Supply and Distribution Module

8/6/2019 Supply and Distribution Module

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KampalaInternationalUniversity

Dip/ B.Commerce

Module 15: Logistics and Supply Chain Management

INSTITUTE FOR OPEN &DISTANCE LEARNING

Strictly For Private Distribution Only


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KAMPALA INTERNATIONAL UNIVERSITY Dip/ B. CommerceModule 15

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CONTENTS

INTRODUCTION 3

UNIT 1 4LOGISTICS AND SCM: AN INTRODUCTION

1.1 INTRODUCTION

1.2 LOGISTICS AND SCM1.3 DEVELOPMENT OF LOGISTICS1.4 THE ROLE OF LOGISTICS IN THE ECONOMY

1.5 LOGISTICS AND COMPETITIVE PERFORMANCE1.6 PHYSICAL DISTRIBUTION MANAGEMENT (PDM)

1.7 SUMMARY

UNIT 2 19PRINCIPLES OF SUPPLY CHAIN MANAGEMENT

2.1 INTRODUCTION2.2 HOW DOES SCM WORK?

2.3 LOGISTICS-MARKETING INTERFACE2.4 THE LOGISTICS-MANUFACTURING INTERFACE

2.5 SUMMARY

UNIT 3 29

CUSTOMER FOCUS IN SUPPLY CHAIN MANAGEMENT3.1 INTRODUCTION3.2 CUSTOMER SERVICE

3.3 FUNCTIONAL VS. INNOVATIVE PRODUCTS: SCM ISSUES

3.4 EFFICIENT CONSUMER RESPONSE3.5 QUICK RESPONSE AND ACCURATE RESPONSE

3.6 CHAIN RELATIONSHIP - WITHIN AND BEYOND THE ORGANIZATION3.7 SCM AS A CORE STRATEGIC COMPETENCY

3.8 SUMMARY

UNIT 4 26LOGISTICS: INBOUND AND OUTBOUND

4.1 INTRODUCTION4.2 LOGISTICS; DEFINITION

4.3 WHAT IS SUPPLY CHAIN MANAGEMENT (SCM)?

4.4 DESIGN AND MANAGEMENT OF SCM4.5 LOGISTICS; INBOUND AND OUTBOUND4.6 LOGISTICS MANAGEMENT

4.7 INTEGRATING LOGISTICS4.8 PERSPECTIVES IN LOGISTICS

4.9 SUMMARY

UNIT 5 63MODELS FOR SCM INTEGRATION

5.1 INTRODUCTION5.2 INTEGRATED SUPPLY CHAIN/VALUE CHAIN

5.3 SUPPLY CHAIN STRATEGIES5.4 DEMAND MANAGEMENT

5.5 INTERNET AND SCM5.6 PHYSICAL GOODS FLOW, VIRTUAL FLOW AND CASH FLOW

5.7 BULLWHIP EFFECT

5.8 A NEW PERSPECTIVE TO COUNTER BULLWHIP EFFECT5.9 DRIVERS OF SCM5.10 SUMMARY

UNIT 6 76

STRATEGIC SUPPLY CHAIN6.1 INTRODUCTION

6.2 SUPPLY CHAIN: GROWTH6.3 SUPPLY ALLIANCES

6.5 SUPPLY CHAIN RE-ENGINEERING6.6 SUMMARY


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INTRODUCTION

This module provides an introduction to logistics and supply chain management. Below arebrief introductions to each of the six units in the module.

Unit 1: Logistics and SCM - An Introduction discusses about definition of Logistics & Supply

Chain Management It discusses the process of development of logistics and its role in theeconomy. It also converse about Physical Distribution Management (PDM) and its components.

Unit 2: Principles of SCMdefines how the supply chain works. It highlights the key processesrequired to integrate the supply chain. It further examines the critical areas of Logistics-Marketing Interface and critical areas of Logistics-Manufacturing Interface

Unit 3: Customer focus in SCMcomprehends the key processes required to enhance customerfocus in the supply chain. It delineates with the concept of Efficient Customer Response (ECR),Quick Response (QR) and Accurate Response (AR). It further scrutinizes chain relationshipwithin and beyond organization.

Unit 4:Logistics - Inbound & Outboundbegins with defining Logistics. It portrays the facets ofLogistics i.e. Transposition & Warehousing. It renders Logistics as a key to supply chain

management. A talk on the subject of Inbound & Outbound Logistics is initiated. Finally itdescribes Logistics from supplier to manufacturer & manufacturer to consumers

Unit 5:Models for SCM integration delineates SCM integration & describes strategies involvedin SCM integration. It illustrates models for integrating supply and demand chain. Itcharacterizes demand management & visualizes real demand. The unit highlights therelationship between material flow, information flow and cash flow it finally elucidates Bullwhipeffect and illustrates measures to counter them,

Unit 6: Strategic Supply Chain Management thrash out the imperatives for supply chainstrategy development. It helps you to be acquainted with the issues in supply chain domainand strategic decisions in the supply chain. It discusses supplier alliances and illustratessupplier quality management and related problems. It also gives explanation of supply chainre-engineering concept.

Institute for Open and Distance LearningKampala International University


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UNIT 1

LOGISTICS AND SCM: AN

INTRODUCTIONAfter going through this unit, you should be able to define Logistics

and Supply Chain Management (SCM); understand the development oflogistics and its role in the economy; and discuss Physical Distribution

Management (PDM) and its components.

1.1

INTRODUCTION

There is a great deal of material that is moved in any organization. Organizationscollect raw materials from suppliers and deliver finished goods to the customers. Itis logistics that executes this function. In other words, logistics is the function thatmoves both tangible materials (e.g. raw materials) and, intangible material (e.g.information) through the operations to the customers (as a finished product). Incontinuation to this explanation, we would introduce what a supply chain means.

A supply chain consists of a series of activities involving many organizationsthrough which the materials move from initial suppliers to final customers. Theremay be' different supply chain for each product. The chain of activities andorganizations is named differently as .per the situation. If the emphasis is onoperations then it is called process; if the emphasis is on marketing then it is calledlogistics; if the emphasis is on value-addition then it is called value-chain; if theemphasis is on meeting customer demand then it is called demand chain; if the

emphasis is on movement of material then we use the most general term i.e., supplychain. This unit will introduce you with the concept of a supply chain.

1.2

LOGISTICS AND SCM

A supply chain may be considered as a group of organizations, connected by a seriesof trading relationships. This group covers the logistics, and manufacturing activitiesfrom raw materials to the final consumer. Each organization in the chain procuresand then transforms materials into intermediate/final products, and distributes theseto customers.

The supply chain can be defined as the integral management (within the companyand through other companies) of the company's various logistical stages such asmaterials procurement, production, storage, distribution and customer service. TheSupply Chain concept should be seen as a whole, that is, the entire system from, theorigin of procurement to the final consumption of goods or services.

In supply chain network we must include all the organizations involved in theproduction of certain goods or services (from the origin of procurement to final


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consumption), and each of the logistical stages within these organizations. Thus, thesupply chain is a network linking and interweaving different supply chains of all thecompanies involved in a production process. A diagram depicting the typical supplychain is shown in Figure 1.1.

Raw

materials

Semi-

finishedproducts

Finished

products

Distributors End

consumer

Figure: Typical Supply chain

The supply chain activity therefore constitutes complex objects, as it involvesdecision-makers from many different companies, who sometimes have no directrelationship and are place in very different geographical locations; yet the decisionsthey make are mutually dependent upon each other. Hence, there is a need for aninformation system capable of linking together the different members of the chain sothat there is an open communication between them.

The concept of supply chain is not new. Historically we have moved from physicaldistribution to logistics management and then to supply chain management. Thismajor difference seems to be that supply chain management is the preferred namefor the actualization of integrated logistics, with it acting as an enabler, it is nowpossible to have an integrated process view about the logistics and all alliedprocesses related to business. Ideally the supply chain should be a seamless chainas shown in Figure 1.2.

