logistics. A procurement cycle is shown below.

Inbound logistics have potential avenues for reducing systems costs.




19

Delivery time, size of shipment, method of transport & value of products involved are different

from those of physical distribution cycles. Normally delivery time is large as a low cost

transportation mode is chosen. As the value of inventory is low size of shipment is large & transit

inventory costs are low. As the price of products is lower, trade off between cost of maintaining

inventory in transit and low cost transport exists to the benefit of the organization.

Inbound logistics

Outbound Logistics

Value added goods are to be made available in the market for customers to perceive value.

Finished goods are to be distributed through the network of warehouses and supply lines to reach

the consumer through retailers‟ shops in the market. During conversion value is added to the raw

materials and as a result value of the inventory in this case is very high unlike inputs. Now the

size of shipment, modes of transport and delivery time are different as compared to inputs.

Activities of distribution performance cycle come under the scope of Outbound Logistics. They

are order management, transportation, warehousing, packaging, handling etc.

7. IMPORTANCE OF 3CS – COMPETITIVE ADVANTAGE BY EFFECTIVE

LOGISTICS MANAGEMENT [Logistics and Supply Chain Management by Martin

Christopher, Page # 5,]

The three Cs in business are Company, Customer and Competition. All the three “C” are vital

for healthy business and prosperous economy. Buying decision is always triggered by a need a

consumer is experiencing due to the stress he is under. Customer is attracted by value when he

is about to make a buying decision. Competitors in business continuously add value to their

Sourcing

Order

placement

& expediting

Supplier

Transportation

Receiving




20

products in order to be ahead in the competition. Any supplier organization or Company tries

to be better than the Competition by utilizing their assets efficiently and effectively.

The Supplier Company tries to differentiate her products in terms of functional quality and

product cost. Competition has ensured that technology and human skills are almost same

everywhere. Hence product differentiation in terms of functional quality and product cost is

nearly impossible. But a great opportunity exists for the Supplier Company to differentiate her

products by service and logistics cost by superior logistics.

Superior logistics gives cost advantage [productivity advantage] to the supplier company as

logistical costs are reduced. Superior logistics provides value advantage as it provides superior

customer service. When this happens customer sees better value in the products of supplier

Company as compared to competition.

Logistics overview and its implications

a. Birth and development of logistics in post war business since 1950. [Refer our earlier notes]

b. External integration of supply chain and concept of Supply Chain management…………

1990

c. Elements of Logistical Management function

d. Scope of Logistical Management

e. Significance of logistics in Business Management, the time and place

a. Overall goal of Logistical Management function

11. DIFFERENT ATTRIBUTES OF LOGISTICS MANAGEMENT AND NEED OF

COORDINATION OF DIFFERENT ORGANIZATIONAL DEPARTMENTS WITH

THAT OF LOGISTICS …[Logistics and Supply Chain Management by Martin Christopher,

Page # 31, Logistics Management by Bowersox Page # 33]

Attributes of Logistics Management [what makes Logistics Management distinct from other

departments?]

1. Functions of logistics are spread across various stages of value chain.

2. Provides interface between marketing and customers, marketing and operations, operations

and supplier




21

3. Provides competitive edge to business in the current environment

4. Handles flow of information and materials.

5. Large avenue for cost reduction.

Need of coordination of different organizational departments with that of logistics

The above features show the complexity and scope of logistics management. For such a

management function to function effectively various pieces of jigsaw puzzle should fall at correct

places which requires coordination of all functional departments. If we want to solve a jigsaw

puzzle, we need to have the complete picture on the box. In the absence of this picture solving the

puzzle becomes impossible. Overall coordination of different organizational departments can

provide the complete picture. This requires integration of all functions of logistics.

If a firm does not consistently satisfy time and place requirement it has nothing to sell in the

market, it is simply out of business. Good logistics alone can enable organizations to do business.

To enjoy full benefits of logistics, full range of functional work must be performed on an

integrated basis. Excellence in each aspect of functional work is relevant only when it is viewed

in terms improving overall efficiency and effectiveness of integrated logistics. This requires that

the functional work of logistics be integrated to achieve business unit goals.

12. LOGISTICAL COMPETENCY…………. [Logistics Management by Bowersox Page # 7]

What is logistical competency?

Competency is the ability to perform a function. Logistical competency is the ability of the firm to

perform logistical function effectively and efficiently.

Definition: Logistical Competency is the relative assessment of a firm‟s capability to provide

competitively superior customer service at the lowest possible total cost. It is a strategy to provide

a superior service at a total cost below industry average. Its aim is to view how logistics can be

exploited as a core competency so that fits into a firm‟s overall strategic positioning

How can this be achieved?

1. Strategic positioning by the company - developing logistics as core competence of the

company

2. Using logistics to gain competitive advantage in creating customer value [every

company‟s business goal]




22

Logistical competency can be achieved by performing logistical functions effectively. To

understand logistical excellence in each aspect of functional work is relevant only when it is

viewed in terms of improving overall efficiency and effectiveness of integrated logistics.

In the above process of achieving logistical competency the firm should coordinate all functions

well. Network design should integrate the need of information, transportation & inventory. These

elements play important roles in overall effectiveness of logistical function. A well-designed

Network keeping in view the objectives of the company is primary for logistical competency.

13. CONCEPT OF INTEGRATION IN LOGISTICS OPERATION… [Logistics

Management by Bowersox Page # 33]

What is the concept of Integration in Logistics Operation?

In order to perform various functions of logistics in coordinated fashion bringing all functions of

logistics under one operational command is important. Performance of these functions in an

isolated fashion is detrimental to the objectives organization. Performance in isolation loses sight

of overall picture. It is like trying to solve a jigsaw puzzle without complete picture before you.

What do we integrate? Information flow, inventory flow, procurement, operations support,

physical distribution.

Concept of Integration in Logistics Operation

14. VALUE ADDED ROLE OF LOGISTICS

Inventory flow

Physical

distribution

Manufacturing

support Procurement

Information flow

Customer Suppliers




23

Different types of economic utilities like form utility, place and time utility and possession utility

add value to a product. In other words make product attractive and trigger purchase.

a) Form Utility is given by Production to a product when conversion process is held.

Logistics also adds form utility when warehousing activities like mixing, assembling, processing

postponement or unpacking take place.

b) Place and Time Utility is given by logistics functions when a product is moved to a needed

place on time to serve the customer

c) Possession Utility: Marketing creates Possession Utility by promoting the product by

advertising and or by any other means. But logistics finally possession by customer happen

COMPONENTS OF SUPPLY CHAIN MANAGEMENT

The following are the five basic components of Supply Chain Management:

1. Plan:-

This is the strategic portion of SCM. You need a strategy for managing all theresources that go toward meeting customer demand for your product or service. A big

piece of planning is developing a set of metrics to monitor the supply chain so that it

is efficient, costs less and delivers high quality and value to customers.

2. Source:-

Choose the suppliers that will deliver the goods and services you need to create

your product. Develop a set of pricing, delivery and payment processes with suppliersand create metrics for monitoring and improving the relationships. And put togetherprocesses for managing the inventory of goods and services you receive from

suppliers, including receiving shipments, verifying them, transferring them to yourmanufacturing facilities and authorizing supplier payments.

3. Make:-

This is the manufacturing step. Schedule the activities necessary for production,

testing, packaging and preparation for delivery. As the most metric-intensive portion

of the supply chain, measure quality levels, production output and worker

productivity.

4. Deliver:-

This is the part that many insiders refer to as logistics. Coordinate the receipt of orders from customers, develop a network of warehouses, pick carriers to get products

to customers and set up an invoicing system to receive payments.

5. Return:-




24

The problem part of the supply chain. Create a network for receiving defective

and excess products back from customers and supporting customers who have

problems with delivered products.

OBJECTIVES/NEED FOR SCM

The major objective of supply chain management is to reduce or eliminate the

buffers of inventory that exists between originations in chain through the sharing of information on demand and current stock levels.

Broadly, an organization needs an efficient and proper supply chain managementsystem so that the following strategic and competitive areas can be used to their full

advantage if a supply chain management system is properly implemented.

1. Fulfillment of raw materials:

Ensuring the right quantity of parts for production or products for sale arrive at the

right time. This is enabled through efficient communication, ensuring that orders are

placed with the appropriate amount of time available to be filled. The supply chainmanagement system also allows a company to constantly see what is on stock and making

sure that the right quantities are ordered to replace stock.