Product Ordering Channel

Raw materials

Seamless Supply Chain

End customer

Material Flow channel

Figure 1. 2: Seamless Supply Chain

The importance of logistics can be gained from the fact that logistics and supplychain management costs are in range of 10 to 15 of the GDP for developing countrieswhile it is around 18 to 20 per cent for developed countries. The concept ofintegrated logistics consists of two interrelated efforts:

y Logistics operation: Logistic operation can be basically clubbed into physicaldistribution management, materials management and internal inventory

transfer.y Logistic coordination: Logistic coordination pertains to forecasting, order

processing, operational planning and product procurement or MRP, Thisintegration is

y affected through effective information flows.


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Definitions

Forrester (1961) suggested mat the five flows of any economic activity money, .orders, materials, personnel and equipment are interrelated by an informationnetwork, which gives the system, which is now called as supply chain due to itsown character.

According to Christopher (1992) supply chain is network of organizations that areinvolved, through upstream and downstream linkages, in the different processes andactivities that produce value in the form of products and services in the hands of theultimate consumer. Managing these linkages and delivering the product/service tothe customer in a cost effective way is SCM. Supply chain management encompassesmaterials/supply management from the supply of basic raw materials to final product(and possible recycling and re-use). Supply chain management focuses on how firmsutilize their suppliers' processes, technology and capability to enhance competitiveadvantage. It is a management philosophy that extends traditional intra-enterpriseactivities by bringing trading partners together with the common goal of optimizationand efficiency.

Supply Chain Management is a set of approaches utilized to efficiently integratesupplier, manufacturer, warehouse and stores so that merchandise is produced anddistributed at the right quantities, to the right location and at the right time, in orderto minimize system under costs while satisfying service level requirements (Levi(2000)).

The common thread in these definitions is that supply chain management seeks tointegrate performance measures over multiple firms or processes, rather than takingthe perspective, of a single firm or process.

Supply chain management has provided the next logical stage in the evolution ofcompetitiveness for the manufacturing organization and added, importantly, a

concern for the flow of materials to and from the organization. Supply chainmanagement integrated suppliers to the end consumers and emphasized the needfor collaboration to optimize the whole system. As such, supply chain management isthe process of designing, planning and implementing change in the structure andperformance cf the 'total' material flow in order to generate increased value, lowercosts, enhanced customer service and yield a competitive advantage. In effect, theaddition of supply chain management to the marketing model created a truly'systems' approach to the organization and its direct and indirect tradingrelationships

The content of supply chain management with in a firm varies considerably with thetype of business. Figure 1.3 shows the different components of logisticsmanagement.


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Management actions

Planning Implementation Control

Input into

Logistics

Suppliers

Rawmaterials

In processinventory

Finishedgoods

Customers

Output of

logisticsNaturalresources(land,equipment,facilities)

Marketingorientation(competitiveadvantage)

Humanresources

Time, placeand utility

Financial andinformationresources

Efficientmovementtocustomers,proprietary

assets

Figure 1.3: Components of Logistic Management (Source: Douglas M.Lambert, 1998, Pg-5)A representative list of logistic element for a firm is given in Table 1.1.Table 1.1: Logistic Element

Facility Location Determining location, number and size offacilities needed Allocation demand tofacilities

Transportation Mode and service selection Carrier routingVehicle scheduling

Inventories Finished goods stocking policies Recordkeeping Supply scheduling Short termsales forecasting

LOGISTICS ACTIVITIES

y Customer Servicey Demand Forecastingy Distribution Communicationy Inventory Control.y Material Handling Order Processing Parts & Service Supporty Plant and Warehouse Sitey Selectiony Procurementy Packagingy Return Goods Handlingy Salvage and Scrap Disposaly Traffic and Transportation


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Customer Service Cooperate with marketing in: determiningcustomer needs and wants for servicedetermining customer response to service

Order Processing andInformation Flows

Sales order procedure Informationcollection, storage and manipulation Data

analysis

Warehousing and MaterialHandling

Space determination Stock layout Materialhandling -equipment selection Stockstorage and retrieval% Equipment replacement policies

Protection Packaging Design for: handling, storage, protection

Product Scheduling Co-operate with production in : specifyingaggregate production quantitiessequencing and timing of production

1.3

DEVELOPMENT OF LOGISTICS

Logistic activity is literally thousand of years old, dating back to the earliest form oforganized trade. As this area of study however it first began to gain attention in theearly 1990s. More emphasis has been given to logistics after the Gulf war in 1990-91when the efficient, and effective distribution of store supplies and person were thekey factors for success.

With rising interest rates and increasing energy cost logistics received more attentionas a major cost driver. Logistics cost became a more critical issue for manyorganization because of globalization of industry. This has affected logistics in twoprimary ways. First, the growth of world-class competitors from other nations hascaused organization to look for new way to differentiate their organizations andproduct offerings. Second, as organizations increasingly buy and sell offshore, thesupply chain between the organizations becomes longer, more costly and morecomplex.

Excellent logistics management is needed to fully leverage global opportunities.Information technology input has given a next boom to logistics management. Thisgave organization the ability to better monitor transaction intensive activities such asordering movement and storage of goods and materials. Combine with theavailability of computerized quantitative models; this information increased theability to manage flows and to optimize inventory levels and movement.

Other factor contributing to the growing interest in logistics include advances ininformation technology, increased emphasis on customer service, growingreorganization of the system approach and total cost concept. The profit leveragefrom logistics and realization that logistics can be used as a strategic weapon incompeting the market place.


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The system approach is a critical concept in logistics. Logistics is in itself a system. Itis a network of related activities with the purpose of managing the orderly flow ofmaterial and personal with in the logistic channel. The system approach simplystates that all functions or activities need to be understood in terms of how theyeffect and are affected by other elements and activities with which they interact. The

idea is that if one looks at action in isolation, he or she will not understand the bigpicture or how such action affects or are affected by other activities. In essence thesum or outcome of a series of activities is greater than its individual parts.

1.4

THE ROLE OF LOGISTICS IN THE ECONOMY

Logistics play a key role in the economy in two significant ways. First, logistics is ofthe major expenditures for business. Logistics expenditure accounts for around 15-20% of GDP. Thus -by improving the efficiency, logistics make an importantcontribution to the economy as a whole.

Second, logistics support the movement and flow of many economic transactions; itis an important activity in facilitating the sale of virtually all goods and services. Tounderstand this role from a system perspective, consider that if goods do not arriveon time, customer can not buy them. If goods do not arrive at the proper place or inthe proper condition, no sale can be made. Thus all economic activities throughoutthe supply chain will suffer.

One of the fundamental ways that logistics add value is by creating utility. From aneconomic stand point utility represent the value or usefulness that an item or servicehas in fulfilling a want or need. There are four types of utilities namely; Form,Possession, Time and Place. Form utility is the process of creating the good or

service or putting them in proper form for the customer to use. Possession utility isvalue added to a product or service because the customer is able to take actualpossession like credit arrangement and loans. These two utility are not directlyrelated to logistics but these are not possible without getting the right item neededfor consumption or production to the right place at the right time and in the rightcondition at the right cost. The time and place utility are directly related to logistics.Time utility is the value added by having an item when it is needed. Place utility isthe item or service available where it is needed. The five rights of logistics are theessence of the two utilities provided by logistics time and place utility.

1.5

LOGISTICS AND COMPETITIVE PERFORMANCE

Today logistics department appears on the organization charts of many largeorganizations. Linking logistics activities directly to organization strategic plan canwork effectively to support their organization for achieving competitive advantage.Porter user a tool called the value chain as shown in the Figure 1.4 to separatebuyers, supplier and a firm into the discrete but interrelated activities from whichvalue stems. The value chain concept may be used to identify and understand thespecific source of competitive advantage and how they related to buyer value. Value


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is the amount a customer is willing to pay for the products, services provided by anorganization. Value added is the difference between what the customer pays and thecost to the organization in providing that product or service. Porter defines the fivecategories of primary activity involved in competing in any industry.

Inbound logistics: Activities associated with receiving, storing and disseminating

input to the product.

Operation: Activity associated with transforming input into the final product form.

Outbound logistics: Activity associated with collecting storing and physicaldistribution of the product to buyers.