2. Logistics:

The cost of transporting materials as low as possible consistent with safe andreliable delivery. Here the supply chain management system enables a company to have

constant contact with its distribution team, which could consist of trucks, trains, or any

other mode of transportation. The system can allow the company to track where the

required materials are at all times. As well, it may be cost effective to share transportation

costs with a partner company if shipments are not large enough to fill a whole truck andthis again, allows the company to make this decision.

3. Smooth Production:

Ensuring production lines function smoothly because high-quality parts areavailable when needed. Production can run smoothly as a result of fulfillment and

logistics being implemented correctly. If the correct quantity is not ordered and delivered

at the requested time, production will be halted, but having an effective supply chain

management system in place will ensure that production can always run smoothly withoutdelays due to ordering and transportation.

4. Increase in Revenue & profit:

Ensuring no sales is lost because shelves are empty. Managing the supply chain

improves a company flexibility to respond to unforeseen changes in demand and supply.

Because of this, a company has the ability to produce goods at lower prices and distributethem to consumers quicker then companies without supply chain management thus

increasing the overall profit.




25

5. Reduction in Costs:

Keeping the cost of purchased parts and products at acceptable levels. Supply

chain management reduces costs by increasing inventory turnover on the shop floor andin the warehouse controlling the quality of goods thus reducing internal and external

failure costs and working with suppliers to produce the most cost efficient means of

manufacturing a product.

6. Mutual Success:

Among supply chain partners ensures mutual success. Collaborative planning,forecasting and replenishment (CPFR) is a longer-term commitment, joint work on

quality, and support by the buyer of the supplier‟s managerial, technological, and capacity

development. This relationship allows a company to have access to current, reliable

information, obtain lower inventory levels, cut lead times, enhance product quality,improve forecasting accuracy and ultimately improve customer service and overall

profits. The suppliers also benefit from the cooperative relationship through increased

buyer input from suggestions on improving the quality and costs and though shared

savings. Consumers can benefit as well through higher quality goods provided at a lowercost.

ACTIVITIES/FUNCTIONS OF SCM

(a) Strategic:-

Strategic network optimization, including the number, location, and size of

warehouses, distribution centers and facilities.

Strategic partnership with suppliers, distributors, and customers, creatingcommunication channels for critical information and operational improvements

such as cross docking, direct shipping, and third-party logistics.

Products design coordination, so that new and existing products can be optimally

integrated into the supply chain.

Information Technology infrastructure, to support supply chain operations.

Where to make and what to make or buy decisions.

(b) Tactical:- Sourcing contracts and other purchasing decisions.

Production decisions, including contracting, locations, scheduling, and planning

process definition.

Inventory decisions, including quantity, location, and quality of inventory.Transportation strategy, including frequency, routes, and contracting.




26

Benchmarking of all operations against competitors and implementation of best

practices throughout the enterprise.

(c) Operational:-

Daily production and distribution planning, including all nodes in the supply

chain.

Production scheduling for each manufacturing facility in the supply chain (minuteby minute).

Demand planning and forecasting, coordinating the demand forecast of all

customers and sharing the forecast with all suppliers.

Sourcing planning, including current inventory and forecast demand, in

collaboration with all suppliers. Inbound operations, including transportation from

suppliers and receiving inventory.

Production operations, including the consumption of materials and flow of

finished goods.

Outbound operations, including all fulfillment activities and transportation to

customers.

Order promising, accounting for all constraints in the supply chain, including all

suppliers, manufacturing facilities, distribution centers, and other customers.

Performance tracking of all activities.

SUPPLY CHAIN DECISIONS

We classify the decisions for supply chain management into two broad categories

– Short term & Long term decisions. As the term implies, short term decisions focus on

activities over a day-to-day basis. On the other hand, long term decisions are made

typically over a longer time horizon. These are closely linked to the corporate strategy

and guide supply chain policies from a design perspective.

There are four major decision areas in supply chain management:

1). Location,

2). Production,

3). Inventory, and

4). Transportation (distribution), and there are both short term and long-term elements in

each of these decision areas.