Support

Company Infrastructure

Organization, People

System & Technology

Procurement

InboundLogistics

Operation OutboundLogistics

Marketing &Sales

Service

Primary Activity

Figure 1.4: Porter Value ChainSource: Porter, Michael E., Competitive Advantage. 1985, the Free Press. New York)

Marketing and Sales: Activities associated with providing a means by which buyerscan purchase the product and inducing them to do so such as advertising, promotionetc.

Service: Activity associated with providing service to enhancer maintain the value ofthe product such as installation, repair etc.

The effective logistics management can provide a major source of competitiveadvantage. The source of competitive advantage is found firstly in the ability of theorganization to differentiate itself in the eyes of the customer from its competitor andsecondly by operating at a lower cost and hence at greater profit. There are twobases of success in any competitive context. One is the cost advantage and second is

the value advantage. Cost advantage is achieved through greater productivity andvalue advantage is pursued through a different plus over competitive offerings.


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V

alue

Adv

anta

e

HI

LO

Service Leader Cost and service leader

Commodity Market Cost leader

LOHI

Productivity advantage

Figure 1.5: Competitive MatrixSource : Christopher, M., 1992, Logistics and Supply Chain Management

From the matrix shown in Figure 1.5 it is clear that successful companies will oftenseek to achieve a position based upon both a productivity advantage and a value advantage. Logistics management can play a critical role to gain both advantages. Inmany industries logistics cost represents such a significant proportion of total costthat it is possible to make major cost reduction through fundamentally reengineering

logistics process. In term of value advantage, companies can gain through servicedifferentiation. Today markets have become more service sensitive. Customer in allindustries are seeking greater responsiveness and reliability from suppliers, they arelooking for reduced lead time, just in time delivery and value added services thatenable them to do better job of serving their customers.

Traditionally most organizations have viewed themselves as entities that existindependently from others and indeed need to compete with them in order tosurvive. However such a philosophy can be self-defeating if it leads to anunwillingness to cooperate in order to compete. Behind this seemingly paradoxicalconcept is the idea of supply chain integration. Supply chain integration links a firmwith its customers, suppliers and other channel members. As such it integrates theirrelationships, activities, functions, processes and locations. The purpose is to

improve the effectiveness and efficiency of SC for ultimate consumers.

A model of the evolution of supply chain is shown in Figure 1.6 Integration startswith the 'baseline' organization (Stage 1) with a reasonably informal approach tomanagement by departments. This level of evolution involves the processing ofmaterial requirements and planning routines that are short term in nature. Thematerial inventories simply arise in response to reactive management practices. Thekey requirement of employees is to react to failure and manage as best that theycan.

The Stage 2 organization reflects the traditional form of supplier management. Thebusiness departments tend to operate autonomously. The Stage 2 organization isfocused on the annual budget allocation and departmental cost management. For thepurchasing function this implies seeking out the lowest price provider of materialrequirements often through a process of tendering, the use of 'power' and theconstant switching of supply sources to prevent 'getting too close'to any individualsource.


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The Four stage of DevelopmentStage 1: Baseline

Stage 2: Functional Integration

Stage 3: Internal Integration

Purchasing

Materialcontrol

Production

Sales

Distribution

MaterialsManagement

ManufacturingManagement

DistributionManagement

MaterialsManagement

ManufacturingManagement

DistributionManagement


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Stage 4: External Integration

12Figure 1. 6: Supply Chain Integration

The Stage 3 organization is internally integrated and has a much greater level ofinterest in material flow processes from suppliers to customers rather than the'grenade over the all' approach of the earlier two forms. The organization hasintegrated the aspects of the internal supply chain that it can influence and control.In parallel, planning systems operated throughout the organization are integratedand demand information, production schedules and material requirements aresynchronized by teams of individuals that were once subordinates of separatedepartments. For this company, the demand and material flow drive the entiresystem in an end-to-end supply chain and the organization makes use of Just in timematerials management techniques.

The Stage 4 company has begun to realize the benefits of true supply chain

management and the ability to synchronize all activities within the factory and tointerface the factory with its suppliers and customers. Under these conditions, thecollaborative and participative internal environment is extended upstream anddownstream and the planning of supply chain management is recognized formally.

The factory is 'customer oriented' instead of product oriented and seeks to partnerwith key customers and suppliers in order to better understand how to provide valueand customer service. This form of company has full improvement processes withinthe organization that are encapsulated in medium term plans for the organizationand its supply chain.

The organization makes most use of information systems to enhance theresponsiveness of the organization and supply chain to deliver products and has alsodeveloped a capability in terms of product design that includes customer and supplierinvolvement.

To enhance the nature of collaboration the organization rewards supplierpartnerships with sole sourcing agreements in return for a greater level of support tothe business and a commitment to on-going improvement of material flow andrelationship management. The model provides a useful means of analyzing thecurrent state of the organization and understanding where the next interventionswould be needed in order to improve performance.

Suppliers

Internalsupply chain

Customers


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1.6

PHYSICAL DISTRIBUTION MANAGEMENT (PDM)

There are many decisions that must be taken, when a company organizes a channel

or network of intermediaries, who take responsibility for the management of goodsas they move from the producer to the consumer. Each channel member must becarefully selected and the company must decide what type of relationship it seekswith each of its intermediate partners. Having established such a network, theorganisation must next consider how these goods can be efficiently transferred, inthe physical sense, from the place of manufacture to the place of consumption.Physical distribution management (PDM) is concerned with ensuring the product is inthe right place at the right time. ;

It is now recognised that PDM is a critical area of overall supply chain management.Business logistical techniques can be applied to PDM so that costs and customersatisfaction are optimised. There is little point in making large savings in the cost ofdistribution if in the long run, sales are lost because of customer dissatisfaction.

Similarly, it does not make economic sense to provide a level of service that is notrequired by the customer but leads to an erosion of profits. This cost/service balanceis a basic dilemma that physical distribution managers face.

The reason for the growing importance of PDM is the increasingly demanding natureof the business environment. In the past it was not uncommon for companies to holdlarge inventories of raw materials and components. Although industries andindividual firms differ widely in their stockholding policies, nowadays, stock levels arekept to a minimum wherever possible. Holding stock is wasting working capital for itis not earning money for the company.

To think of the logistical process merely in terms of transportation is much too

narrow a view. Physical distribution management (PDM) is concerned with the flow ofgoods from the receipt of an order until the goods are delivered to the customer. Inaddition to transportation, PDM involves close liaison with production planning,purchasing, order processing, material control and warehousing. All these areas mustbe managed so that they interact efficiently with each other to provide the level ofservice that the customer demands and at a cost that the company can afford.

1. Components of PDM

There are four principal components of PDM namely; Order processing, Stock levelsor inventory, Warehousing and Transportation.


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Order processingOrder processing is the first of the four stages in the logistical process. Theefficiency of order processing has a direct effect on lead times. Orders arereceived from the sales team through the sales department. Many companiesestablish regular supply routes that remain relatively stable over a period oftime ensuring that the supplier performs satisfactorily. Very often contractsare drawn up and repeat orders (forming part of the initial contract) are made

at regular intervals during the contract period. Taken to its logical conclusionthis effectively does away with ordering and leads to what is called'partnership sourcing'. This is an agreement between the buyer and seller tosupply a particular product or commodity as and when required without thenecessity of negotiating a new contract every time an order is placed. Order-processing systems should function quickly and accurately. Other departmentsin the company need to know as quickly as possible that an order has beenplaced and the customer must have rapid confirmation of the order's receiptand the precise delivery time. Even before products are manufactured and soldthe level of office efficiency is a major contributor to a company's image.Incorrect 'paperwork' and slow reactions by the sales office are often theunrecognised source of ill will between buyers and sellers.'When buyers reviewtheir suppliers, efficiency of order processing is an important factor in theirevaluation. A good computer system for order processing allows stock levels

and delivery schedules to be automatically updated so management canrapidly obtain an accurate view of the sales position. Accuracy is an importantobjective of order processing, as are procedures that are designed to shortenthe order processing cycle.

InventoryInventory, or stock management, is a critical area of PDM because stock levelshave a direct effect on levels of service and customer satisfaction. Theoptimum stock level is a function of the type of market in which the companyoperates. Few companies can say that they never run out of stock, but ifstock-outs happen regularly then market share will be lost to more efficientcompetitors. The key lies in ascertaining the re-order point. Carrying stock atlevels below the re-order point might ultimately mean a stock-out, whereastoo high stock levels are unnecessary and expensive to maintain. Stocks

represent opportunity costs that occur because of constant competition for thecompany's limited resources. If the company's marketing strategy requiresthat high stock levels be maintained, this should be justified by a profitcontribution that will exceed the extra stock carrying costs.

WarehousingMany companies function adequately with their own on-site warehouses fromwhere goods are dispatched direct to customers. When a firm markets goodsthat are ordered regularly, but in small quantities, it becomes more logical tolocate warehouses strategically around the country. Transportation can becarried out in bulk from the place of manufacture to respective warehouseswhere stocks wait ready for further distribution to the customers. This systemis used by large retail chains, except that the warehouses and transportationare owned and operated for them by logistics experts. Levels of service will of

course increase when number of warehouse locations increases, but cost willincrease accordingly. Again, an optimum strategy must be established thatreflects the desired level of service.

TransportationTransportation usually represents the bulk of distribution cost. It is usuallyeasy to calculate because it can be related directly to weight or numbers ofunits. Costs must be carefully controlled through the mode of transportselected amongst alternatives, and these must be constantly reviewed.


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The patterns of retailing that have developed, and the pressure caused by lowstock holding and short lead times, have made road transport indispensable.When the volume of goods-being transported reaches a certain level somecompanies purchase their own vehicles, rather than using the services ofhaulage contractors. However, some large retail chains have now entrusted alltheir warehousing and transport to specialist logistics companies.

For some types of goods, transport by rail still has advantages. When lead-time is a less critical element of marketing effort, or when lowering transportcosts is a major objective, this mode of transport becomes viable. Similarly,when goods are hazardous or bulky in relation to value, and produced in largevolumes then rail transport is advantageous. Rail transport is also suitable forlight goods that require speedy delivery (e.g. letter and parcel post). Exceptwhere goods are highly perishable or valuable in relation to their weight, airtransport is not usually an attractive transport alternative. For long-distanceoverseas routes air transport is popular. Here, it has the advantage of quickdelivery compared to sea transport, and without the cost of bulky andexpensive packaging needed for sea transportation, as well as higherinsurance costs.

The chosen transportation mode should adequately protect goods from

damage in transit (a factor just mentioned makes air freight popular overlonger routes as less packaging is needed than for long sea voyages). Not onlydo damaged goods erode profits, but frequent claims increase insurancepremiums and inconvenience to customers, endangering future business.

2. The Systems or 'Total' Approach to PDMPDM has been neglected in the past; this function has been late in adopting anintegrated approach towards it activities. Managers have now become moreconscious of the potential of PDM, and recognize that logistical systems should bedesigned with the total function in mind. A fragmented or disjointed approach to PDMis a principal cause of failure to provide satisfactory service, and causes excessive

costs.

PDM is concerned with ensuring that the individual efforts that go to make up thedistributive function are optimised so that a common objective is realised. This iscalled the 'systems approach' to distribution management and a major feature ofPDM is that these functions be integrated.

To plan an efficient logistics structure it is necessary to be aware of the interactionbetween the different distribution costs and how they vary with respect to thedifferent depot alternatives (number, size, type and location).

Figure 1.7 demonstrates how the individual distribution and logistics cost elementscan build up the total logistics cost.

y Storage Cost: Storage cost will increase as the number of depots willincrease because there will be a need for more stock coverage, more storagespace, more management etc.

y Delivery cost: This will concern with the secondary transportation cost i.e.cost of delivery from the depot to the consumer. The greater the number ofdepots, the lesser is the secondary mileage and the delivery cost.


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y Trunking Cost: This is the primary transport cost in the supply of products inbulk to the depots from the central finished good warehouses or productionpoints. AS the number of depots increases this cost will also increases.

y Inventory Cost: The main elements of inventory holding costs are:y Capital Cost: The cost of physical stock. This is the financing charge, which

is the current cost of capital to a company.

y Service Cost: That is stock management arid insurance costy Risk Cost: Which occur through pilferage, deterioration of stock, damage and

stock obsolescence.y System Cost: These costs represent a variety of information or

communication requirements ranging from the order processing to loadassembly lists.

1.7

SUMMARY

Supply chain is network of organizations that are involved, through upstream and

downstream linkages, in the different processes and activities that produce value inthe form of products and services in the hands of the ultimate consumer. Logisticsexpenditure accounts for around 15-20% of GDP. Thus by improving the efficiency oflogistics operations, logistics can make an important contribution to the economy asa whole. Factors contributing to the growing interest in logistics include advances ininformation system technology, an increased emphasis on customer service, growingreorganization of the system approach and total cost concept.

Supply chain management seeks to integrate performance measures over multiplefirms or processes, rather than taking the perspective of a single firm or process.Supply chain integration links a firm with its customers, suppliers and other channelmembers. As such it integrates their relationships, activities, functions, processes

and locations. Physical distribution management (PDM) is concerned with ensuringthe right item needed for consumption or production to the right place at the righttime and in the right condition at the right cost

REVIEW QUESTIONS

1. Logistics is the function that is responsible for the flow of materials into,through and out of an organisation. Elaborate?

2. These are many possible structures for SC, but the simplest view hasmaterials converging on an organizing through tiers of suppliers and productsdiverging through tiers of customers. Elaborate.

3. It is said that the overall aim for logistics is to achieve high customersatisfaction or perceived- product value. This must be achieved withacceptable costs. How would you find the best balance?

4. What is Physical Distribution Management? Describe its components? Also,elucidate the total approach to PDM.

5. Describe the evolution of Supply Chain concept. What in your opinion is themost important stage?


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FURTHER READINGSSimchi Levi (2000), Designing and Managing the Supply Chain, Irwin/ McGraw-Hill, IL.Christopher, M., 1992, Logistics and Supply Chain Management:Strategies for Reducing Costs and Improving Services, Pitman, London.Croucher Phil, Rushton Alan and Oxley John, The Handbook Of Logistics And DistributionManagementDouglas M. Lambert, 1998, Fundamental of logistics management, McGraw Hill.

Sahay B S, 1998, Supply Chain Management for Global competitiveness (Macmillan)Chopra Sunil and Meindl P, 2001, Supply Chain Management: Strategy, Planning, andOperation, Prentice Hall.Waters Donald, 2003, Logistics:An Introduction to SCM, Palgrave McMillan, New York.


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UNIT 2

PRINCIPLES OF SUPPLY CHAIN

MANAGEMENTAfter reading this unit, you would be able to: define how the supply

chain works; understand the key processes required to integrate thesupply chain; examine critical areas of Logistics-Marketing Interface;

and examine critical areas of Logistics-Manufacturing Interface.

2.1

INTRODUCTION

Now you are aware of what Logistics and SCM mean. You have appreciated the roleof Logistics and SCM. In the economy. SCM is basically a system that connects anorganization with its customers and suppliers. SCM is the management of all keybusiness processes across a number of supply chains. It is important to know aboutdifferent supply chain processes for having an integrated SCM.Also there is a strong relation between Logistics group and Marketing group in anorganization. Similarly, Manufacturing and Logistics are also interrelated. This unitwill take you through to these concepts.

2.2

HOW DOES SCM WORK?

The supply chain management (SCM) is viewed as a system that links an enterprisewith its customer and suppliers. As shown in Figure 2.1 information flows fromcustomer in the form of forecast and orders to both the enterprise and suppliers.This information is refined through planning into specific manufacturing andpurchasing objectives. As materials and products are purchased, a value addedinventory flow is initiated which ultimately results in ownership transfer of finishedproduct to customers.

SCM is an integrated approach that is highly interactive and complex and requiressimultaneous consideration of many trade-offs. SCM is the management of all keybusiness process across a number of the supply chains. Successful SCM requires achange from managing individual function to integrating activities into key supply

chain processes. Operating an integrated supply chain requires continuousinformation flows, which in turn helps to create the best product flows.