1). Location Decisions:

The geographic placement of production facilities, stocking points, and sourcing

points is the natural first step in creating a supply chain. The location of facilities involves

a commitment of resources to a long-term plan. Once the size, number, and location of




27

these are determined, so are the possible paths by which the product flows through to the

final customer. These decisions are of great significance to a firm since they represent the

basic strategy for accessing customer markets, and will have a considerable impact on

revenue, cost, and level of service. These decisions should be determined by an

optimization routine that considers production costs, taxes, duties and duty drawback,

tariffs, local content, distribution costs, production limitations, etc. Although location

decisions are primarily long term they also have implications on short term level.

2). Production Decisions:

The long term decisions include what products to produce, and which plants to

produce them in, allocation of suppliers to plants, plants to DC's, and DC's to customer

markets. As before, these decisions have a big impact on the revenues, costs and customer

service levels of the firm. These decisions assume the existence of the facilities, but

determine the exact path(s) through which a product flows to and from these facilities.

Another critical issue is the capacity of the manufacturing facilities--and this largely

depends the degree of vertical integration within the firm. Short term decisions focus

decisions focus on detailed production scheduling. These decisions include theconstruction of the master production schedules, scheduling production on machines, and

equipment maintenance. Other considerations include workload balancing, and quality

control measures at a production facility.

3). Inventory Decisions:

These refer to means by which inventories are managed. Inventories exist at every

stage of the supply chain as either raw material, semi-finished or finished goods. They

can also be in-process between locations. Their primary purpose to buffer against any

uncertainty that might exist in the supply chain. Since holding of inventories can cost

anywhere between 20 to 40 percent of their value, their efficient management is critical insupply chain operations. It is long term in the sense that top management sets goals.

However, most researchers have approached the management of inventory from short

term perspective. These include deployment strategies (push versus pull), control policies

--- the determination of the optimal levels of order quantities and reorder points, and

setting safety stock levels, at each stocking location. These levels are critical, since they

are primary determinants of customer service levels.

4). Transportation Decisions:

The mode choice aspect of these decisions is the more long term ones. These are

closely linked to the inventory decisions, since the best choice of mode is often found by

trading-off the cost of using the particular mode of transport with the indirect cost of

inventory associated with that mode. While air shipments may be fast, reliable, and

warrant lesser safety stocks, they are expensive. Meanwhile shipping by sea or rail may

be much cheaper, but they necessitate holding relatively large amounts of inventory to

buffer against the inherent uncertainty associated with them. Therefore customer service

levels and geographic location play vital roles in such decisions. Since transportation is

more than 30 percent of the logistics costs, operating efficiently makes good economic




28

sense. Shipment sizes (consolidated bulk shipments versus Lot-for-Lot), routing and

scheduling of equipment are key in effective management of the firm's transport strategy.

SCM PROCESS INTEGRATION

Successful SCM requires a change from managing individual functions to

integrating activities into key supply chain processes. The purchasing department placed

orders as requirements became appropriate and marketing, responding to customerdemand, interfaced with several distributors and retailers and attempted to satisfy this

demand. Shared information between supply chain partners can only be fully leveragedthrough process integration. Process integration means collaborative working between

buyers and suppliers, joint product development, common systems and shared

information.

According to Lambert and Cooper (2000), operating an integrated supply chain

requires continuous information flows, which in turn assist to achieve the best product

flows. However, in many companies, such as 3M, management has reached the

conclusion that optimizing the product flows cannot be accomplished without

implementing a process approach to the business.

The key critical supply business processes stated by Lambert and Cooper are asfollows:

1. Customer service management process:

Customer service provides the source of customer information. It also provides the

customer with real-time information on promising dates and product availability through

interfaces with the company production and distribution operations

2. Procurement process:

Strategic plans are developed with suppliers to support the manufacturing flow

management process and development of new products. In firms where operations extend

globally, sourcing should be managed on a global basis. The desired outcome is a win-win relationship, where both parties benefit, and reduction times in the design cycle and

product development is achieved. Also, the purchasing function develops rapid

communication systems, such as electronic data interchange and Internet linkages to

faster transfer possible requirements. Activities related to obtaining products andmaterials from outside suppliers requires performing resource planning, supply sourcing,

negotiation, order placement, inbound transportation, storage and handling and quality

assurance Also, includes the responsibility to coordinate with suppliers in scheduling,supply continuity & research to new programmes.