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And interconnected between the customers and the suppliers:

Enterprise

Physical distribution Manufacturing support Purchasing

Figure 2.1: Supply Chain SystemSource:. Logistics Management, Bowersox et al., 1986

The customer remains the primary focus of the process. However, improved linkageswith supplies are necessary because controlling uncertainty in customer demand,manufacturing processes and supplier performances are critical for effective SCM.The key processes for the integrated SCM {Figure 2.2) are as follows:

Customer Relationship ManagementThis is the process to identify the key customers. With customer moving to centrestage, more companies have begun to treat a customer as a value independententity. The companies no longer view sales as selling of their products, but as sellingof relationships, solutions, support and care. Customer relationship teams developand implement partnering program with key customer. Product and serviceagreements specifying the level of performance are established with these keycustomers.

Customer Relationship Management

Demand Management

Customer Service ManagementOrder Fulfillment

Manufacturing Flow Management

Procurement

Product Development and Commercialization

Return Channel

Performance Metrics

Figure 2.2: Supply Chain Process for Integrated SCMSource: Lambert 1998

Customers

RequirementInformation

FlowSuppliers

Value AddedInventory

Flow


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Customer Service ManagementIncreased and intense competitions all around have made customer service as thekey differentiator in a marketing system. Customer service provides the singlesource of customer information. It provides the customer with real time informationon promised shipping dates and product availability. Customer service is a valuablebusiness activity governing both resources and top management attention. Customer

| service is being offered in many forms such as post warranty support, fast repairs,speedy response to service calls from customers, easy availability of spares,qualified,) competent and customer friendly technicians.

Demand ManagementCustomer demand in the form of irregular order pattern is the largest source ofvariability. Given this variability in customer ordering, demand management is a keyto an effective SCM process. Manufacturers are moving from a push system to maketo order mode, in such case predicting or forecasting demand is the key driver onwhich all of the supply related decision will depend. The demand managementprocess must balance the customer's requirement with the firm's supply capabilities.A good demand management system uses point of sales and key customer data to.reduce uncertainty and provide efficient information flows through out the supplychain.

Customer Order FulfillmentThe key to effective SCM is to achieve high order fill rate. Order fill rate can bedefined as % of order fulfilled before or on the due date set by the customer.Performing the order fulfillment process effectively requires integration of firmsmanufacturing, distribution and transportation plans.

Manufacturing Flow ManagementThis functional area decides how production should be organized and managed,Traditionally production system uses push strategy but in a customer focusenvironment pull strategy is more effective. To implement pull system,

manufacturing process must be flexible to respond to market changes. This requiresthe flexibility to perform rapid change over to accommodate mass customization;orders are processed on a just in time basis in minimum lot size. In a customerfocused business world, production process has to optimize balance betweencustomer satisfaction and efficiency.

ProcurementProcurement is concerned with buying and movement of materials, parts or finishedinventory from supplier location to manufacturing or assembly plants, warehouse orretail stores. Traditionally procurement is carried out on the basis of bid and buyssystem whereas in new integrated concept long-term partnerships are developedwith core group of suppliers. Suppliers are involved at the early design stage whichcan lead to reduction in product development cycle times. For quick response to

customer demand purchasing activities are carried out with rapid communicationmechanism such as EDI and interest linkages. This reduces the cost and time on thetransaction portion of the purchase.

Product Development and CommercializationIn today's fast changing environment new products are life bloods of a company. Forthe firm to remain competitive it has to sharpen its product development times. Thisrequires that customer and suppliers must be integrated into product developmentprocess.


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Return ChannelManaging the return channel as a business process offers the same opportunity toachieve a sustainable competitive advantage as managing the supply chain fromanout-bound perspective. Effective process management of return channel enablesthe identification of productivity improvement opportunities and break throughprojects.

a) Focusing effort on improvement in key business process is the foundation ofSCM philosophy. Thus the goals of these processes are to:

b) Develop customer focused teams that provide beneficial product and serviceagreement to strategically significant customers

c) Provide a permit of contact for all customers, which efficiently handle theirinquiries.

d) Continually gather, compile and update customer demand to matchrequirement with supply.

e) Develop flexible manufacturing system that responds quickly to changingmarket conditions.

f) Manage supplier partnership that allows for quick response and continuousimprovement.

g) Fill 100% of customer order accurately and on timeh) Enhance profitability by managing the return channel (reverse logistics)

2.3

LOGISTICS-MARKETING INTERFACE

Traditionally logistics group assumed primary responsibility for warehousing,inventory and transportation within many organizations while marketing group isresponsible for negotiation, promotion and selling. As neither group had

responsibility for over all channel management, conflicts arose at the expense ofoverall organization goal. The organizations had realized that functionalinterdependence, not internecine conflicts, is the key to satisfy customer needs.Despite the realization by logistics and marketing manager that cooperation isessential marketers often criticize logistics department for being cost minimizershaving no concern for customer needs while logistics department accuses marketersof chasing sale at any cost. Therefore it is essential that organizations identify areaof agreement and potential conflict. Senior management must be keen to activelysupport cooperation between the two groups. This can be assisted by performancemeasurement that rewards cooperation and a spirit of interdependence that activelydiscourages parochial behaviour.

1. Logistics and Product Life CycleProduct life cycle (PLC) is a key marketing concept that affects the relationshipbetween logistics and marketing. For different stages of PLC i.e., introduction,growth, maturity and decline, different level of logistics support is required bymarketing. In the introduction and growth stage timely cost effective fulfillment oforder is a major requirement in ensuring initial acceptance of the product. Later assales slow down arid the product moves into the maturity and decline stages, thecompany changes to trimming cost as the product faces stiff price competition andconsequent pressure on margins. Hence there is need for a logistics manager to


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understand what marketing is trying to achieve with each product and whatappropriate level of logistics support is required accordingly. ;

2. Areas of Logistics and Marketing InteractionIn today's competitive environment organizations are utilizing the benefits of theirestablished logistics/marketing interface to be competitive not in terms of product

and price but also logistics services tailored to meet individual customer needs.These organizations are able to differentiate themselves from their competitors byoffering a total service with logistics forming an essential part of the total valuechain.

The major area of interaction between logistics and marketing includes (Gattorna1995):

1. Product Design: This can have a major effect on warehouseand transportation utilization (and therefore costs).

2. Pricing: This is the means by which logistics services customerdemand affects the overall cost of the product and in turn the

organization's pricing policies.3. Market and Sales Forecasts: Marketing forecasts will largelydictate the level of logistics resources needed to move productsto customers.

4. Customer Service Policies: If marketing opts to offer a veryresponsive level of service to customer, logistics resources, inthe form of facilities and inventory, will need to be veryconsiderable.

5. Number and Location of Warehouses: This is one of thegreatest areas of contention and can only be satisfactorilyresolved if marketing and logistics develop the policy jointly.

6. Inventory Policies: This is another area of contention, asthese decisions have a significant bearing on operational costs

and the extent to which desired levels of customer service areachieved. It is another key area where policy should bedeveloped jointly.

7. Order Processing: Responsibility for who receives customer'sorders and the speed and efficiency with which they areprocessed has a major impact on operational costs andcustomer's perceptions of service levels. This is another areawhere joint policy-making is preferable.

8. Channels of Distribution: Decisions to deliver direct to thecustomer or through intermediaries will greatly influence thelevel of logistics resources required. As channels change, so willthe resources required. Marketing should definitely consult withlogistics when making channel decisions.

2.4

THE LOGISTICS-MANUFACTURING INTERFACE

Manufacturing and logistics are interrelated so no one can be considered in isolation.Decisions made in these two areas commit the organization to relatively long-lasting


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y An image of being unreliabley Poor product availabilityy Poor delivery service

Table 2.1: Manufacturing / logistics approach when the basis for competing isdifferentaiation (Source: Gattorna 1995)

Basis for Competing: Product Availability and delivery time

Old Approach New Approach

Increase inventory to act as a buffer Shorten internal lead times to improveresponsiveness to market

Increase number of branchwarehouses

Emphasize schedule performance to ensurereiiable supply

Increases capacity to provideflexibility

Emphasize product and process quality so as toreduce delays caused by rework, breakdownsetc.

Release orders early to production Utilize express transport and centralizeddistribution to prevent misallocation of stock

Emphasize production output Initial superior customer service and order entrysystems to enhance customer communication

Which also results in: Which also results in:

Higher costs Lower costs

Negatives cause by the complexity ofthe system and poor product qualitycaused by emphasis on 'getting theproduct out'

Improved product performance Reducedproduct variability

Long internal lead times caused byearly release of works orders to givethe plant plenty of time'

An image of reliability

Stock-outs due to work orderoverload, confused priorities anddifficulty in allocating stock to manywarehouses

Improved flexibility in volume and product mix

Logistics link the manufacturing both from characteristics of inputs i.e., suppliers ofraw materials and characteristics of market i.e., customers. For a givenmanufacturing organization there is a production/branch warehouse configuration,which satisfies most constraints or pressures imposed by the inputs or the markets.For effective operation of manufacturing/logistic interface there are two primarydeterminants i.e., Capacity and Location.


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Capacity is related to location and logistics in the following way. First, productioncapacity must be matching in some sensible way to the market demand then inaccordance with the production capacity matching is required for the logisticsnetwork i.e., procurement, storage, order entry and processing, outbound transport,branch warehouse and final customer delivery.

The capacity issues are very crucial decision and are required to change as per themarket demand and demand locations. Short-term solutions can be capacityenhancement by overtime, second and third shifts, third party contracting, extensionof the existing facility and long-term solution are additional facility in a new locationor extensive capacity in new location. Short term decisions possess the least risk,and impact on the logistics network only in terms of the additional capacityrequirement where as long term solution demand a re-evaluation of themanufacturing/logistics network not only in terms of the capacity of each componentbut also the strategic necessity and location of each facility (factory, warehouse) interms of its contribution to the effectiveness of the total network. In other words, achange in location and capacity of any one facility requires a review of the locationand capacities of all other facilities. Clearly, the issues involved in location, capacityand logistics are inextricably linked.

1. Customer Service Issues at the Logistics-ManufacturingInterfaceCustomer service strategy is an on-going process of increasing both the quality andnumber of links between the manufacturing organization and the customer. Thewhole emphasis in today's service intensified businesses are to increase a series ofboth human and information based technological relationships between customerand the organization so that better customer services and satisfaction to thecustomer can be realized. The issues at the manufacturing/logistics interface forbetter customer service are as follows:

Demand ForecastingThe general function of product forecasting in the short to mid term is to contributeto the process of ensuring the availability of stock for customers. This includes theuse of distribution requirements planning (DRP) wherever appropriate. For the longerterm, forecasting at the product group level is crucial for manufacturing capacity andflexibility decisions.

Customer and Supplier Oriented SystemOrganizational systems will need to be directly related to the issues of how to bindthe customer more tightly to the organization and how effectively integrate suppliersinto the overall supply chain with the objective of enhancing customer service.

The systems installed by organizations will need the capability to formally link thecustomer in a form that benefits both parties. Systems will also be required to link .with suppliers in a manner that gives meaning to the concept of strategic alliances.In a strategic alliance the supplier and the manufacturer agree to a relationship thatgoes beyond the normal commercial relationship such that each obtains synergisticbenefits similar to that obtained by forward/backward integration but with leastassociated risks and negative attributes.

Plant Configurations


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The location, nature and operating performance of manufacturing facilities, centralwarehouses and branch warehouses impact heavily on both cost structure andservice levels. In the longer term, and in conjunction with other factors (systems,supplies), the plant/branch configuration is a major structural input to reducingoverall supply chain costs. When the links between manufacturer and customer andmanufacturer and supplier are complete, a rethink of the logistics (supply chain)

network from supplier through to customer will be required, for two reasons:

y Available technology, particularly information technology, will allow certainplant/branch configurations, previously ruled out, to be feasible.

y There will be an on-going need to reduce (in real terms) the cost of thenetwork.

A key feature of this process will be the requirement of involving in an appropriatemanner both customers and suppliers. This will be new ground for manyorganizations and will force a re-evaluation of values and mission in somecircumstances.

Master Production schedulingThe master production schedule (MPS) is an area where a number of parties(manufacturing, logistics, marketing, finance) have a vested interest. Often as not,though, it is done by one group in isolation from the others. In the operational sensethe MPS is primarily concerned with stock availability within a set of constraints suchas capacity. As such, it is the single instrument, which demonstrates the plan for:

a) Finished goods inventory levelsb) Customer sendee in terms of stock availabilityc) Machine utilizationd) Capacity utilizatione) Labor productivityf) Outputg) Need for overtime/casual employees and so on.

The real power of the MPS, however, is its potential to involve all interested parties.In practice, when people from marketing, logistics and manufacturing get togetherand agree on a schedule, the result is a superior schedule. Clearly the MPS may beused as a vehicle to integrate a number of parties into the planning and decision-making process with the result being a superior plan which, when executed, resultsin superior customer service.

2.5

SUMMARY

In this unit, we have discussed how the supply chain works and what are the keyprocesses required to integrate the supply chain. We have also examined the criticalareas of logistics-marketing interface and logistics-manufacturing interface. Theseinterfaces are critical for enhancing supply chain performance. Finally we havediscussed how manufacturing-logistics interface could provide better customerservice.


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UNIT 3

CUSTOMER FOCUS IN SUPPLY CHAIN

MANAGEMENT

After reading this unit, you would be able to Understand the keyprocesses required to enhance customer focus in the supply chain;

Define Efficient Customer Response (ECR); Define Quick Response(QR) and Accurate Response (AR); and Examine chain relationship

within and beyond organization.

3.1INTRODUCTION

Management of a supply chain means managing all the different processes andactivities that produce value in the hands of the ultimate consumer. A supply chaincan be viewed as the network of entities through which the material and informationflow. Those entities may include suppliers, carriers, manufacturing sites, distributioncenters, retailers and customers. Effective streamlining of the supply chain canimprove the customer service levels dramatically, reduce excess inventory in thesystem, and cut excess costs from the network of the organization.

Supply Chain Management competency contributes to an organization's success byproviding customers with tiiely and accurate product delivery. The customer is anydelivery destination - from consumers' homes to retail and wholesale businesses to

the receiving docks of a firm's manufacturing plants and warehouses. The customerbeing serviced is the focal point and driving force in establishing Supply ChainManagement performance requirements. It is important to clearly understandcustomer service deliverables when establishing Supply Chain Managementstrategies.

The customer-focused marketing is built on three fundamental concepts.

1. The essence of a marketing orientation to business policy2. Developing Supply Chain Management competency as strategic resource to

customer service planning3. The changing nature of most desired Supply Chain Management practice to

accommodate product life-cycle requirements.

This unit will discuss the customer focus in Supply Chain Management.


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3.2

CUSTOMER SERVICE

A customer-focused strategy needs to accommodate and develop a combination ofproducts and services that satisfies customers. One of the key factors for successful

marketing is the availability of products and services to the customers, when andwhere desired by them.

Basic customer service is defined in terms of availability, performance and reliability.

Availability is the capacity to offer inventory when demanded by a customer.1) Normally this is achieved by stocking adequate inventory in anticipation of

demand from customers.2) Inventory stocking plans take into consideration forecasted demand, sales

popularity, importance of a product in the product line, profitability and thevalue of the merchandise.

3) Safety stock is kept to take care of demand forecast error and anyunanticipated operational or delivery problems. The availability depends on

three performance measures: stock out frequency, fill rate and ordersshipped.

Operational Performance can be measured in terms of speed, consistency,flexibility and malfunction/recovery.

1) Speed is the time taken for executing an order. With the level of developmentin information, communication and transportation technology/ systems, thelead-time will continue to be shorter.

2) Consistency is reflected by execution of large number of orders in expecteddelivery time.

3) Organization's ability to respond to unexpected situation or request for uniquecustomer service shows the flexibility.4) Preventing malfunction and having contingency plans for prompt recovery canadd value to customer service programme.

Reliability is one of the most important dimensions of customer servicequality. Customers' confidence can be built by providing advanced accurateinformation on the status of their orders, rather than giving surprises.