3. Product development and commercialization:

Here, customers and suppliers must be united into the product development

process, thus to reduce time to market. As product life cycles shorten, the appropriate

products must be developed and successfully launched in ever shorter time-schedules to




29

remain competitive. According to Lambert and Cooper, managers of the product

development and commercialization process must:

a) coordinate with customer relationship management to identify customer-articulated needs;

b) select materials and suppliers in conjunction with procurement, and

c) develop production technology in manufacturing flow to manufacture and

integrate into the best supply chain flow for the product/market combination

4. Manufacturing flow management process:

The manufacturing process is produced and supplied products to the distribution

channels based on past forecasts. Manufacturing processes must be flexible to respond tomarket changes, and must accommodate mass customization. Orders are processes on a

just-in-time (JIT) basis in minimum lot sizes. Also, changes in the manufacturing flow

process lead to shorter cycle times, meaning improved responsiveness and efficiency of

demand to customers. Activities related to planning, scheduling and supportingmanufacturing operations, such as work-in-process storage, handling, transportation, and

time phasing of components, inventory at manufacturing sites and maximum flexibility inthe coordination of geographic and final assemblies postponement of physical distribution

operations.

5. Physical Distribution:

This concerns movement of a finished product/service to customers. In physical

distribution, the customer is the final destination of a marketing channel, and theavailability of the product/service is a vital part of each channel participant. It is also

through the physical distribution process that the time and space of customer servicebecome an integral part of marketing, thus it links a marketing channel with its customers

(e.g. links manufacturers, wholesalers, retailers).

6. Outsourcing/ Partnerships:

Not just outsourcing the procurement of materials and components, but also

outsourcing of services that traditionally have been provided in-house. The logic of this

trend is that the company will increasingly focus on those activities in the value chainwhere it has a distinctive advantage and everything else it will outsource. This movement

has been particularly evident in logistics where the provision of transport, warehousing

and inventory control is increasingly subcontracted to specialists or logistics partners.Also, to manage and control this network of partners and suppliers requires a blend of both central and local involvement. Hence, strategic decisions need to be taken centrally

with the monitoring and control of supplier performance and day-to-day liaison with

logistics partners being best managed at a local level.

7. Performance Measurement:



30

By taking advantage of supplier capabilities and emphasizing a long-term supply

chain perspective in customer relationships can be both correlated with firm performance.

As logistics competency becomes a more critical factor in creating and maintaining

competitive advantage, logistics measurement becomes increasingly important becausethe difference between profitable and unprofitable operations becomes narrower. As

Kearney Consultants (1985) noted that firms engaging in comprehensive performance

measurement realized improvements in overall productivity. According to internal

measures are generally collected and analyzed by the firm including1) Cost,

2) Customer Service,

3) Productivity measures,4) Asset measurement, and

5) Quality…..

Force of supply chain management is on trust and cooperation and the recognitionthat is properly managed 'the whole cane be greater then the sum of its part'.

For example:

Let's look at consumer packaged goods for an example of collaboration. If thereare two companies that have made supply chain a household word, they are Wal-Mart andProcter & Gamble. Before these two companies started collaborating back in the '80s,

retailers shared very little information with manufacturers. But then the two giants built a

software system that hooked P&G up to Wal-Mart's distribution centers.

When P&G's products run low at the distribution centers, the system sends an

automatic alert to P&G to ship more products. In some cases, the system goes all the way

to the individual Wal-Mart store. It lets P&G monitor the shelves through real-time

satellite link-ups that send messages to the factory whenever a P&G item swoops past ascanner at the register.

With this kind of minute-to-minute information, P&G knows when to make ship

and display more products at the Wal-Mart stores. No need to keep products piled up in

warehouses awaiting Wal-Mart's call. Invoicing and payments happen automatically too.

The system saves P&G so much in time, reduced inventory and lower order-processingcosts that it can afford to give Wal-Mart "low, everyday prices" without putting itself out

of business.

Documents

Chp 1 Introduction to Logistics and Supply Chain Management