A customer-focused firm will do well to state the level of basic service commitment interms of availability, operational performance and reliability to all customers.

The common interpretations for customer service are easy to do business with andsensitive to customer needs. LaLonde and Zinszer suggested three dimensions of

customer service:

i. As an activity that can be managed.ii. In terms of performance levels - can be accurately measurediii. As a philosophy of management - showing the importance of customer

focused marketing

They defined: Customer service is a process for providing significant value-addedbenefits to the supply chain in a cost effective way. Excellent customer service


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performance is likely to add value for members of the supply chain. A customerservice programme needs to be evaluated of its performance through measures likegoal attainment and relevancy.

A primary reason for SCM becoming an important managerial issue in the ninetiesstems from increased national and international competition.- Customers have

multiple sources from which to choose to satisfy demand; locating productthroughout the distribution channel for maximum customer accessibility at aminimum cost becomes crucial. The dynamic nature of the market place makesholding inventory a risky and potentially unprofitable business. Customer's buyinghabits are constantly changing and competitors are continually adding and deletingproducts. Demand changes only make it almost sure that the company will have thewrong inventory.

3.3

FUNCTIONAL VS. INNOVATIVE PRODUCTS: SCM

ISSUESMarshall L. Fisher observed that in some cases, costs have risen to unprecedentedlevels because of adversarial relations between SC partners as well as dysfunctionalindustry practices such as an over reliance on price promotions. A framework wasdevised for deciding which SC is the best for a particular company's situation.Products can be classified into two categories, either primarily functional or primarilyinnovative based on their demand patterns. It helps a manager to understand thenature of demand for their products and devise the SC that can best satisfy thatdemand. The root cause of the problems faced by many SCs is a mismatch betweenthe type of product and the type of SC.

Functional products are the staples, which satisfy basic needs, don't change much

over time, have stable, predictable demand, long life cycles and available at a widerange of retail outlets/grocery stores. Their stability invites competition and leads tolower profit margins. (See Table 3.1)

Fashion apparel and personal computer manufacturers introduce innovations to avoidlow margins and to give customers reason to buy their products. But, the demandsfor these products are unpredictable, life cycle is short and profit margin is high.They also require a fundamentally different SC than functional products. (See Table3.2).

SC performs two distinct types of functions: a physical function and a marketmediation function. Physical function includes converting raw materials into parts,components and finished goods, and transporting all of them from one point to thenext in the SC. Market mediation function is less visible but equally important andensures matching of offerings with customer's preferences.

Each of these two functions incurs physical costs (costs of production, transportation,inventory storage) and market mediation costs arising out of marked down or lostsales opportunities and dissatisfied customers.

Table 3.1: Functional Versus Innovative Products: Differences in Demand


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Functional (PredictableDemand)

Innovative(Unpredictable Demand)

Aspects of Demand

Product Life Cycle More than 2 years 3 months to 1 year

Contribution margin 5% to 20% 20% to 60%

Product Variety Low (10 to 20 variantsper category)

High (often millions ofvariants per category)

Average margin of error inthe forecast at the timeproduction is committed

10% 40% to 100%

Average stock out rate 1% to 2% 10% to 40%

Average forced end of seasonmarkdown as percentage of

full price

0% 10% to 25%

Lead time required for made-to-order products

6 months to 1 year 1 day to 2 weeks

Table 3.2: Physically Efficient Versus Market-Responsive Supply Chains

Physically EfficientProcess

Market-ResponsiveProcess

Primary Purpose Supply predictable demandefficiently at the lowestpossible cost

Respond quickly tounpredictable demand inorder to minimize stock outs,forced markdowns andobsolete inventory

Manufacturing focus Maintain high averageutilization rate

Deploy excess buffer capacity

Inventory Strategy Generate high turns andminimize inventorythroughout the chain

Deploy significant bufferstocks of parts or finishedgoods

Lead-time focus Shorten lead time as long asit doesn't increase cost

Invest aggressively in waysto reduce lead time

Approach to choosingsuppliers Select primarily for cost andquality Select primarily for speed,flexibility, and quality

Product Design Strategy

Maximize performance andminimize cost

Use modular design in orderto postpone productdifferentiation for as long aspossible


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A global brand can be greatly benefited by having gathered knowledge of customersand their choices, through channel partners; and can create global products, whichmay need to be adapted as per local preferences.

3.4EFFICIENT CONSUMER RESPONSE

Since 1980s, many organizations have been going through, the job of reengineeringtheir business process and it involved revisiting their supply chain. One EfficientConsumer Response study estimated that 42 days could be removed from the typicalgrocery supply chain, freeing up $30 bn in current costs and reducing inventory by41 % in USA. A study by A.T.Kearney estimated that supply chain costs representmore than 80% of the cost structure in a typical manufacturing company. Forretailers, this figure is 70 to 80 %. These numbers indicate that even slightimprovements in the process can translate into millions of dollars on the bottom line.

Some of the critical success drivers to achieve improvements have been suggestedand these are:

y Well-defined processes with well-defined guidelines for decision making;y Removal of the organizational and functional barriers;y Early visibility to changes in demand all along the supply chain;y A single set of plans that drives the supply chain operations and integrates

information across the supply chain.

Some of the learning from case studies on SCMa) ABCFoods Company:

y Materials common across businesses are purchased centrally to takeadvantage of economies of scale, other items exclusive to a given businessunit are purchased by the unit,

Supply strategy includes four key practices:

1. Consolidation of the supplier base,2. Development of supplier partnership,3. Penetration into supplier performance,4. Commitment to Quality.

Manufacturing plants are strategically located throughout the US, based onsupplier or customer base,

Distribution network includes facilities strategically located based on customer

demographics, as well as transportation efficiencies. Some of these facilities are selfowned and third parties operate others.

Main focus in distribution was to establish customer partnerships, which wasbased on ECR concepts including continuous replenishment.

The ECR includes the following strategies:


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1. Widespread implementation of EDI (Electronic Data Interchange), up anddown the supply chain; both between Supplier and Manufacturer,Manufacturer and Distributor, Distributor and Customer.

2. Greater use of POS (Point of Sales) data obtained by greater and moreaccurate use of bar coding.

3. Co-operative Relationship between Manufacturer, Distributor, Suppliers, andcustomers.

4. Continuous Replenishment of inventory and flow through distribution. (LikeJIT (Just-in-time), Cross Docking)

5. Improved Product Management and Promotions.6. Could be the best source of Competitive Advantage.

One of the most beneficial aspects from ECR could be building relationship with the.Customers:

y Customer satisfaction improves, as customer gets what he wantsy Capturing database of customer through a smart card device and link it to his

purchase patterns in terms of item, quantity, size and time-offering volume orvalue bases incentive scheme.

y Make use of such database to forecast future demand and thereby achievingbetter customer service and less stock out situations.

y Inform customers of new arrivals - through direct mailers.

Customer Focus in Supply Chain ManagementSince the ECR is a strategic option for an organization, we first need to understand

what factors have driven a firm to re-look at their current strategy and what are theoptions an organization has to respond to such factors, keeping in mind pastperformance and internal capabilities and resources.

Once a strategic option has been chosen after evaluating possible alternatives, firmis required to go through the process of implementation, which includes structureand systems, people, skills, values and culture, resources and leadership.

The Efficient Consumer Response concept popularly known as ECR is a strategicchoice for many organizations to survive/grow in the current business environment,which is driven by competition, speed, technology, customer satisfaction and everchanging customer preferences. ECR provides a competitive advantage todifferentiate from other players.

ECR movement, which followed another movement called Quick Response in textile/apparel industry, initially started in grocery industry to respond to the followingcustomer service expectations, most efficiently and effectively.

y They get what they want, when they want it, and as much quantity as theyneed.

y They get it at the most competitive pricey They achieve satisfaction or delight, through customer value addition.


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y They feel good of having received attention.y They feel happy being cared for.y They enjoy being listened to and being served quickly.

In order to fulfill these expectations organizations will be required to re-orient andreview the areas like structure and systems; people, skills, values and culture;

resources and leadership.

Structure and SystemsECR has a long-term impact on the effectiveness of the value delivery system to thecustomers, by way of a collaborative relationship between manufacturers,wholesalers, retailers, brokers, and transporters through application of advancementin Information and Communication Technologies (ICT). Therefore, the structuralchanges may be necessary to enhance and focus on proper co-ordination andcollaboration among channel partners. Many organizations have switched over fromproduct focus to customer focus.

Application of technology for data capturing and processing to help quick and

accurate decision-making is a must. EDI and Bar Coding technology can only enabletransfer of POS data to the channel partners and avoid losses due to over/understocking of products throughout the channel. Through integrated EDI; purchaseorder, delivery order, Invoice, Shipping bill, Stock Information, Truck MovementInformation can be exchanged between channel partners.

Earlier firms used to produce goods as per their capacity and convenience to achieveeconomy of scale and profitability. Now the manufacturing plans are customer drivenand there is major dependence on POS data at SKU level (stock keeping unit) forforecasting, in many organizations. New product introduction system will be requiredto draw major inputs from customer feedback or customer survey. It has to be doneat a faster speed than the competitors and frequency has to be improved due toshortening of PLC. Even an innovation can't assure a very long-term stay and

benefits. Moreover, failure rates are also to be reduced.

Another important system change necessary for more meaningful decisions, is tointroduce Activity Based Costing (ABC) instead of using full cost allocation systems.The Internet revolution will create a new dimension in achieving ECR. Channelpartners can share data through common sites and consolidate/ process the same,for useful decision making and information sharing, in a most cost effective way.

People, Skill, Values and CultureBased on the current status of the organization in terms of availability of humanresources and skills, the firm has to review the needs for training of existingresources and acquiring required skill through recruitment. In case of adoption of

advance technologies, one has to review its imperative for the organization toacquire new skills.As this new concept thrives on efficiency, speed, responsiveness and the customersatisfaction, the values and culture of the organization have to make necessaryadjustment and proper realignment to meet the new challenges.

Category Management requiring cross-functional skills to decide on product-mix,assortments (flavour, pack size, colour etc), co-ordination with manufacturing,


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purchases, shipping/transportation, accounts, contribution/profitability analysis, newproduct development, customer service etc, will require new skills.

ResourcesMajor investment will be necessary to acquire the new advanced technologies andthe necessary skills required to operate it. Integrated Supply Chain Network

demands adoption of similar relevant technologies by the channel partners. In asituation when some of these Channel Partners are not able to arrange for theresources, the manufacturer/marketer may be required to find financial .resourceswith an objective to achieve total Supply Chain efficiency.

It is very important to note that each partner and the links in the value deliverychain must perform efficiently and continuously strive for further improvement. Evenone inefficient link can result in sub optimal performance for the total chain.

There may be a serious need to improve transportation facility to improve on Speedto Market advantage. This can be done through owning additional trucks or byoutsourcing.

LeadershipIn order to adopt ECR concept as a differentiator, sound leadership can play a veryimportant role. To drive the organization and channel partners through the changeprocess may not be an easy task. Therefore, success of implementation will dependon the leadership qualities.

The leadership has to ensure executive support, commitment to change andempowerment, which are the key areas for successful ECR implementation. Forexample, wherever cross docking will be possible the tasks of and need for adistribution center will be minimum or nil. This may call for some unpleasantdecisions from the leadership.

Strategic Alliances can facilitate new product development/introduction and marketaccess or ensuring timely delivery and is coming off age now. Rediff.com has createdsuch alliances with the partners like product/service suppliers, transporters/couriersand payment facilitators to be successful in their e-commerce venture.

3.5

QUICK RESPONSE AND ACCURATE RESPONSE

Quick Response is a retail sector strategy, which combines a number of tactics toimprove inventory management and efficiency, while speeding inventory flows. MostQRs are between manufacturers and retailers only. When fully implemented, QRapplies JIT principles through the entire supply chain, from raw material suppliersthrough ultimate customer demand.

Customer's sales are tracked immediately using EDI with bar code technology. Itallows manufacturer to notify raw material suppliers and schedule production anddeliveries as required to meet replenishment needs. This allows inventory reduction,speeding response times, lowering number of out of stock products, reducing


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handling and obsolescence. QR was first implemented in Textile & Apparel industryand an adaptation called ECR was implemented in grocery industry.

In order to fully understand the role of supply chain management in an industry it isnecessary to study in depth the complexity of the supply chains for specific productgroups, number of constituents in each level of the chain, the impact of constituents'

performance in the value delivery system in general and to their customers of thechain in particular, their awareness of this impact and which are the areas that needperformance improvement for overall efficiency and effectiveness of the valuedelivery system.

With the application of advanced Communications and Information Technology in thesystem, now each of the constituents would be able to serve its customer better andimprove the value delivery process. The partners in the chain must understand whatkind of support need to be provided to each other to ensure overall cost and valueoptimization of the system.

Some learning experience from case studies

a) Apparel Manufacturery The company sells lower priced brands to discount stores and upscale line to

department stores. It has 20000 SKUs and sold through 6000 differentaccounts.

y Their efforts were on reducing costs within their exiting SC instead ofproducing overseas and utilizing time as a speed -to-market advantage.

y Apparel manufacturing is done at 2 units in US and another one offshore. Allproducts are finished at one site and then shipped to two distribution centers.

y Implemented flow replenishment along with EDI connections with severalmajor customers. It replenished inventory at the retailer without a purchaseorder from the retailer. Products are replenished daily or in economicalbatches, based on POS transactions transferred from the retailer on a daily or

weekly basis.

b) Electronico - An Electronics CompanyOne division produced corporate computer networks and secondary storage fordesktop computers. With ever changing electronics trends, products are short livedand often engineered to order.

y SC is a global network that delivers products and services from the supplybase to the end customer through an engineered flow of information andmaterial.

y SC comprises of: mining concerns, component manufacturers, assemblers,distributors, resellers/integrators, retail, end users, return depots andrecycling Partners.

y Information is communicated across nodes using various methods to assuredelivery of marketing programs. An engineering change order initiates animplementation process, which involves all departments affected by it.Information and communication must flow within predetermined normalresponse times and these are critical in maintaining strong vendorrelationship and assuring delivery of programs within marketingrequirements.


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The uncertain market reaction to innovation increases the risk of shortage andexcess supplies. High profit margins and the importance of early sales to capturemarket share for new products, increase the cost of shortages. At the same timeshort life cycle increases the risk of obsolescence and thus costs of excess supplies.So, most important is to read early sales indication or other market signals and toreact promptly. Crucial flow of information occurs not only within the chain but also

from the marketplace to the SC. The critical decisions about inventory and capacityare as to where in the SC to position inventory and available production capacity inorder to hedge against uncertain demand. Suppliers should be chosen for their speedand flexibility, not for their cost alone.

A leading Japanese apparel manufacturer produces its basic styles in low costChinese plants keeping production of high fashion styles in Japan, where theadvantage of being able to respond quickly to emerging fashion trends more thanoffsets the disadvantage of high labour costs.

A lean, efficient distribution channel is exactly right for functional cars, but totallyinappropriate for innovative cars, which require inventory buffers to absorbuncertainty in demand. The most efficient place to put buffers is in parts, but doingso directly contradicts the just-in-time system that automakers vigorously adopted.

Mass CustomizationNational bicycle's success of a responsive supply chain was part of new movementcalled mass customization - building ability to customize a large volume of productsand deliver at close to mass-production prices.

Accurate Response SystemSport Obermeyer, manufacturer of fashion skiwear, adopted a blending of three .strategies of reducing, avoiding and hedging against uncertainty.

1. To reduce uncertainty, company solicited early orders from 25 largestretailers. This enabled them to forecast national demand with a margin oferror of just 10%.

2. Once employees were told of the benefits of shaving off each day in lead timeby way of saving the cost of air-shipment, they found many ways to shortenthe lead time.

3. Company asked six members of a committee to forecast for all products andselected those styles when all six individual forecast agreed. Using thisaverage forecast as well as data on the cost over and under production, itdeveloped a model for hedging against the risk of both problems. The modelworked out the quantity of each style to make in the early production season(which begins a year before the retail season) and how much to make inFebruar

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Supply and Distribution Module